City_of_Scranton_OPEB_FINAL--12.31.2023.pdf

CITY OF SCRANTON OPEB TRUST

(a Fiduciary Component Unit of the City of Scranton, Pennsylvania)

Financial Statements

December 31, 2023

(A Fiduciary Component Unit of the City of Scranton, Pennsylvania)

Table of Contents

Page(s)

Independent Auditors’ Report 1–3

Management’s Discussion and Analysis 4-5

Statements of Fiduciary Net Position 6

Statements of Changes in Fiduciary Net Position 7

Notes to Financial Statements 8–14

Required Supplementary Information (Unaudited)

Schedule of Changes in Net OPEB Liability and Related Ratios 15

Schedule of Employer Contributions – Last 10 Fiscal Years 16

Schedule of Investment Returns 18

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Management’s Discussion and Analysis

December 31, 2023

(Unaudited)

This section of the financial report presents our discussion and analysis of the City of Scranton (“City”) Other Post-Employment Benefits (OPEB) Trust (the Trust) financial performance during the fiscal year ended December 31, 2023. Please read it in conjunction with the Trust’s financial statements, which immediately follow this section.

Overview of the Financial Statements

The financial section of this annual report consists of four parts: management’s discussion and analysis (this section), the financial statements and related notes to the financial statements, and required supplementary information.

The financial statements provide both long-term and short-term information about the Trust’s overall financial status. The financial statements also include notes that explain some of the information in the financial statements and provide more detailed data. The statements are followed by a section of required supplementary information that further explains and supports the information in the financial statements.

Financial Analysis of the Trust

Net Position and Change in Net Position

The Trust’s total net position at December 31, 2023 was approximately $2.16 million. The change in net position is comprised of the employer contributions to the Trust of $2 million and net investment income of $.16 million. Actual cash contribution by the City to the Trust was $2 million in fiscal year 2023. No benefits were paid out of the Trust during fiscal year ending December 31, 2023.

Other Post-Employment Benefits (OPEB) Trust

In December 2022, the City established the City’s Other Post-Employment Benefits (OPEB) Trust. The Trust was established for the sole purpose of providing for the advance funding of future costs of retired employee health insurance and other benefits provided to retirees. It is intended that the Trust shall constitute a “Qualified OPEB Trust” according to the standards set forth in GASB Statement No. 43, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions and the standards of GASB Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans.

The OPEB Trust Agreement establishes a five-member Board of Trustees, to control and manage the trust.

An initial deposit of $2 million was made to the trust upon establishment of the trust in January 2023. The balance of the trust at December 31, 2023 was $2.16 million.

Investments

The Board of Trustees has prepared an Investment Policy to manage the growing portfolio of trust assets.

For the period ended December 31 2023, investment income was $.16 million.

Management’s Discussion and Analysis (Continued)

December 31, 2023

(Unaudited)

Contacting the Trust’s Financial Management

This report is designed to provide all interested parties with a general overview of the Trust’s finances. If you have questions about this report or need additional information, contact the City of Scranton, Business Administrator, City of Scranton, 340 North Washington Avenue, Scranton, Pennsylvania 18503.

Statement of Fiduciary Net Position

December 31, 2023

Cash and cash equivalents $ 22,475 Investments:

Fixed income securities - US 845,885 Domestic equity securities 1,291,385

Total investments 2,137,270

Accrued Interest Receivable 3,843 Total assets 2,163,588

Accrued Expenses —

Net position restricted for OPEB $ 2,163,588

See accompanying notes to financial statements.

Assets

Liabilities

Statement of Changes in Fiduciary Net Position

Year Ended December 31, 2023

Additions:

Employer contributions $ 2,000,000

Net investment income (loss) 163,588

Total additions 2,163,588 Deductions:

Administrative expense — Total deductions —

Change in net position restricted for OPEB 2,163,588

Net position restricted for OPEB, beginning of the period — Net position restricted for OPEB, end of period $ 2,163,588

See accompanying notes to financial statements.

Notes to the Financial Statements

Year Ended December 31, 2023

8 (Concluded)

(1) Organization and Nature of Activities

The City of Scranton (City) OPEB Trust (Trust) was established in December 2022 as a single-employer other post-employment benefits (OPEB) plan, for the purpose of accumulating and investing assets to fund certain post-retirement medical and life insurance for retirees of the City. The Trust is included as a fiduciary component unit in the City’s financial statements because of its financial relationship with the City.

The Trust’s Board of Trustees has fiduciary responsibility for the investment of monies and administration of the Trust pursuant to the Trust Agreement. The Board of Trustees is currently composed of the City Business Administrator and the Trustees term of service shall continue for as long as each is willing to perform the duties and obligations of the position.

The City provides provide medical coverage to eligible retirees and their dependents who meet specific criteria. Under the police, firemen, and clerical labor contracts, the City is responsible for providing health insurance to retirees and spouses for the remainder of their lives if the employee was hired or retired prior to December 31, 1993. Employees hired after December 31, 1993, are not eligible for these benefits. The City’s contribution for retiree health insurance is equal to the cost in effect in 1993 plus 75% of any increase above that cost. The retiree pays the other 25%.

Under the public works labor contract, the City will provide health insurance to retirees and spouses only from age 62 to 65. The City’s contribution is equal to the cost in effect in 1994 plus 75% of any increase above those costs. The retiree pays the other 25%.

(2) Summary of Significant Accounting Policies

(a) Basis of Presentation

The accompanying basic financial statements of the Trust are presented in conformity with the U.S. generally accepted accounting principles as prescribed by the Governmental Accounting Standards Board (GASB).

The Trust’s financial statements are presented in accordance with GASB Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans. This statement requires, among other things, additional disclosures and descriptive information about classes of plan members, plan investments and significant assumptions used to measure the total OPEB liability.

The Trust has also implemented GASB Statement No. 85, Omnibus 2017. This statement addressed various topics, including requirements related to presenting payroll measures in required supplementary information related to OPEB plans.

Notes to the Financial Statements (Continued)

December 31, 2023

(Unaudited)

(b) Basis of Accounting

The financial statements of the Trust are presented as a fiduciary fund type. The economic resources measurement focus and the accrual basis of accounting are used in the preparation of the financial statements.

Employer contributions to the plan are recognized when due and the employer has made a formal commitment to provide the contributions. Benefits paid represents the gross up of amounts paid directly by the plan sponsor, the City, for retiree OPEB costs and the implicit rate subsidy associated with such costs. The implicit rate subsidy is the inherent subsidy of retiree healthcare costs by active employee healthcare costs when healthcare premiums paid by both actives and retirees are the same. Benefits paid are recognized when due and payable in accordance with the terms of the employer/sponsor’s plan.

(c) Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(3) Cash and Cash Equivalents

Cash and cash equivalents consist of money market accounts or highly liquid investments with a maturity of three months or less. The custodial credit risk for deposits is the risk that, in the event of a bank failure, the Trust’s deposits may not be recovered. The Trust does not have a formal policy for custodial credit risk for deposits and the balance of $22,475 at December 31, 2023. The entire amount was exposed to custodial credit risks as uninsured and uncollateralized.

(4) Investments

The Trust’s investment policy and any changes to the policy are adopted by the Board of Trustees of the Trust. The current policy was approved in December 2022 and contains long-term asset allocation ranges.

The primary objective of the investment policy is to assure that assets will be available to pay postemployment benefits throughout the life of the Plan and to maintain or improve the market value of the fund relative to vested and accrued benefit liabilities. The objectives seek to preserve the actuarial soundness of the Plan by achieving a long-term return of at least the actuarial return rate and to prudently manage the inherent investment risks that are related to the achievement of this goal.

Long-term asset allocation ranges are developed based on several factors including, the long-term investment goals of the Trust; the Trustee’s tolerance for short-term losses; the Trust’s liquidity needs;

and any legal or regulatory requirements.

Notes to the Financial Statements (Continued)

December 31, 2023

(Unaudited)

Custodial Credit Risk is the risk that the Trust will not be able to recover the value of its investments if the counterparty fails. The Trust’s mutual fund investments are not subject to custodial credit risk in accordance with GASB Statement No. 40, Deposit and Investment Risk Disclosures—an amendment of GASB Statement No. 3 as the investments are open-end mutual funds.

Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations.

The Plans do not have a formal investment policy that addresses credit risk. The credit risk of a debt instrument as measured by a Nationally Recognized Statistical Rating Organization (NRSRO). All of the Trust’s mutual funds and ETFs are not rated.

Interest rate risk is the risk that changes in interest rates that will adversely affect the fair value of an investment or a deposit Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment or a deposit. The Plans do not have a formal investment policy that limits investment maturities as a means of managing its exposure to fair value losses arising from increasing interest rates. As of December 31, 2023, the Trust’s investment balance exposed to interest rate risk was as follows:

Investment Type No Maturity Less Than 1 Year 1-5 Years

Fixed Income Mutual Funds 625,952$ -$ -$

Fixed Income ETF 219,934 - -

Equity Mutual Funds 105,162 - -

International Equity ETF 331,125 - -

International Equity Mutual Funds 52,345 - -

US Equity ETF 802,752 - -

Total Pension Trust Fund 2,137,270$ -$ -$

Investment Maturities

Foreign Currency Risk is the risk that changes in exchange rates will adversely affect the fair value of an investment in a foreign financial institution. The Plan mitigates this risk by limiting its investments in funds with foreign exposure. The underlying assets of the Trust’s International Equity Mutual Funds and ETFs are invested in foreign assets that may be exposed to exchange rate changes.

Concentration Risk is the risk of loss attributed to the magnitude of the Plan’s investment in a single issuer. The following investments represent over 5% of total investments with a single investor as of December 31:

Notes to the Financial Statements (Continued)

December 31, 2023

(Unaudited)

Investment %

Vanguard Total Stock Market Index Fund 802,752$ 37.56%

Vanguard Star International Stock Fund 241,230 11.29%

Baird Funds Core Fixed Income Fund 220,593 10.32%

Prudential Investments Fixed Income 177,888 8.32%

Ishares Core US Aggregate Bond ETF 177,657 8.31%

Total Pension Trust Fund 1,620,120$

GAAP defines fair value as the price that would be received upon the sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. GAAP specifies a hierarchy of inputs to valuation techniques, which categorizes inputs to fair-value measurement that reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs). The following summarizes the fair-value hierarchy:

Level 1 Inputs – Unadjusted quoted market prices for identical assets and liabilities in an active market that an organization has the ability to access, Level 2 Inputs – Inputs other than the quoted prices in active markets that are observable either directly or indirectly, and

Level 3 Inputs – Inputs based on prices or valuation techniques that are both unobservable and significant to the overall fair-value measurements.

The following tables present the fair-value measurements of assets recognized in the accompanying statements of net position measured at fair-value on a recurring basis and the level within the fair-value hierarchy in which the fair-value measurements fall at December 31:

Investment Type Level 1 Level 2 Level 3 Fair Value

Fixed Income Mutual Funds 625,952$ -$ -$ 625,952$

Fixed Income ETF 219,934 - - 219,934

Equity Mutual Funds 105,162 - - 105,162

International Equity ETF 331,125 - - 331,125

International Equity Mutual Funds 52,345 - - 52,345

US Equity ETF 802,752 - - 802,752

Total Pension Trust Fund 2,137,270$ -$ -$ 2,137,270$

Fair Value Measurements Using

Notes to the Financial Statements (Continued)

December 31, 2023

(Unaudited)

(5) Other Postemployment Benefits

(a) Plan Description

The City of Scranton’s Retiree Health Care Plan (Plan) is a single-employer defined benefit postemployment health care plan that covers eligible retirees. The Plan, which is administered by the City, allows employees who retire and meet retirement eligibility requirements under one of the City’s retirement plans to continue medical, dental and vision coverages as a participant in the City’s plan.

Plan Membership: At January 1, 2023, the following employees were covered by the benefit terms:

Inactive plan members or beneficiaries currently receiving benefits 507 Inactive plan members entitled to but not yet receiving benefits - Active plan members 479

Total 986

Benefits Provided: The benefits provided and required retiree contributions vary by employment group and retirement date and are outlined in the Plan Provisions section of this report.

Contributions. A $2,001,624 contribution was made to the Trust. No benefits were paid out of the Trust during the fiscal year ending December 31, 2023.

(b) Investments

Investment Policy: The following asset allocations were provided as of December 31, 2023:

Asset Class Target Allocation (%)

US Equity 38.8%

International Equity 14.9%

Emerging Equity 6.0%

Core Fixed 39.2%

Cash 1.1%

Total 100.0%

Rate of Return: The money-weighted rate of return on investments for the year ended December 31, 2023 was 5.66%. The money-weighted rate of return expresses investment performance, net of investment expense, adjusted for the changing amounts invested.

Notes to the Financial Statements (Continued)

December 31, 2023

(Unaudited)

(c) Net OPEB Liability of the City

The components of the net OPEB liability of the City at December 31, 2023, were as follows:

December 31, 2023

Total OPEB liability 148,818,129$

Plan fiduciary net position 2,163,588

Net OPEB liability 146,654,541$

Plan fiduciary net position as a percentage of the total OPEB liability 1.45%

Actuarial Assumptions. The total OPEB Liability was determined by an actuarial valuation as of January 1, 2023 using the following actuarial assumptions:

Inflation 2.47 percent

Salary increases 4.50 percent

Discount rate 5.00 percent

Healthcare cost trend rates (2023) Non-Medicare & Non-Uniformed: 8.54%, then 8.50%, then 7.90%, then 7.35%, then 6.75%, then 6.20%, then 5.60%, then 5.05%, then an ultimate of 4.75%.

Non-Medicare & Uniformed: 2.00%, then 8.50%, then 7.90%, then 7.35%, then 6.75%, then 6.20%, then 5.60%, then 5.05%, then an ultimate rate of 4.75%.

Medicare: 1.76%, then 7.50%, then 6.90%, then 6.50%, then 6.10%, then 5.70%, then 5.25%, then 4.85%, then an ultimate rat of 4.75%.

Mortality rates are based on PUBG-2010 and PUBS-2010 mortality tables projected 5 years past the valuation date using the mortality improvement scale MP-2021. We feel this assumption sufficiently accommodates future mortality improvements.

The long-term expected rate of return on OPEB plan investments was provided by PFM Asset Management LLC. The target allocation and best estimates of real rates of return for each major asset class are summarized in the following table. These rates of return have been reduced by inflation of 2.47%.

Notes to the Financial Statements (Continued)

December 31, 2023

(Unaudited)

Long Term Expected Asset Class Real Rate of Return

US Equity 6.62%

International Equity 6.91%

Emerging Equity 8.92%

Core Fixed 2.46%

Cash 0.76%

Total

Discount Rate. The discount rate used to measure the Total OPEB Liability was the municipal bond rate of 5.00%. The expected rate of return on trust investments is 5.00%. This rate was used to discount projected benefit payments.

Sensitivity of the Net OPEB Liability to Changes in the Discount Rate. The following presents the net OPEB liability of the City, as well as what the City’s net OPEB liability would be if it were calculated using a discount rate that is one percentage-point lower or one percentage-point higher than the current discount rate:

1% Decrease Current

Discount Rate 1% Increase (4.00%) (5.00%) (6.00%)

Net OPEB Liability (asset) 160,477,672$ 146,654,451$ 133,831,242$

Sensitivity of the Net OPEB Liability to Changes in the Healthcare Cost Trend Rates. The following presents the net OPEB liability of the City, as well as what the City’s net OPEB liability would be if it were calculated using healthcare cost trend rates that are one percentage-point lower or one percentage-point higher than the current healthcare cost trend rates:

1% Decrease Healthcare Cost 1% Increase Trend Rates

Net OPEB Liability (asset) 132,100,913$ 146,654,451$ 162,473,727$

Required Supplementary Information – Schedule of Changes in Net OPEB Liability and Related Ratios

December 31, 2023

(Unaudited)

Total OPEB Liability

Total OPEB Liability - Beginning 157,157,517$ 195,437,896$

Service Cost 2,900,858 4,299,442 Interest 6,923,991 4,384,743 Change of Benefit Terms (44,488) - Differences between expected and actual experience 5,438,183 - Change of assumptions (13,760,349) (37,190,448) Benefit payments (9,797,583) (9,774,116) Net Change in total OPEB liability (8,339,388) (38,280,379)

Total OPEB Liability - Ending 148,818,129 157,157,517

Plan Fiduciary Net Position

Plan fiduciary net position - beginning - -

Contributions - employer (implicit + explicit) 2,000,000 - Net investment income (loss) 163,588 - Administrative expense - - Net change in plan fiduciary net position 2,163,588 -

Plan fiduciary net position - ending 2,163,588 -

Net OPEB Liability 146,654,541$ 157,157,517$

Plan fiduciary net position as a percentage of the total OPEB liability 1.45% 0.00%

Covered-employee payroll 37,107,524$ 34,912,230$

City's net OPEB liability as a percentage of covered employee payroll 395.22% 450.15%

Notes to Schedule

Covered Employee Payroll was actual calendar year 2023 covered payroll provided by City personnel.

Required Supplementary Information – Schedule of Changes in Net OPEB Liability and Related Ratios (Continued)

December 31, 2023

Also reflected as assumptions changes are updated health care costs and trend rates, as well as updated mortality rates.

See accompanying independent auditors' report

Fiscal Year Ending December 31, 2023: 5.00% Fiscal Year Ending December 31, 2022: 4.31%

Covered Employee Payroll was actual calendar year 2023 covered payroll provided by City personnel.

Difference Between Expected and Actual Experience. Difference Between Expected and Actual Experience reflects the impact of changes to the census data from the prior valuation to the valuation as of January 1, 2023.

Changes of benefit terms. Changes of benefit terms reflect Fire and Police Arbitration Awards.

Changes of assumptions. Changes of assumptions and other inputs reflect the updated claims costs and health care trend rates, as well as the effects of changes in the discount rate each period. The following are the discount rates used in each period:

Required Supplementary Information – Schedule of Employer Contributions – Last 10 Fiscal Years

December 31, 2023

Actuarially determined contribution $ —

Contributions in relation to the actuarially determined contribution 2,001,624 Contribution deficiency (excess) $ (2,001,624)

Covered- Employee Payroll (projected) $ 37,107,524 Contributions as a Percentage of Covered- Employee Payroll 5.39%

Data is being accumulated annually to present 10 years of the reported information.

See accompanying independent auditors’ report.

Required Supplementary Information – Schedule of Investment Returns

December 31, 2023

Annual money-weighted rate of return net of investment expense 5.66%

Data is being accumulated annually to present 10 years of the reported information.

See accompanying independent auditors' report.