Tending to our Long Term Liabilities
by William Dowd 9/24/12
On Tuesday night, September 18, the FinCom met with Sam Tyler, Holliston resident and President of the Boston Municipal Research Bureau, a privately funded financial watchdog agency tending to the cost and operation of Boston city government.
The FinCom was seeking Sam’s insights into a huge financial mess facing Holliston, Boston and all the cities and towns in Massachusetts – paying for the billions of dollars in retiree health insurance benefits being provided to state and municipal employees in Massachusetts. No doubt Sam has much to share. He’s been working this issue, writing about it and pushing for reform for many years. I’m looking forward to Sam’s contribution.
As important as it is to tackle paying for our obligations, let’s not forget what we’re talking about.
Gently referred to as “long term liabilities” or obscurely referred to as OPEB (Other Post Employment Benefits), this is as simple as health insurance provided to employees after they leave the Town’s employment – retiree health insurance. For the vast majority of US Citizens, retiree health insurance means Medicare. It begins at age 65, it has deductibles and partial coverage and most often, folks buy a supplemental insurance plan on their own to fill in the gaps between Medicare and what they had when they were working. Retiring before age 65 for that vast majority of US citizens means finding health insurance and paying for it between the date they retire and turn age 65.
Not so long ago, many non-government employees had employer provided retiree health insurance that made insurance available before age 65 and even paid some or the entire Medicare gap plan. These employer provided benefits were paid for on a pay as you go basis and looked very reasonable. But in 1989, the Financial Accounting Standards Board (FASB) issued and long announced rule known as FAS 106 that required non-government employers to recognize and disclose the real cost of these benefits on the same accrual basis as was being used for pensions. This was hardly a surprise.
But when these employers got a look at what these retiree health insurance benefits really cost, major change began. Benefit plans were reduced, eligibility rules made more strict, retiree contribution requirements increased, plans were phased out. Today, only a small fraction of the US workforce will receive retiree health insurance from their employers. The bottom line was that what looked reasonable on a “pay as you go” basis was unaffordable and unsustainable on a true cost basis.
Despite this now twenty three year old preview of the future, Holliston and most towns in Massachusetts continued to - and still do - budget for their retiree health insurance plans on a “pay as you go” basis. But that may change, and that’s what the meeting on Tuesday is all about.
In 2004, the government equivalent of FASB, the Government Accounting Standards Board (GASB) issued a rule much like FASB did in 1989 except this one applied to government employers like Holliston. It is called GASB 45. The rule required governmental employers to measure and disclose the true cost of retiree health insurance on the same accrual basis as was being used for pensions. Holliston received its first financial valuation of retiree health insurance in January of 2008, although it’s results weren’t really talked about until the spring of 2010. The bad news was that Holliston had accumulated an obligation for retiree health insurance benefits of over $45 million and not one dollar put aside for it. Really paying for those benefits is going to require an increase in the annual budget from about $1.5 million to nearly $4 million – a $2.5 million increase ANNUALLY for 30 years.
So what exactly is all that money being spent on? Despite the widespread withdrawal of the private employment market from these benefits, Massachusetts is still doing today what it was doing back in the mid 1900’s when the now infamous Mass General Laws Chapter 32B was passed; benefits as early as age 55, after as little as 10 years of service , the same percentage contribution from the Town as applies to active employee, no correlation in that contribution to years of service – an employee with 10 years service gets the same Town contribution as an employee with 30, 35, or 40 years of service, and no correlation in that contribution to work schedule – a part timer working 20 hours a week gets the same contribution as a full timer working 40 hours a week. I have extensive experience in the design and delivery of these benefits, and even by pre-1989 benefit plan standards in the private sector, these benefits are indefensibly generous. They may have seemed correct in 1963, but they are no more, and haven’t been for decades. To be fair, as part of pension “reform” enacted this past year, new hires on and after April of 2012 will have to wait until age 60 for these benefits. This change will begin to have meaningful impact on our retiree health insurance costs in about 15 years.
But as our local elected officials are quick to point out, Holliston is only following the law. That is correct. But when a law needs changing, leaders push for change. Despite a Town Meeting resolution urging them to do so, neither the Selectmen, the FinCom, nor the School Committee have taken any official action to push for reform, all delegating that task to professional associations that lobby on Beacon Hill. As one indication of how successful that approach has been, there isn’t even a bill pending to reform the retiree health insurance provisions of Chapter 32B.
So on to funding. To the credit of the FinCom, a discussion about actually funding the $45 million began. You’ll find no bigger fan for funding than me, but I have been consistently pushing for reform of the benefit before marching down the funding path. It’s like setting up a mortgage payment for a house you know you can’t afford before working with the builder to shrink the property to something you really can afford.
The FinCom’s approach, which now appears to have been “adopted” only by the FinCom which, when things get hot are quick to remind us that they are only an “advise and consent” body, is to set aside $500,000 each year before all other budget needs are considered so that over 5 years, we can build up to that additional $2.5 million we need. That’s five years of delaying or reducing other spending to provide the benefits described above. That’s five years of fewer services to the Town so that retiree health insurance eligibility rules from fifty years ago can be continued.
I am convinced that delaying the eligible age for benefits for many current employees, requiring at least 20 years of service for benefits, correlating the Town contribution to both years of service and part time work schedule and stopping the plan entirely for new hires will have a huge impact on our annual cost increase now and gradually relieve the taxpayers of the obligation to pay for these benefits. Millions of private sector workers have gone through this since 1989, and they’ve made the required shifts in their personal preparations for retirement. Millions of private sector workers never had the benefits in the first place. To suggest that public employees in Massachusetts should be immune or protected from a necessary benefit plan redesign is neither practical nor logical.
But the FinCom meeting on Tuesday, didn’t deal with any of this. The only question the FinCom wanted to deal with on Tuesday is “what do we do with about $1.2 million already “set aside” in the Stabilization Fund – about $700,000 from “Free Cash” certification in the fall of 2011 and $500,000 from Town Meeting in May. At the moment, there are really only two choices: leave it in Stabilization and just remember it’s there, or establish a separate retiree benefits trust either under Section 20 of Chapter 32B, or on its own.
Leaving it in Stabilization would be sloppy, and make it difficult to persuade bond rating agencies that the Town has begun funding these benefits. The Chapter 32B trust has it’s own flaws. The Town’s acceptance of Section 20 is irrevocable. As ridiculous as that sounds, the legislature actually amended Chapter 32B years ago so that cities and towns can never reconsider their acceptances of sections of 32B. We can amend the Constitution, we can repeal entire chapters of the General Laws, but a city or town that has accepted a section of Chapter 32B never gets a second chance. Again, there isn’t even a bill pending to correct this abuse.
The good news is that recent amendments make it possible to combine Holliston’s funds with the funds of other Town’s into a common trust, just like we do with pensions. It’s called the Health Care Security Trust. Until this amendment, each town had to run its own trust. Unfortunately, I have been unable to locate any of the rules or regulations governing the Health Care Security Trust. I’m also not sure why a different agency is required given that we already have a Pension Reserves Investment Management board in place. There are many complex moving parts to this and not much detail available. Other than my comments to the FinCom during the discussion, this really did not get addressed.
There was a discussion about setting up a trust outside of Chapter 32B, but Sam was not convinced that such an approach was necessary.
I’m just not sure why a discussion about a decision with huge financial implications for generations of Hollistonians is just getting serious with six weeks to go to the Town Meeting to which the Selectmen and FinCom postponed the decision last May. And while the FinCom deserves credit taking this issue on, I just don’t understand why there is such resistance to talking about, and moving on the reform we need to be able to afford these benefits.
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