Board of Selectmen struggle with funding retiree liabilities (Updated)

by beth on December 5, 2013

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.

 

1 John Butler December 5, 2013 at 11:38 PM

This is likely to produce a lot of “sky is falling” anxiety that is unjustified. In a world in which most Town services are in some way obligated, this study represents extreme accounting selectivity about what costs to focus on. For example one could, with equal justification, regard the education of all the students in the K12 system and their preschool siblings, not to mention the unborn and move-ins, as an “unfunded liability” to provide State-mandated free public education. The Town is like parents who haven’t saved for college. My quick calculation of just the next 12 years, not the 30-40 that this study considers, is an “unfunded liability” of $300+ million for mandated K12 public education, against which the $28 million pales. Another way to look at this retiree benefit obligation is that it represents 2% of the total Town spending on a pay as you go basis over a 30 year time period, assuming that Town spending increases at a modest 2.5%/yr. Should it be ignored? Absolutely not. Is it large in the scheme of obligations that this Town has met for scores of years and will continue to meet? No, it is not. Are comparisons to Detroit in order? Not at all.

Mark Purple, however, is correct, we should consider full costs every time we hire. Since public benefit schemes are comparatively rich and we must make “public” vs. “contractor” trade offs frequently, we need to look at the full costs. But, unless you are worried about those kinds of Town decisions, don’t lose sleep over this.

2 Al Hamilton December 6, 2013 at 3:36 PM

I agree with Mr. Butler that we should include our pension and other retirement obligations when evaluating the outsourcing of municipal services.

I am not as sanguine about the financial impact. The projections that are done typically assume a return on investment in the 7.5% to 8% range which is optimistic. It is one of the reasons why pension funds regularly invest in hedge funds.

We find ourselves in a “catch up” situation where we have to provide for the pensions of those already retired and also those that will retire. What that means in a real sense is that a greater and greater portion of our budget will be devoted to paying for pension and retirement obligations as opposed to providing direct services. The prospect of rising taxes coupled with stagnant or declining services is fraught with danger. At some point the taxpayers can say no.

The clear way to manage this situation is with economic growth in the tax base. A growing economy will permit us to have a growing tax base which in turn will make it easier to fund our obligations to our retired employees.

For tax payers, if we do not like the economic situation in Southborough, we can move and take our tax dollars elsewhere. That is not true for our employees. The are the ones that are truly vested in the economic health of our community because they will rely on that healthy economy to generate the taxes necessary to pay for their retirement benefits

Pension reform is also a needed component but don’t hold your breath. For the life of me I do not understand why our public unions do not insist on a change to a defined contribution plan (like a 401k with contracted municipal matching) rather that the much riskier defined benefit plans (pensions) which require that a community remain economically healthy for decades to work.

3 mike fuce December 6, 2013 at 9:11 AM

Good recommendation Mark Purple. Let’s see now what all government, unions et. are costing us and perform like we do at home and private business a cost benefit analysis for services rendered.

4 Brain December 7, 2013 at 9:59 PM

My cousin is a local cop. His pension is almost like a 401k I think. 12% of every paycheck goes into his pension.

5 John Butler December 7, 2013 at 11:18 PM

Just for clarification, for this post and for Al Hamilton’s, this whole story is not about pensions. It is only about funding for non-pension benefits for retirees, such as retiree health coverage. Pensions per se are handled differently from these benefits, and differently depending upon the type of employee. The Town has some unfunded liabilities for the pension programs in addition to the liabilities described in this story. I don’t have comprehensive data on the funding status of the various programs, particularly the teachers, so I won’t attempt a full review here.

6 Publius December 9, 2013 at 2:17 PM

One way or the other someone will pay. Do the math.

Previous post:

Next post: