ATFC members discuss OPEB liability

At the MMA office on May 3, 30-plus members of the Association of Town Finance Committees engaged in a discussion of Other Post Employment Benefits (OPEBs).

OPEBs primarily take the form of health insurance, along with dental, vision, prescription or other health care benefits, provided to eligible retirees and, in some cases, their beneficiaries.

Dan Sherman, president of Sherman Actuarial Services, focused on the actuarial analysis of a community’s OPEB liability and the funding mechanisms for dealing with them.

Since 2008, when the Government Accounting Standards Board (GASB) issued reporting requirements for OPEB costs, communities have begun to report on their liabilities. These reports need to disclose the Annual Required Contribution: what’s being paid out on a pay-as-you-go basis plus the unfunded accrued liability.

The GASB rules require reporting, but do not require pre-funding the liability. The reporting information is shared with the Public Employee Retirement Administration Commission and bond rating agencies, Sherman said.

In order to understand the full scope of the liability, the actuary will need to know what is offered to retirees, including eligibility requirements, the actual benefits, the percentage split between the employee and the employer, grandfather provisions, Medicare subsidies, and plan design features.

Sherman said actuaries will take these specifics and combine them with some more general assumptions, including demographics, specific rates for pre-funding vs. pay-as-you-go, health care cost trends, and the anticipated portion of active employees electing health insurance.

In its “Plain-Language Summary of GASB Statements No. 43 and No. 45,” the GASB reports that when it comes to OPEBs, “most governments currently follow a pay-as-you-go approach, paying an amount each year equal to the benefits distributed or claimed in that year.” The board adds, however, that it “believes that … [OPEBs] are a part of the compensation that employees earn each year, even though these benefits are not received until after employment has ended. Therefore, the cost of these future benefits is a part of the cost of providing public services today.”

Sherman discussed the advantages and disadvantages of prefunding OPEB liabilities versus “pay-as-you-go.”

Prefunding, he explained, helps to maintain a strong bond rating, provides increased security for retirees, assists in budgeting, and helps keep the OPEB liability under control. The obvious disadvantage, he said, is the upfront money needed to build a trust fund and the administrative costs to manage the fund.

Paying as-you-go is simpler and has no upfront costs, Sherman said, but over the long run could negatively affect a community’s bond rating. It also does not provide investment earnings to offset costs and shifts the liability to the next generation of taxpayers.

The unfunded OPEB liability for cities and towns statewide is estimated at between $25 billion and $30 billion.

The ATFC also held meetings in Hadley on May 10 and Marion on May 24 to discuss OPEBs.

Meanwhile, the Special Commission to Investigate and Study Retiree Healthcare and Other Non-Pension Benefits, established through the 2011 pension reform law, held its first two meetings on April 5 and May 31.

The 11-member commission is charged with considering the full range of benefits that are or should be provided to current and future retirees and creating recommendations on the structure of benefits and how to pay for them.

The commission plans to hold four more meetings by October to gather information and review options, and will hold public hearings in the fall if needed.

The MMA’s designee on the commission is Shrewsbury Town Manager Dan Morgado.

The commission’s deadline for making recommendations to the Legislature is Nov. 30.