Retiree Health Costs (OPEB/VEBA)
The city pays for the health care costs of its retired employees. Historically, with many governments around the nation, and with the city prior to 1999, premiums have been funded “pay-as-you-go” rather than using a pre-funded actuarial valuation. In 1999, the city Council and the Pension Board established a Voluntary Employee Benefit Association (VEBA) agreement and an associated trust fund to start pre-funding the ever-increasing costs associated with this benefit. As a result, in addition to funding the insurance premiums for retiree health care each year, the city now sets aside funds in a VEBA trust fund to pay for the future costs of retiree health care. This amount is determined by an actuarial valuation. In 2011, City Council passed a resolution directing staff to pursue a reduced plan providing access only for new hires. The effect of this policy change will substantially reduce this liability in future years.
For budget purposes, the city uses a percentage from the actuary report and applies it to wages to determine each service unit’s share of the pre-funding piece of Actuarially Determined Cost (ADC). The remaining amount (or the “pay-as-you-go” insurance premiums) is charged to each service unit based on the retirees that served the service unit while they were employed at the City. The entire ADC is what the city endeavors to fund each year and remit to the VEBA Trust fund.
The City of Ann Arbor has been slowly increasing funding status from 30% to 66% funded over the last several years. The City's Pension is 86% funded while OPEB is 66% funded. Combined, the City's liability for these two items are 80% funded as of 2018.