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.