At this week’s meeting, the Board of Selectmen discussed the harsh reality of Southborough’s non-pension retiree liabilities.
Like most towns across the country, Southborough has been accruing enormous OPEB* retiree liabilities without setting aside funds to meet the future payments.
We have a liability of over $28,785,000 estimated to grow annually by $1,465,000+. The only funding set aside is $50,000.
Shocking as it may seem, that is purportedly a better standing than most town across the state.
Detroit’s declaration of Bankruptcy this July was a wake-up call for many. But the truth of the problem has been known to towns since at least 2004.
At that time, the Government Accounting Standings Board passed a requirement that cities and towns begin reporting the liabilities associated with post employment benefits. They also required that towns amortize the liabilities within 30 years.
This year, Southborough began efforts to deal with the problem. An earmarkable trust was established at Town Meeting with $50,000 in seed money to begin a funding process.
Now the question Selectmen are facing is with only a drop in the bucket, how can the town find the rest of the funds. They are also concerned about the effect of liabilities on the Town’s bond rating.
Consultant, Parker Elmor of Odysses, analyzed the town’s liabilities for selectmen. On Tuesday night, he answered questions and offered advice.
According to Elmo, it would cost almost $900,000/yr to catch-up on liability coverage over 30 years.
Simply keeping the liability from growing would cost about $750,000/year. In today’s dollars, that would decrease to about $300,000/year over 30-40 years.
[Admittedly, the finances here confused me, since the liability was estimated to grow by almost double that figure. The answer appears to be the difference between putting off the expense and long-term investment of the earmarked funds.
But, don’t take my word for the financials. You can read the report starting on page 12 of the December 3, 2013 Board of Selectmen Meeting packet.]
Elmor explained that when the private sector faced the problem 20 years ago, corporations made radical changes to their retiree benefits. This isn’t an option for towns in Massachusetts.
The State requires of allowing retirement plans at age 55 for employees with 10 years service. Southborough can’t adjust that. And unlike pension plans, retiree welfare plans give financial incentives for retiring early – additional years of received benefits and extra time before Medicare kicks in.
Town Administrator Mark Purple foresees legislative changes taking years to accomplish.
The Massachusetts Municipality Association that Purple is on will continue pushing it as ae prioritiy. But he believes it will take time for legislators to come to terms with the politically dicey issue.
That leaves premium contributions as the only slightly flexible benefit. The state allows charging employees up to 50% of premiums. Southborough is currently charging 25% to 50%.
Elmor assured that any effects on the town’s bond rating are a few years away. And as dire as the situation sounds, Southborough’s burden is a lower ratio than most due to the town’s life cycle. In addition, many towns have put less aside than Southborough.
The key measurable for ratings will be reasonableness of a payment schedule compared to other towns.
Chairman Dan Kolenda asked how other towns are finding funds. Elmore said that no one is increasing taxes, but where and how they make cuts varies.
A discussion ensued about how the burden could be built into budgets going forward. He advised that an important step is building an initial cost into the budget. Then the town can work toward increasing the amount set aside over time.
Selectmen discussed making departments and committees responsible for acknowledging liabilities in their budgets beginning this year.
Purple says that at future Town meetings, Warrant articles will highlight specifics on costs for current benefits and future retiree expenses by department. There should be no hidden costs.
Updated (4/11/14 11:07 am): I should have noted at the time of this article, that the liabilities discussed were OPEB (Other Post-Employment Benefits). Those benefits include life insurance premiums and healthcare premiums, plus any deferred-compensation arrangements.