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What is OPEB and Why Should We Care? PART 2

Part 2 of the explanation and discussion of the Town's retiree healthcare liability.

What is OPEB and Why Should We Care?  PART 2

Bob Jacobson, Bill Kneeland and Chuck Woodard

Why is Sudbury’s OPEB obligation so large ($73.5 million)?  The cost of healthcare has grown dramatically over the past decade resulting in a greater cost for promised healthcare benefits in retirement.  Additionally, retirees are living longer resulting in the benefit being paid for a longer period of time.  Since retirees are living longer the number of retirees collecting these benefits is getting larger.  State law mandates that the municipality must pay a minimum of 50% of the cost of a retiree’s healthcare premium if they meet certain eligibility requirements.  For employees hired before April 2, 2012, the minimum requirement is age 55 with 10 years of service (or 20 years of service at any age); for employees hired since then, the minimum requirement is age 60 with 10 years of service (or attainment of age 55 for public safety employees).  To be eligible employees must have worked at least 20 hours per week (0.5 FTE or 15-17.5 hours per week for teachers). 

Why is the LS obligation ($46.1 million) so much larger than the Town/SPS obligation ($34.3 million)?  LS generally pays 75% of the cost of a retiree’s healthcare premium (70% for employees that retired after September 2009) based on negotiated collective bargaining agreements and the Town/SPS generally pays 50% of a retiree’s premium.  In addition, since LS pays 70-75% of the premium, it is projected that more retirees will elect to have these benefits provided to them.  Since the Town/SPS pays 50% of the premium it is projected that a lesser percentage of their retirees will elect the coverage.  The Town/SPS also joined the state “GIC” (Government Insurance Commission) program, which is available to all state employees and the employees of those municipalities choosing to join.  Since it has the economic advantages of scale the premiums per retiree are lower.  As a result of joining the GIC, the Town/SPS retirees’ projected liability decreased by $16.0 million to the figure shown above.

Is the scale of this OPEB obligation unique to Sudbury?  No, it is a financial challenge for most municipalities and states all across the country.  Furthermore, most municipalities and states continue to pay on a “Pay-As-You-Go” basis for this liability.

Is Sudbury now funding the ongoing obligation of retiree healthcare to slow the growth of this liability?  Not yet.  That is one of the budgeting challenges facing all municipalities since it would require an operating budget increase to set aside the funds to cover these obligations.  These set aside funds would compete against funds necessary to provide current services.

How deficient is the Town’s current funding vs. its current OPEB liability?  The current annual projected retiree healthcare insurance cost is $1.75 million for the Town/SPS and $1.88 million for LS.  This compares to the budgeted amounts for retiree healthcare included in the operating budgets for Fiscal Year 2013 of $0.9 million for the Town/SPS and $0.8 million for LS.

What are we doing about the liability for past service - the OPEB amounts of $34.3 million for the Town/SPS and $46.1 million (Sudbury share $39.2 million) for LS?  These amounts are estimates.  They are based on very long range assumptions that may or may not be accurate.  However, while the specific absolute value of the liability may not be what the actual cost turns out to be, the significant magnitude of the liability is of concern.  The annual amount necessary to pay these retiree healthcare obligations will continue to grow for the reasons discussed previously.  Each year, the Pay-As-You-Go practice of funding these benefits will require greater proportions of the current budget.  Since these are mandatory costs, if they grow at a pace greater than the increase in revenue they will reduce the ability to fund budgetary items that are not mandatory.  The Town/SPS and LS are in the very early stages of looking at funding mechanisms to address this potential burden.  Stay tuned and ask questions of your elected and appointed representatives.

Where can we find more information?  Copies of the actuaries’ reports on the OPEB liabilities can be found at http://sudbury.ma.us/departments/HR/doc8186/FY12SudburyGASB45ReportFinal.pdf (Town/SPS) and http://www.lsrhs.net/sites/schoolcommittee/files/2012/12/Lincoln-Sudbury-2011-GASB-45-Report-Final-Revised.pdf (LS).

The writers are members of the Sudbury Finance Committee.  Bob Jacobson and Chuck Woodard are former chairmen of the Committee.

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