OPEB looms as dark fiscal cloud on horizon

From the Beacon, October 2017
 
Over the next 30 years, communities and the Commonwealth will face a combined unfunded liability of more than $46 billion to pay health insurance benefits for their retired employees, a staggering burden that is clearly unaffordable for taxpayers.
 
To put the issue in perspective, this means that over the next three decades an average family of four would have to pay more than $30,000 in taxes just to fund health insurance benefits for public employees who are retired or who will retire during that time, in addition to any other taxes they pay for essential services. It is hard to see how taxpayers will agree to pay this much, considering that 90 percent of private sector workers have no access to similar retiree health benefits from their employers.
 
Massachusetts is not alone. States and localities across the country are beginning to understand the heavy burden that “other post-employment benefits” (the non-pension benefits provided to retirees, consisting mainly of health insurance, called OPEB for short) will place on their budgets.
 
Unlike defined benefit pensions, which are funded using a tightly regulated model adopted by the state in 1988, retiree health benefits are funded on a pay-as-you-go basis. But because the cost of medical care is rising much faster than inflation or local revenues, pay-as-you-go is not sustainable. Unabated, the cost of retiree health insurance will consume a larger and larger share of municipal budgets, and push out spending on vital public services, including education, police and fire protection, road repairs and much more.
 
Last month, Standard & Poor’s issued an overall analysis of the credit position of cities and towns in Massachusetts, including a warning that OPEB costs are consuming an ever-greater portion of municipal budgets.  Coupled with the record spike in retirements that we will experience over the next five years, S&P predicts that OPEB funding needs will erode finances and weaken credit ratings in communities across the state.
 
Further, next year, most cities and towns will begin reporting OPEB liabilities on their balance sheets, a requirement being implemented by the Governmental Accounting Standards Board, and it will become clear to everyone that the costs are rising at an unsustainable rate.
 
Many communities have started to salt away a small amount to pre-fund a portion of their liability, but in spite of this good intention, this pre-funding offsets about 1 percent of the problem. Here’s the reality: the only way to responsibly control OPEB costs will be to adopt a package of strong and meaningful reforms to moderate the current system and make it affordable for cities, towns, the state, and taxpayers.
 
The MMA and local officials strongly support providing excellent health benefits for employees and retirees. This benefit offers essential security for public workers and their families and is an important strategy in recruiting, retaining and rewarding a high-caliber workforce. But without reform, skyrocketing OPEB costs will force major reductions in the municipal workforce, eliminating jobs for thousands and thousands of dedicated teachers, police officers, firefighters, DPW workers, and other vital employees.
 
The bottom line is that reform is needed for several reasons: to protect local taxpayers, to preserve an important benefit for retirees, to ensure that cities and towns can provide all of the municipal and school services that citizens deserve, and to protect municipal jobs.
 
The last time the Legislature considered OPEB reform was in 2014, when the previous governor developed a bill. The MMA and the Massachusetts Taxpayers Foundation testified in favor of some aspects of the bill, but strongly objected to other parts that would postpone real savings for at least 15 years, strip away local authority to control costs, and impose unaffordable unfunded mandates on dozens of communities. The Boston Globe agreed with the MMA and the MTF and editorialized against the bill because it was inadequate in addressing the problem.
 
Unfortunately, little progress has been made since that time, primarily because meaningful solutions are, by definition, very controversial.
 
Time is of the essence, however. The earlier we embrace real and meaningful OPEB reform, the easier the solutions will be. Delaying reform will only kick the can down the road and impose a greater burden on the next generation of citizens, employees, retirees and taxpayers.
 
For all of these reasons, OPEB reform must be a top priority on Beacon Hill and in every city and town hall in the Commonwealth.