Link to meeting starting at about 1 hour and 29 minutes–click here. In order to calculate your OPEB liability you need an actuary to look at:
- employee population
- promises the have been made
- estimated costs of these promises
- inflation needs to be estimated
- there are many other factors
An actuary then comes up with a number as to how much this will cost and how much needs to allocated each year to fund it. In our case the actuarial estimate is to put aside $20 million per year. Once the City of Worcester has this number from the actuary, they have two options either 1) put money aside or 2) simply put away what want. Let me give you an example, assume you had a $20,000 credit card bill, you could either:
- Put it in your budget to pay $500 per month
- Do not budget for it and then figure out how much “free cash” you have at the end of the month and pay 45% of that towards your credit card
If you wanted to follow the example that City is using to pay down the OPEB debt, you would go with the later.
It is true that the OPEB liability was much larger, in the billion range. The City Council being lead by City Manager O’Brien, however, adopted Section 19 which made employees who were eligible for Medicare take Medicare as their primary coverage, not the City of Worcester plan, and buy a Medicare supplement. Not much different then the rest of the population, including my mother, mother-in-law and what I will be doing when I turn 65. This change alone dropped the liability about 40%, to be somewhere in the 600 million range. Looking back this will may be City Manager O’Brien’s biggest accomplishment!! Please note there are no other moves like this that are available, this was one time event!!
Although there may be talk about changes in retirement plans at the state level, this will only effect new employees and no lower our current OPEB deficit. There will be some minor changes in the OPEB estimates each year as the actuarial assumptions change like inflation, but the question going forward will be how we going to deal with this 600+ million dollar bill? Do we continue the “pay as you go” funding and run the risk that we will not have the money to pay these benefits later or do we budget for this now per the actuarial estimates in the annual operational budget? Although “pay as you go” resulted in $4.8 million going towards OPEP last year, it fell approximately $15.2 million short of what our actuary suggested.
SEC Commissioner Dan Gallagher wants better accounting of OPEB liabilities
Lastly the GASB is cracking down on the accounting of the OPEB liability and will be forcing Government entities to clearly outline OPEB liability on the face of their financial statements If we continue this “pay as you go” funding, bond rating agencies will lower our bond rating and cost us millions when we issue new bonds. The City has done a great job cutting OPEB liability from a Billion to 600 Million when they adopted Section 19, but this hard work must continue with full funding of the actuarial estimates in the operational budget.
