29
May
2015

Establishing Trust Funds One Strategy for Communities Facing Millions in Unfunded OPEB Liabilities

Categories: New England Developments,OPEB/GASB 45/75
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Daily Hampshire Gazette by Tom Relihan (The Recorder), Dan Crowley and Scott Merzbach,  May 22, 2015

Predictions that unfunded health care expenses for municipal employees when they retire will total in the millions of dollars have prompted some communities to establish trust funds to begin setting aside money toward those costs.

But the amounts in those funds still fall far short of the projected liability.

Retiree health care benefits are known in state bureaucratic jargon as “other post-employment benefits,” or OPEB, and that’s the term most municipal officials have been using in their discussions about this potential fiscal threat.

A town’s OPEB liability refers to the amount of money that needs to be set aside today to continue to provide those benefits to retired employees and to those who could retire and be entitled to benefits. That includes public school and other municipal employees. The projections are based on a potential escalation of health care costs for a bulge of retiring baby boomers.

Amherst is one town that’s proactive in dealing with its OPEB liability.

“We’re better in the long run if we set money aside now to prefund it,” said Finance Director Sanford “Sandy” Pooler.

Annual Town Meeting, which concluded Wednesday, agreed to place $455,000 from the general fund and sewer, water and transportation enterprise funds into the OPEB Trust Fund, which was created in November 2012. As of July 1, that trust fund will have $2.39 million, Pooler said.

Amherst is facing an estimated $95.7 million OPEB liability based on an actuarial valuation report showing there are 389 retirees and beneficiaries and 513 active employees.

Pooler said Amherst’s strategy is to try to increase the town’s contribution to the trust fund from the general fund by $100,000 each year.

Standard & Poor’s, which provides the bond rating for the town, has cited this as good fiscal management that helps to lower borrowing costs.

“It’s been good for the town for the bond rating to show we’ve been dealing with this issue,” Pooler said.

Amherst has also used other means to reduce the long-term OPEB liability, such as getting better control of health care costs.

“We’ve been able to work to make modest adjustments to benefits in cooperation with our unions,” Pooler said.

In fact, some of the OPEB trust fund is derived from one-time sources that include nearly $300,000 the town did not have to spend on health coverage premiums two years ago.

‘Pay-as-you-go’

Northampton’s unfunded OPEB liability stands at nearly $109 million and the city pays about $3.3 million annually to meet its current obligations.

The city established a trust fund in the current fiscal year, contributing an initial $100,000. It budgeted $125,000 for next year, with plans to increase its contribution by $25,000 annually.

“Like most municipalities, we’ve been doing it on a pay-as-you-go basis,” Mayor David J. Narkewicz said of the city’s OPEB obligations, which are largely health insurance. “We’re simultaneously trying to fund our retirement system.”

“It’s definitely a big number,” Narkewicz said of the $108.9 million. “It’s bigger than our budget this year. But I would caution people that all of our employees are getting their benefits.”

A Standard & Poor’s bond rating report released Wednesday states that while Northampton’s unfunded OPEB liability is “somewhat large at $108.9 million,” the city’s pension and OPEB costs “are manageable at this time.”

South Hadley also created an OPEB trust fund and put an initial $75,000 in it last year, with another $120,000 approved this year. Town Administrator Michael Sullivan said the money does not come anywhere close to the town’s $31 million OPEB liability calculated to 2038, but at least it’s a start. The figure covers about 230 retirees and 160 active employees, he said.

“It is prudent to try to work towards having some money in the bank,” Sullivan said. “There are a lot of communities that haven’t even started down this path yet.”

Sullivan said the first two steps for South Hadley were creating a trust fund and getting some money invested. Now, town officials are working with an adviser to create a longer-term funding plan as general revenues are being used to invest in the trust fund.

“There is a concern when you’re looking at taking $120,000 out of this year’s revenue stream,” he said of the year-to-year costs the town absorbs to close the funding gap.

Annual reports

Since 2008, the Government Accounting Standards Board, a nonprofit organization that sets the accounting rules followed by governments, has required public employers to report their liabilities annually in the same way as pensions.

Although there is no legal requirement for governments to follow the board’s rules, Geoffrey Beckwith, the executive director of the Massachusetts Municipal Association, said failing to do so makes it far more difficult for towns to have audits done or borrow money, and it can damage their credit ratings.

“It’s sort of voluntary, but it’s really not,” Beckwith said.

The idea behind the rule is that retiree health care costs are being incurred during the time an employee works for the town and will come due upon retirement, and they should be accounted for as an everyday operating expense.

But towns are not required to put any money toward them, and most do not.

A report released by the Massachusetts Taxpayers Foundation last September notes that towns have little control over benefit costs, since eligibility requirements are mandated by state laws. Public employers are also far more generous in the benefits they offer retirees than the private companies for which many taxpayers work. While the vast majority of public employers provide retiree health benefits, fewer than 10 percent of private employers do.

A 2013 report from a state commission charged with studying OPEB and retiree health care noted that no municipality pays less than half of its retirees’ health care premiums and most pay for about three-quarters of them.

Beckwith said OPEB liabilities, unless kept in check through legislative reform, could eventually become such a large portion of a town’s budget that they would begin to squeeze out essential services, such as education, police or fire departments, as health care costs continue to rise faster than municipal revenues and the baby-boomer generation begins to retire en masse, adding more retirees to the books.

Buzzword in Deerfield

OPEB has become a buzzword at the meetings of many Deerfield boards and committees throughout the current budget season, with some officials concerned that not saving now could hurt the town’s financial standing today and taxpayers’ wallets further down the road.

A 2013 study suggests Deerfield’s liability for retiree health care costs — at $7.4 million this year — will reach a potential $37 million by 2044.

The study shows that the town should have set aside about $400,000 this year toward the future liability.

The town pays 50 percent of its retirees’ medical and life insurance benefits and had 141 active and 33 retired employees in 2013, according to the study.

Select Board Chairwoman Carolyn Shores Ness said that until now, the town has been paying for retirees’ benefits as they come due as part of the annual operating budget, but setting up a trust fund, which would grow over time and could not be used for any other purpose, would be a much better method. As the fund grows, it would be used to pay the benefits.

At the annual Town Meeting in April, Deerfield voters created such a fund, but the town stopped short of putting any money into it this year.

Sunderland established its own trust fund in 2013 and voted at Town Meeting on April 24 to transfer $5,300 into it. Town Administrator Margaret Nartowicz said the town will continue to contribute to the trust fund to the extent that it can.

Worst-case scenario

Since the liabilities in each town’s studies are based on what would happen if all the municipal employees suddenly retired on the same day, officials in other towns believe the numbers represent a worst-case scenario — one that’s very unlikely to occur.

Marjorie Lane Kelly, finance director of Greenfield, counts herself in that camp.

Greenfield is the largest town in Franklin County and its own 2013 valuation puts the current OPEB liability at $71 million. Kelly said that’s likely a bigger liability than the rest of the county combined, but she’s not particularly concerned about it.

“For an OPEB liability to be cashed in, all of our employees would have to retire at the same time, on the same day. That’s not going to happen,” Kelly said. “If that did happen, we’d have far bigger problems than retiree benefits. The town would disintegrate.”

Despite that, Kelly said the town has begun putting money in a trust to fund the liability, if only to show ratings agencies and lenders that the town is making some progress toward that goal. That fund currently contains about $703,000, she said. Last September, the town deposited about $350,000 into the account from a surplus windfall.

State efforts to reform

At the state level, former Gov. Deval Patrick introduced legislation in 2013 designed to address some of the issues surrounding OPEB. The legislation would have increased the minimum years of service requirement from 10 to 20, increased the minimum age for eligibility and implemented a proration schedule to gradually phase in benefits. The reforms would not have applied to current retirees or some employees who were nearing retirement.

The bill ran into opposition from organizations representing public employees, such as the Massachusetts Organization of State Engineers and Scientists, who said it was unfair to public employees who were convinced to work for state and local governments — sometimes for less pay than in the private sector — specifically because of the benefits they were promised.

In the budget proposed by Gov. Charlie Baker for the year beginning July 1, the amount active employees contribute to their health care plans would increase. But that proposal also ran into opposition and was not included in the House Ways and Means Committee’s budget.

State Rep. Stephen Kulik, D-Worthington, is the vice chairman of that committee.

“The major reason we did not adopt (Gov. Baker’s) request is that the Group Insurance Commission has recently made changes to its plans which will raise co-pays and deductibles, and we felt that combining a premium percentage increase with this would be a significant financial burden for state employees,” Kulik said.

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