What is OPEB and Why Should We Care? PART 1
What is OPEB? Almost all municipal employers offer a retiree healthcare benefit which requires the employer to pay an agreed percentage of employees’ healthcare insurance premiums in retirement. OPEB stands for “other post-employment benefits” provided to retired employees, over and above pensions, of which the retiree healthcare benefit is by far the largest. The OPEB liability is the dollar amount of the liability which the Town is projected to be required to pay for this benefit. It is calculated by actuaries who take into account the age of our currently active employees, the cost of the health plans we offer, employee turnover (how many are projected to collect this benefit), and actuarial mortality tables (how long are these employees projected to live). While a significant portion of the payments for this benefit will be paid in the future, the actuary can calculate a “present value” of all of those payments to determine the amount of the liability in today’s dollars. As an example, if you were to add up all of the payments to be made on a 30 year mortgage it would amount to a very large sum but, since most of those payments are “in the future”, little credibility is attached to that large sum. If you take the present value of all of those payments using the mortgage interest rate as the discount rate, the amount of the liability today would be equal to the principal amount of the mortgage. Conceptually, that is how to think of the OPEB liability. There are a lot of payments to be made far in the future but the obligation reported today is similar to that “principal” amount. However, the specific size of that OPEB liability is based on many assumptions so the actual total liability is not as definitive an amount as one’s mortgage since there are few assumptions in a mortgage calculation.
How large is the Town’s liability? The OPEB liability for Town’s and Sudbury Public Schools’ (“Town/SPS”) employees is $34.3 million, or roughly $37,400 per active employee and $64,400 per retired employee (the amount of the obligation attributable to active employees divided by the number of active employees and the amount of the obligation attributable to retired employees divided by the number of retired employees). The OPEB liability for the Lincoln Sudbury Regional School District (“LS”) is $46.1 million, or roughly $181,700 per active employee and $161,400 per retired employee. [The dollar amount of Sudbury’s share of the LS obligation is roughly 85% or $39.2 million] These amounts assume that the Town/SPS and LS continue the current practice with regard to retiree healthcare liabilities of “Pay-As-You-Go” (i.e. - pay the bills for retirees’ health costs as they are presented without setting aside money for future costs).
Why are we only hearing about this now, after the amount of the projected liability has grown so large? For decades, state and local governments have promised defined benefit pensions together with retiree healthcare benefits as part of the compensation package provided to government employees. While funds were often set aside to cover the cost of the pension payments when they came due, generally no funds were set aside to cover the cost of the promised healthcare premiums. As a result, most towns today (including Sudbury) have an operating budget that includes salaries and healthcare benefits for active employees, plus healthcare benefits for retired employees who are no longer actively employed. Operating budgets are paying for the cost of operating government today plus part of the cost of operating government in the past - that unfunded liability to pay for healthcare in retirement. It has only been in the last five years that the Government Accounting Standards Board (GASB), which governs municipal accounting, required municipalities to calculate the amount of this liability and include it in the footnotes to their financial statements.
Bob Jacobson, Bill Kneeland and Chuck Woodard
The writers are members of the Sudbury Finance Committee. Bob Jacobson and Chuck Woodard are former chairmen of the Committee. Part 2 will be published next week.
JON999
12:03 pm on Tuesday, January 22, 2013
What is OPEB? it's the credit card bill you rip up before your spouse sees it. it's the accumulation of bills that municipalities across the country have hidden from their residents for decades. it's the ignoring of entirely predictable costs for political (and prop 2 1/2!) reasons until it can't be ignored any more (because the accountants are demanding it, not because politicians have sought any salvation).
what is OPEB? it's the immoral transfer of debt from one generation to another, resulting in the crowding out of and forced reduction of current period spending, such as on schools, infrastructure, and public safety.
how large is Sudbury's OPEB? it's almost the size of Sudbury's entire yearly budget. so large that in order to pay it off, Sudbury's schools, government, town services, bond payments, etc. would have to literally cease to exist for an entire year (except for the tax collector, of course). in other words, a secret credit card bill so large it equalled your entire yearly take-home pay.
(btw, not disclosing OPEB liabilities like this would be considered fraud in the private sector.)
where is this heading? a massive bond issue to fund this liability (i'm guessing that's coming in "Part II" of this article). and the answer will be "no" unless and until these liabilities are renegotiated.
SkimThreePercent
1:22 pm on Tuesday, January 22, 2013
But someone once told me that Sudbury was a well run Town.
I'm guessing that it is NOT!
Why did it take Woodward and Bernstein (or is Woodard and Jacobson) thirty years to figure this out? Furthermore what did Gossells know and when did she know it?
Follow the money.
Pat Brown
11:35 am on Wednesday, January 23, 2013
I give FinCom credit for courage in bringing up this issue. Absolutely we have been mortgaging the future without ever exactly admitting it--but don't blame FinCom. They (and Sudbury HR) are just the messengers. Whoever negotiated the agreements didn't factor in the full costs in subsequent budgets.
GASB45 ( see http://en.wikipedia.org/wiki/GASB_45 ) came into effect in 2006 and requires reporting--although not funding--of this liability by government entities at all levels nationwide. We now have a handle on our accrued liabilities--for OPEB, anyway. So do all those other government bodies. It's not pretty, but it's more transparent. At least now bond purchasers can factor these obligations into their calculations. If retired employees have first claim on the municipal revenue stream then bondholder default risk rises and interest rates rise to compensate.
As discussed at the November 22, 2012, BOS meeting, moving SPS and Town of Sudbury employees to the GIC reduced our OPEB liability by $16 million.
At last night's BOS meeting (January 22) someone floated the idea of dedicating the revenue stream from the 0.75% local meals tax to funding the OPEB account. It wouldn't cover the obligation in one year, but it would be a start.
What do you think?
JJoseph
12:20 pm on Wednesday, January 23, 2013
This debt is way too large to ever get paid and yet we continue to negotiate with the Unions and continue to offer the same Rolls Royce package. When will people in government ever learn? This is an unsustainable model. The OPEB problem is the final straw to put cities and towns into bankruptcy. Where are all the financial experts that we have on the payroll? Nobody saw this coming?
Sudburytoo
12:21 pm on Wednesday, January 23, 2013
What a well run town!!!
JJoseph
12:52 pm on Wednesday, January 23, 2013
Just to put this in perspective, if every taxpayer (individual and Corporate) in Sudbury paid twice the amount of current taxes for an entire year, we would still not catch up on this debt obligation. Meanwhile we still think we can afford two school superintedents and staffs, multiple payroll and HR departments at SPS, LS and the Town. We are leaving the next generation with a mountain of debt!
Pat Brown
3:49 pm on Wednesday, January 23, 2013
From the November 20, 2012, BOS minutes discussing the reports presented by KMS Actuaries, LLC (Linda Bournival presented the reports for KMS; "this year" is FY2013)
:
Mr. Woodard summarized findings from the report, stating the Town/SPS OPEB expense for this year is approximately $1.7 million, but only $844,000 has been budgeted. Thus, this underfunding each year is how the total obligation has reached $34 million over time. He asked if this was a fair conclusion, and
Ms. Bournival responded affirmatively. Mr. Woodard stated for the benefit of the average taxpayer that benefits have been promised for which no money has been set aside for their costs.
(end quote)
The $844,000 for OPEB in FY2013 above is consistent with the actual payments we make to cover existing retirees for this year, as shown in the slides for the KMS report. We are currently setting nothing aside for future obligations being accrued by existing employees for their retirement in the future. The OPEB Trust Fund is currently empty. We have more current employees, and health care costs are increasing.
I don't think we're going to dig ourselves out of this in a year--it will take longer and be less draconian, and we will see nothing--no more teachers, no better services--other than a decreasing liability on the books. I do think we're going to demand much greater restraint in how we negotiate benefits that stretch into the future, and in how we account for them.
Mike Hullinger
1:53 pm on Thursday, January 24, 2013
Digging into this a little deeper: The first time the audited statements of the Town were required under GASB Statement #45 to disclose the funding status of OPEB benefits was FY 2009. Interestingly, the audited financial statements as far back as FY 2004 footnoted that GASB Statement #45 was a future disclosure requirement.
The first question is, why did the Town decide to wait until 2009 to make the OPEB funding status financial disclosures rather than disclose it earlier when they clearly were aware of both the OPEB liability and the requirement to disclose it in the future?
When the OPEB funding liability was first disclosed in the audited financial statements for FY 2009, it reported an unfunded liability of $27.8 million based on the most recent actuarial analysis dated July 1, 2007. It also reported that the current year funding requirement was $3.3 million while only $771,000 was actually contributed. The Funding shortfall suggests the unfunded liability may have been built up over the prior 10 or 11 years (i.e since late 1990’s). Another question is if it has always been the policy of the Town to not fully fund the annual cost of the OPEB Plan or is this something that was changed from full funding to partial funding at some specific point in time? If so, why?
(Part 1)
Mike Hullinger
2:05 pm on Thursday, January 24, 2013
(Part 2)
There is no indication in the FY 2009 audited statement if the OPEB liability includes of excludes LS, it simply has a line item for “education”. If the OPEB liability includes LS, then the OPEB liability has grown $45.7 million in about 5 years, or $9 million per year.
The FY 2010 audited statement indicates the OPEB liability grew $8.6 million from July 1, 2007 to July 1, 2009.
When FinCOm provides Part 2, it would be good to see the history of the growth in the OPEB liability by year for the last 15-20 years. If we could see this broken down by legal entity, Town, SPS and LS, that would be even more informative. It would also be helpfuly for an analysis of what it would take in annual incremental tax revenue over what period of time to fund the OPEB Plan liability to a 90% level.
Tch_yr_kids
8:10 pm on Wednesday, January 23, 2013
@ J Joseph, I would love to know just who has a "Rolls Royce" Health package in the Public Sector. Pray tell, show us some actual data before making such an absurd and false claim.
Have you thanked our governor and legislature who took away the union's right to collectively bargain with cities and towns for health benefits? I for one hated town employee pay more and get less for my health insurance and have far more on out-of-pocket by way of co-pays and deductables. I wish you were right about "Rolls Royce" but it never has been that way and sure as heck is not that way now.
Making such false claims is beyond ignorant, it is misleading and bashing the wrong group of people.
Bryan S
9:13 am on Friday, January 25, 2013
BB&C - Thank you for posting this article and explaining OPEB but also detailing the amounts. I am hoping in part 2 you could answer:
1. How are other towns dealing with this?
2. Why is there such a disparity between LS and the town?
3. Will the Supreme Court ruling that caused Lincoln to have to contribute more to LS also mean they will have to contribute more to OPEB for LS?
4. To Mike's question above, why so long to talk about this?
How can we hire new employees for non-essential functions or duplicate functions when today we can't cover the true long term cost of our current employees?
Selectmen - where have you been on this issue for the past 10 years?
Mike Hullinger
1:41 pm on Friday, January 25, 2013
More questions:
1. How much of the growth in OPEB actuarial liability is related to the Federal Reserve artificially depressing interest rates? How much would a 1% increase in the base interest rate used for the actuarial liability calculation reduce the current OPEB liability, everything else remaining the same?
2. The KMS report for the Town and SPS combined can be found here: http://sudbury.ma.us/departments/HR/doc8186/FY12SudburyGASB45ReportFinal.pdf. Its is interesting to note that SPS is not specifically indentified. The report simply identifies "Schools." However the report does not include LS. The LS OPEB liability report can be found here: http://www.lsrhs.net/sites/schoolcommittee/files/2012/12/Lincoln-Sudbury-2011-GASB-45-Report-Final-Revised.pdf
3. Is there a 20 year forecast of the pay-as-you-go annual payment requirement, including supporting assumptions about rates of growth in health care costs and demographics, and how does this compare to a 20 year forecast of the annual required contribution?
4. Why is the participant percentage contribution so much lower for LS and SPS?
5. Is there any pending legislation that will require minimum OPEB plan funding levels similar to private sector defined benefit plan regulations? If so, what is the potential impact on Sudbury taxpayers?
Mike Hullinger
1:43 pm on Friday, January 25, 2013
Number 4 above contains a typing error and should read,"Why is the participant percentage contribution so much lower for LS than SPS?
Charles Woodard
5:34 pm on Friday, January 25, 2013
Let me try to answer the questions. This will be in multiple comments because of the word count limitation.
Has it always been the policy of the Town to not fully fund the annual cost of the OPEB Plan or is this something that was changed from full funding to partial funding at some specific point in time?
The policy of the Town, as with most Towns in the State (and elsewhere around the country), has historically been to pay the bills for the cost of retiree healthcare as they were presented (“pay as you go”). Few if any towns have been setting aside money to cover the entire cost of the retiree healthcare benefit, which would include the current value of the promise made this year to provide healthcare in retirement i.e. to make payments in the future.
There is no indication in the FY 2009 audited statement if the OPEB liability includes or excludes LS, it simply has a line item for “education”.
The “Town” financial report includes the cost of all Town employees: those that work for the Town departments and those that work for the K-8 school system. Because it is a joint school district with Lincoln, LS is a separate legal entity and has a separate set of financial statements and a separate OPEB report.
How are other towns dealing with this?
Most are where Sudbury is: just getting started.
Charles Woodard
5:35 pm on Friday, January 25, 2013
Second of three
Will the Supreme Court ruling that caused Lincoln to have to contribute more to LS also mean they will have to contribute more to OPEB for LS?
The State Supreme Court ruling concerned capital expenditures only.
Why has it taken so long to talk about this?
The first OPEB reports came out in the Spring of 2008 and reported the data as of July 1, 2007. The Board of the Selectmen and the FinCom held a joint public hearing on this and other retiree obligations, including pensions, on October 23, 2008. As a result of the then unfolding financial crisis, other more immediate concerns took precedence in Sudbury and elsewhere.
How much of the growth in OPEB actuarial liability is related to the Federal Reserve artificially depressing interest rates? How much would a 1% increase in the base interest rate used for the actuarial liability calculation reduce the current OPEB liability, everything else remaining the same?
We don’t have that data. Given the way present value calculations work, a rise in interest rates will reduce the present value of the OPEB liability and vice versa.
Charles Woodard
5:36 pm on Friday, January 25, 2013
Third of three.
Is there a 20 year forecast of the pay-as-you-go annual payment requirement, including supporting assumptions about rates of growth in health care costs and demographics, and how does this compare to a 20 year forecast of the annual required contribution?
See page 11 in both OPEB reports. Column 5 is the Expected Benefit Payments, which would be the Pay as You Go numbers. Both OPEB reports (Town/SPS and LS) include information about health care cost assumptions and employee demographics.
Why is the participant percentage contribution so much lower for LS than for the Town and SPS?
That is what was negotiated in the labor contracts.
Is there any pending legislation that will require minimum OPEB plan funding levels similar to private sector defined benefit plan regulations? If so, what is the potential impact on Sudbury taxpayers?
I do not believe there is any pending legislation to require this. Any such requirement would either add to the budget or require that other budget items be cut or some combination of the two.
Bryan S
11:43 pm on Sunday, January 27, 2013
Charles - Thanks for the answers. One additional questions - Does the town set aside any OPEB for current employees at all? Or is everything pay as you go?
JON999
7:57 am on Monday, January 28, 2013
Mr. Woodard,
thanks for your responsiveness.
First, I am disturbed at the matter-of-fact tone that this matter is being dealt with. Why? because I feel deceived (btw, not surprised but still deceived). It doesn't matter that nearly all other towns have deceived their residents as well. The long-serving Selectmen, the school committees and FinComm owe the citizens an apology first for (I believe willfully) misleading the Town before anything can go forward productively on this matter.
Second, what can be done to reduce the OPEB before addressing how to fund it? What attempt has been made to renegotiate these liabilities? What will it take to put LS teachers into the GIC? Rahm Emmanuel in Chicago is planning to creatively dump their enormous OPEB onto the Federal government by putting all of their retirees into Obamacare (at our expense). Have we explored that? Also, some have suggested that deeply indebted states such as California and Illinois charge residents an "exit fee" when they move for having irresponsibly burdened successive generations with their bills. Could Sudbury do that? Also, it's ironic that we just passed a Senior Tax reduction when those seniors actually underpaid their bills for decades.
In summary, before a bonding article comes before the Town:
- the Town must admit that they have misled us and apologize
- seniors must admit that they are immorally pushing their own bills onto our generation
- OPEB amount is renegotiated
Karoles
8:51 am on Monday, January 28, 2013
I have a hard time understanding why posters believe there was nefarious and underhanded dealings here. As a long time resident, this comes as no surprise. Laying blame on the Selectmen or even FinCom/school committees is indicative of a lack of understanding of municipal government and the authority each entity possess. Jon999, do yourself a favor and take a course in MassMunicipal government, and try to stop the paranoia. Trying to attribute this to one, two or several persons is the talk of ignorance. (term meaning: unaware of the facts, not you personally of course).
JON999
9:12 am on Monday, January 28, 2013
Karoles, appreciate the thoughts.
I do understand how "pay as you go" works in municipal government. it works about the same as Social Security, Medicare, and military/civilian pensions and OPEB work at the Federal level (and State level) - no money is set aside (or saved) and legacy liabilities accumulate to be paid for by future generations. I'll say it again, intergenerational debt transfer is immoral and great shame on those who are aware of such and look the other way.
in Sudbury's case "everyone is doing it" is not an excuse.
honest question: if we exclude the (long-serving) Selectmen, FinCom and the School committees from blame, who then is responsible for not being honest with us and setting aside money in a proper budget to pay for these legacy costs, which do nothing for current/future residents?
(I wasn't surprised either, as I said, but still deceived)
(btw, thanks for the dialogue and happy to discuss directly. Town leaders know my handle and can put you in touch with me.)
siobhan hullinger
9:17 am on Monday, January 28, 2013
To proceed as we and other municipalities across the country in the past is simply not an option any longer. Several municipalities across the country are finding that the well is drying and there ability to fund current OPEB is diminishing. Investment houses are turning away from offering muni bonds from these areas. It is a serious thing to consider and yes, those who negotiate contracts need to consider this.
Nefarious? No Underhanded? No Illogical to think we can continue this path? Yes
SkimThreePercent
9:52 am on Monday, January 28, 2013
I object strongly to the characterization that those of us who want and are now demanding strong municipal leadership are ill informed folks who "lack understanding".
Actually we understand these matters all too well and can't figure out why both staff and officials in Sudbury can't figure it out. It's indeed frustrating.
Remember that school project that was going to cost a cup of coffee for the mean household in Sudbury. Well, wee now learn that that cup and others EXCEEDS this years entire budget!
Thanks a lot.
Pat Brown
12:59 pm on Monday, January 28, 2013
The sterling virtue of GASB 45 is that it REQUIRES that OPEB obligations be valued. Therefore, even if we--town, region, state, or nation--won't set aside funds to address these obligations, we have to name them. Prior to GASB 45, what would have been the point of valuing OPEB? It would then be a known liability that Sudbury was required to disclose even as other communities did not.
Now everyone has to value these liabilities. If nothing else, it's transparency for (potential) bond-holders.
However, even without putting a precise value on our OPEB liability, negotiating contracts that provide future benefits without designating revenue to cover the cost of providing those benefits is profligate. Did our elected officials not know this? Many negotiators have moved beyond reproach or discipline. Any public official who negotiated such an agreement but who is no longer running for office was no doubt praised for coming to a "fair" contract at the time, and is no longer subject to the judgement of the ballot box.
We could ask how much the voters cared about OPEB when the agreements were negotiated. Were they kicking the can down the road and their current wrath is just because they're stuck cleaning up the mess? Or were they completely uninformed by the elected officials negotiating these benefits, and now feel blindsided by this obligation?
We need to ask hard questions about these contracts. It's not a matter of blame; it's a matter of scrutiny.
JON999
2:13 pm on Monday, January 28, 2013
"confession without repentance is just bragging"
final thoughts:
elected officials responsible for the unfunded OPEB will definitely be held accountable at the ballot box
I'd still like to know what can be done to renegotiate/reduce these OPEB liabilities before discussing how to fund them.