Making Cents of Implicit Subsidy Liabilities: An Imperative Case for Pre-Funding OPEB in TexasCategories: OPEB/GASB 45/75,PARS News,Texas Developments
In the complex landscape of municipal finance, unique challenges constantly arise. Among these, a particularly significant concern for Texas municipalities pertains to Other Post-Employment Benefits (OPEB), specifically the implicit subsidy liabilities. This financial quandary emerges when active employees and retirees share the same healthcare plan, inadvertently leading to inflated average costs for the employer.
With retirees, who are typically older and more likely to utilize healthcare, forming part of the same plan as younger, healthier active employees, the average cost per member escalates. This cost is primarily absorbed by the employer, creating an ‘implicit subsidy’. This not only amplifies the financial burden on local governments but also presents a conspicuous liability that must be disclosed in financial statements, thus affecting the overall fiscal picture.
For local governments whose OPEB liabilities consist solely of this ‘implicit subsidy’, the predicament takes on an even more significant role. In these cases, the financial burden isn’t merely a side-effect of broader obligations but forms the heart of their OPEB liabilities. It’s therefore critical to proactively address this issue with tailored strategies.
One unique solution that has been used is to pre-fund these liabilities through a Section 115 Trust. This strategic move allows municipalities to handle the immediate financial implications of the implicit subsidy effectively as well as unlocking several long-term fiscal benefits.
Benefits of Pre-Funding Implicit Subsidy Liabilities
- Illustrates Fiscal Responsibility: Taking proactive measures against future liabilities is a clear indicator of prudent fiscal management.
- Generates Investment Income: Monies deposited into a Section 115 Trust can be invested, generating income to counterbalance future liabilities.
- Strengthens Budget Stability: The act of pre-funding liabilities contributes to budgetary predictability and more precise financial forecasting.
- Improves Creditworthiness: By showing proactive fiscal management, a municipality can enhance its reputation and standing with credit rating agencies.
- Facilitates Resource Sharing: By joining a multiple-employer trust, municipalities can share resources, paving the way for cost savings and a broader range of investment options.
Unique Benefits: Stabilizing Contributions and Reducing Employee Costs
- Stabilize Health Care Costs: Accumulating assets in a trust can level out the municipality’s employer health care rates over time, providing budgetary certainty.
- Reduce Employee Costs: When employees share the cost of healthcare with the employer, the earnings from the trust can offset the increased healthcare costs of active employees resulting from the implicit subsidy, leading to substantial budget savings.
Complementary Strategies to Manage Implicit Subsidy Liabilities
Beyond pre-funding, several other strategies can help manage and reduce OPEB liabilities that are entirely implicit subsidy:
- Reduce Costs: Put measures in place that reduce the cost of benefits and bring long-term efficiencies.
- Implement Wellness Programs: Promoting good health among active employees can reduce future healthcare costs.
- Use Medicare Advantage Plans: For eligible retirees, Medicare Advantage plans can offer significant cost savings with comparable or better coverage.
- Adjust Eligibility Criteria: Modifying the eligibility criteria for receiving benefits can reduce the number of employees eligible for these benefits.
- Contract Negotiations: Alterations to retiree benefits in union contracts can manage these costs but require careful negotiation.
- Eliminate Implicit Subsidies: Creating separate healthcare plans for retirees and active employees can eliminate the implicit rate subsidy.
- Pre-Retirement Education: Enlightening employees about their post-retirement healthcare options can help them make informed decisions, reducing the employer’s OPEB liability.
Each municipality must consider its specific circumstances when selecting the most fitting strategies. It is recommended that legal and financial advice be sought to fully comprehend the implications of these decisions.
When OPEB liabilities are entirely constituted by implicit subsidies, the task of tackling this financial challenge becomes paramount. However, through pre-funding OPEB liabilities and adopting these complementary strategies, what appears to be a daunting liability can be transformed into a manageable task. With strategic foresight and prudent planning, Texas municipalities can ensure their fiscal health and sustainability, converting potential liabilities into opportunities for long-term fiscal stability.
About the Author
Charlie Francis is a retired city finance director following a 45+ year career in local government finance. He is most well known for being the “Godfather of Post Employment Benefit Pre-funding” because he led the efforts for being the first city in the nation to establish a multiple-employer Section 115 trust for both OPEB and pension liabilities and costs. In his retirement, Francis provides consulting on these trust programs to local governments nationwide.