Most Communities Have No Money Saved for $2.6B in Retiree Benefits
Thursday, January 22, 2015
Thirty six cities, towns, and school districts have saved no money for $2.6 billion they owe towards healthcare and other benefits for retirees, according to a new state report issued earlier this month.
Just 13 cities, towns, or school districts have any money saved for retiree benefits. When their savings and liabilities are thrown into the mix, the total amount owed by all local jurisdictions amounts to just over $3 billion, of which only 1.7 percent is funded, according to the report, which was issued by the Locally-Administered Pension and OPEB Study Commission.
“The problem is that decades of elected officials have made very generous promises with little thought as to their affordability or equitability,” said Monique Chartier, spokesperson for the Rhode Island Taxpayers group. “This has proven unfair to both public employees, who may have been effectively lied to all of these years, and to taxpayers, who are blithely expected to fund an outsized obligation with no thought as to affordability or capacity to pay.”
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTAbout a third of the total liability was from just one community, Providence, which owes $1.1 billion towards what is technically known as Other Post-Employment Benefits, or OPEB. So far, Providence has put aside no money towards this debt. Instead, Providence, like most other communities pays for the benefits as the bills comes in, also referred to as “pay-as-you-go.”
When viewed on a per capita basis, each resident of Providence has a $6,455 share in that debt.
That exceeds the per capita burden in all but 13 of the 15 largest cities in the country. The two urban centers with higher unfunded liabilities per capita were New York City, at a debt of $10,108 per resident, and Detroit, at $8,023, according to 2013 data published by Bloomberg.
In Rhode Island, Pawtucket had the second highest unfunded liability, an estimated $309 million, with no money saved for it. The next three highest unfunded liabilities, which exceeded $100 million each, were in Warwick, Johnston, and Woonsocket. (See below slides for the liabilities for all cities, towns, and school districts.)
When compared to the state, the local OPEB liabilities are a much bigger problem. A report released by the state Auditor General yesterday pegged the corresponding state unfunded liability at $714 million, as of June 30, 2013. (The dates for the local figures range from 2011 to 2013.)
“OPEB municipal liabilities in Rhode Island look very high compared both to the state and other cities and towns in America,” said Mike Riley, a local private equity and hedge fund investment manager and a GoLocalProv MINDSETTER.
The commission's report also examined the status of local pension plans. There, the problem of underfunding is significant as well, though not as severe as it is for retiree benefits. The commission found that there was a total unfunded pension liability of $2 billion among cities and towns. Twenty two locally administered pension plans were deemed to be in “critical status,” meaning that they were less than 60 percent funded.
Local governments were allowed to ignore liabilities
Yet compared with retiree benefits, most pension plans were in better financial shape. Only one pension plan was zero percent funded (the one for Narragansett police). About two thirds of local pension plans were better than 33 percent funded. In the world of retiree benefits, on the other hand, 33 percent is considered exemplary. Only one community reached that level: Charlestown.
City and state governments did not even have to report their liabilities until recently, thanks to a new reporting standard issued by the Government Accounting Standards Board. (Click here to learn more about GASB’s rule.)
“The reason we know these numbers is GASB has been on a campaign to produce accurate municipal accounting. The idea is that these pension and OPEB liabilities are real and should be reflected as liabilities. The towns have been ignoring them as liabilities,” Riley said.
Cities the size of Providence had to start reporting their liabilities in 2008. The smallest communities could wait until 2010 before they had to report theirs. “Nationally, GASB believes bond investors and citizens should be able to understand these burdens—so do I,” Riley said.
Dennis Hoyle, the state Auditor General, said a new national accounting standard will mandate that most governments record the net pension liability on their government-wide financial statements. A proposed rule would require the same for the OPEB benefits.
“Eventually GASB will force these onto the balance sheet. My guess is three to four years,” Riley said.
Not everyone is convinced the OPEB funding shortfall is the crisis that some say it is.
One outspoken local critic is Tom Sgouros, who has noted that long forecasts into the future can make retiree liabilities appear larger than they really are. An extreme example is the U.S. Postal Service, which is under a new Congressional mandate to bank away about $5 billion a year for retiree health and other benefits. In 10 years, the agency has to fully fund the benefits. However, those benefits will actually be paid out over 75 years, which means that it is being asked to save money for workers who haven’t even been hired yet.
In a previous MINDSETTER piece for GoLocalProv, Sgouros also has singled out GASB for criticism, saying its standards require local governments treat OPEB liabilities the same way as bonds that are owed in a year. (Sgouros, who recently was appointed senior policy advisor for new state Treasurer Seth Magaziner, declined comment for this report.)
Cities cannot afford to fully fund benefits
In Rhode Island, most cities and towns are not saving up any money for their retiree benefit liabilities. While it may be an accepted practice today, it certainly is not the way things should be done, two government officials told GoLocalProv.
“From a ‘best practice’ perspective, governments should fund the OPEB benefits on an actuarially sound basis and make annual contributions to the plan,” Hoyle said.
Tony Pires, the city director of administration in Pawtucket, agreed. “But to do that would bring communities to their knees, especially older larger urban communities who just don’t have the resources to do that,” Pires said.
Pawtucket’s current unfunded liability for city and school employees is $309 million. To make the annually required contribution—here “required” being of a misnomer—Pires said the city would have to set aside about $18 million to $19 million a year. That would result in a tax increase of about 20 percent, a move that he called “unrealistic or unattainable.”
“You just can’t increase taxes by that level,” Pires said.
Chartier agreed that any suggestion that the bill “can simply be handed to taxpayers” is “out of the question.” “Taxpayers on both the state and local level are tapped out, as evidenced by high property taxes and high overall tax burden,” she said.
Panel recommendations put OPEB ball in lawmakers’ court
The state commission makes 11 recommendations to Governor Gina Raimondo and the General Assembly. In some cases, the commission acknowledged the options for local action are limited: “Requiring municipalities to develop funding improvement plans to achieve a 60 percent or better funding level for OPEB, as they did for pensions, was not seen as practical since the annual contribution required would likely be so significant that it would be unaffordable for most communities,” said Hoyle, who was a member of the commission.
“The focus of the recommendations in the local pension study commission report with respect to OPEB [was] directed towards trying to explore efficiencies through a potential statewide administered OPEB plan or investing local OPEB assets collectively within a state investment pool,” Hoyle added.
The commission met over the course of three years and logged in a about 1,000 hours in meetings, according to its Jan. 9 final report. Among its most important achievements was simply raising awareness of the issue, according to Pires, who was also a member of the commission. While state and local government officials have been focused on pension reform in the past few years, the 800-pound gorilla in the room is the OPEB liability, Pires said.
In Pawtucket, the unfunded liability for the retiree benefits, at $309 million, is more than double the unfunded liability for pensions, which stood at $145 million in 2012.
“So it’s an enormous problem,” Pires said.
At the state level, it’s not yet clear what the next step will be. Larry Berman, a spokesman for Speaker Nicholas Mattiello said the House leadership is still reviewing the report and has not yet issued a comment on it. He did not indicate if or when hearings will be held on the report. A spokeswoman for Raimondo did not respond to a request for comment in time for publication.
While state lawmakers weigh their options, Pires said the new federal health care reform law may end up helping to alleviate the retiree health liabilities Pawtucket and other communities are facing.
Chartier says Medicare is another alternative.
“Healthcare coverage for life has proven an unreasonable and financially non-feasible proposition. Minimally, going forward, all state and local contracts should stipulate that, at 65, the retiree rolls into Medicare. Additionally, however, with regard to the existing unfunded liability, the option of moving current retirees to Medicare must be explored. The alternative for many cities and towns is a fiscal impossibility, which in turn would leave the retiree with zero healthcare coverage—not an acceptable situation from anyone’s perspective,” Chartier said.
Related Slideshow: City and Town Retiree Benefits Liabilities
The below slides list the liabilities for retiree health care and other post-employment benefits (OPEB) in cities, towns, and school districts that have local plans. For each jurisdiction, the total liability and the amount that is unfunded are displayed. The slides also show how much is funded as a percent and indicate the date that the numbers were estimated. In many instances, the most recently available figures are from several years ago. Note that in some communities the OPEB liabilities are broken out into separate plans, one for the city and town and one for the school district. Data source: the report of the Locally-Administered Pension and OPEB Study Commission, dated Jan. 9, 2015.
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