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BACKGROUND Since 1990 the City has provided a post- retirement medical benefit that allows eligible employees (and their spouses) retiring from the City to continue participation in group health plans with the City paying a percentage of the plan's cost based on years of service. As an example, for an employee retiring from the City with 15 years of service, the City will pay 60% of the health plan premium. The City has funded its post retirement medical benefits through annual contributions to its Retiree Insurance Reserve Funds. However, unlike many cities that have limited their annual contribution to the amount that must be paid to retirees, (a practice commonly referred to as "pay as- you -go the City has significantly "pre- funded" or established reserve funding, to cover the cost of not only existing retirees but a portion of the cost of current employees in anticipation of their retirement. Recently both private and public sector employers have experienced significant increases in health care cost resulting generally from inflationary pressures and increases in the number of their retirees. In an attempt to contain these escalating costs, Pleasanton, like most cities and private sector firms, has implemented costs saving features in its post retirement health plans. However, the cost of health care continues to increase and the City and private sector firms have limited ability to impact the cost of these services. In recognition of this issue, since 1990 the Financial Accounting Standards Board (FASB) has issued a number of private sector rulings that have significantly changed the prevalent practice of accounting for post retirement benefits on a pay -as- you -go (cash) basis. As an example, its Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, requires an accrual of the expected cost of providing the benefits to an employee and the employee's beneficiaries and any covered dependents. This requirement, which increases the funds that must be set aside annually for the post retirement benefits, has had a substantial adverse impact on the annual net income of many private employers since these costs, usually funded on a pay -as- you -go basis, previously were recognized only during the year that benefits were paid. Further, the amount of the annual contribution was often based on available financial resources rather than the full long term cost of the employer's financial obligation. Similar to the private sector, in 2004, the Governmental Accounting Standards Board (GASB) issued two new accounting rules that generally mirror the FASB requirements; Statement 43, Reporting for Postemployment Benefit Plans Other Than Pension Plans, and Statement 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. GASB #43 covers the accounting and reporting of an irrevocable trust established for assets used to pre -fund these non pension benefits. The other, GASB #45, requires the following three disclosures on an agency's financial statements: Page 2 of 13