Debunking the Top 6 Myths of OPEB PrefundingCategories: New England Developments,OPEB/GASB 45/75
Below PARS refutes six of the most common OPEB prefunding myths that we hear from many municipalities and schools we talk to in the Northeast.
1. We are already lowering our agency’s OPEB liabilities by setting money aside in the general fund.
WRONG. According to GASB, the only way for assets to offset liabilities on balance sheets is for funds to be set aside in an IRS-compliant trust. The trust must be: (1) irrevocable, (2) inaccessible to creditors and (3) established for the purpose of prefunding OPEB liabilities.
2. Establishing a trust means that we must continue to provide retiree healthcare benefits in the future.
WRONG. Prefunding does not affect your agency’s right to bargain – many agencies have changed OPEB benefits or eliminated them entirely after prefunding.
3. If our agency begins prefunding, we are obligated to make regular contributions into the trust.
WRONG. This may depend on your trust provider, but with the PARS OPEB Trust Program, there are no contribution requirements – your agency can make contributions of any amount, at any time.
4. If we eliminate retiree healthcare benefits, the money will be stuck in the trust because it’s irrevocable.
WRONG. If OPEB benefits are eliminated and no beneficiaries or liabilities remain, the trust can be terminated and all assets will be transferred back to your agency.
5. Funds in the trust can only be used to pay future retiree healthcare premiums.
WRONG. Funds in the trust can be used to cover any OPEB related costs since plan inception. For instance, in addition to paying or reimbursing retiree healthcare, assets can also be used for pay-as-you-go OPEB costs or the cost of actuarial valuations.
6. We don’t have enough money to prefund the ARC, so there is no point in setting up a trust.
WRONG. Every dollar makes a difference. No matter what amount your agency is able to contribute, every asset will help to offset the liability on your balance sheet, and prefunding will show a commitment to addressing the outstanding liability that will enable your actuary to raise your agency’s discount rate. At PARS, we believe that something is always better than nothing.
By addressing these misconceptions, it is clear that OPEB trusts are much more flexible than many first think. Not only can they lower liabilities, act as a rainy day fund, help to improve credit ratings and be accessed to pay for OPEB costs at any time, but most importantly, they are a fiscally prudent measure to help protect the long-term fiscal health of your municipality or school district.