R.I. Towns & Cities Look Beyond Pension Liabilities to an Even Bigger Problem: OPEBsCategories: New England Developments,OPEB/GASB 45/75,PARS In the News
Providence Business News by Eli Sherman, July 21, 2016
Leading up to the financial crisis of 2008, cities and towns in Rhode Island and throughout the country enjoyed pre-recession revenue surpluses made available by the bubble-year economies of 2006-07.
Flush with cash, and unaware of the subsequent market crash, municipal leaders were faced with budget options: use the excess money to fund new, short-term projects or pay down old, long-accumulating obligations, such as pension liabilities and other post-employment benefits, known as “OPEBs.”
Rhode Island cities and towns by and large chose the former and allocated excess funds toward new programs, new hires and salary increases. Shortly thereafter, the global economy plummeted, having a trickle-down effect on local municipalities that were left to struggle through the worst recession since the Great Depression.
Budgets tightened, and while earlier choices had not put resources toward those overlooked long-term obligations, now municipalities had no choice. They had no money to put away. And the combination of those earlier choices and the effects of the Great Recession have allowed unfunded OPEB liabilities for 52 locally administered public plans to exceed $3 billion – an amount most likely understated.
“OPEBs are kind of the elephant in the room,” said Mark Higgins, former dean of the College of Business Administration at the University of Rhode Island. “That’s why Rhode Island has a problem with paying for its infrastructure. That’s why it has a problem paying for its education.”
OPEBs are all benefits other than pensions that are given to employees after retirement, but the majority of costs are tied to health care. Like pension liabilities, the cost of funding these OPEB obligations is growing quickly. Unlike pensions, however, the costs among municipalities are much greater than with the state, for which the OPEB liability totaled $778.3 million in fiscal 2015, according to a state fiscal audit. Municipal employees – comprising a greater number of public safety workers – on average retire at an earlier age than state workers, which extends the payment timeline and exacerbates the post-employment liability.
“If you thought the local pension systems were bad news, guess what’s coming next?” Higgins said of OPEBs.
New accounting standards that go into effect next year will start giving taxpayers a clearer picture of exactly how much these unfunded amounts are impacting local budgets, which has sparked some public policy action and has municipal leaders worrying about the potential fallout.
The majority of Rhode Island cities and towns have zero, or next-to-zero, money set aside to pay for these unfunded liabilities, which the state estimates exceeds $3 billion in aggregate and is funded at 1.4 percent, according to the R.I. Division of Municipal Finance.
Because there’s no money set aside, the liabilities – funded on a pay-as-you-go basis each year – eat away at an increasing pace on yearly operating budgets, making it more difficult for municipalities to pay for anything outside of benefit costs.
“That [liability] is increasing each year and that number is significant,” said Kathryn Cannie, senior consultant at the Public Agency Retirement Services, which helps public entities set up OPEB funding programs throughout the country.