By William Newell with John Glennon and Brandon Maxwell
Most Oregon taxpayers are likely to have heard of the multi-billion dollar problem of unfunded pension debt for public sector workers. Oregon’s Public Employee Retirement System (PERS) is one of the most generous in the country, and paying for it has forced cities, counties, and school districts to repeatedly cut services to current residents in order to transfer large amounts of revenue to retirees. Despite robust stock market returns on PERS investments, the PERS fund is still billions of dollars short of being fully funded.
While this problem has been well chronicled by the news media over the past 15 years, there is another aspect of retirement debt that has received much less scrutiny: Other Post-Employment Benefits (OPEB). These are benefits promised to employees that will be paid out during retirement years in addition to pensions. Such promises typically include health care coverage, but may also include life insurance, longterm disability insurance, or any other benefit negotiated by the employee.
More than a decade ago, the Government Accounting Standards Board (GASB) recognized that such promises imposed real obligations on public employers, but the amount was not being specifically identified in annual financial reports. Therefore, GASB adopted Statement 45, which requires that all units of government undertake regular valuations of their OPEB obligations and clearly state those obligations in annual financial reports.
OPEB audits must calculate liabilities for all current and future retirees, amortized over a period not to exceed 30 years. Based on these calculations, actuaries determine what the Annual Required Contribution (ARC) would be if each entity paid for current OPEB benefits as well as future obligations, on an amortized basis.
However, the ARC is not actually mandatory, despite use of the word “required;” governments must publish information about net OPEB liabilities, but are not required to create OPEB trust funds or pay anything for future obligations.
PORTLAND, Ore. – Cascade Policy Institute today announced the release of a new report showing that Oregon public employers have more than $2.6 billion in unfunded actuarially accrued liabilities associated with non-pension benefits promised to current and future retirees. These benefits, often referred to as “Other Post-Employment Benefits (OPEB),” typically include health care coverage for retirees, but may include other forms of deferred compensation such as life insurance.
A decade ago, the Governmental Accounting Standards Board (GASB) mandated that public employers begin clearly stating financial obligations for OPEB in their comprehensive annual financial reports. However, employers were not required to set up trust funds to pay for these promises. As a result, the Cascade review of 125 financial reports of state, regional, and local governments shows that most employers have no money set aside and are paying for OPEB obligations out of annual operating revenues. This cannibalizes funds needed for actual services.
The Portland transit agency TriMet has the biggest unfunded OPEB liability, estimated to be $950 million as of January 2014. Other employers with relatively large unfunded liabilities include Lebanon school district, Tillamook County, and the city of Corvallis.
Cascade President and CEO John A. Charles, Jr. said, “Over a period of decades, Oregon public employers have deliberately back-loaded employment contracts so that the cost of generous compensation packages would not become apparent until decades later, when the decision-makers themselves would be long gone. Those time bombs are now exploding, harming public school students, transit riders, and others who rely on public services.”
The Cascade paper is a call to action for the legislature to impose some form of fiscal discipline on public employers by requiring them to make annual contributions to OPEB trust funds. Legislation to accomplish this has been considered in past sessions but never approved.
In commenting on this failure, Charles noted, “Actuaries always state what it would take to amortize OPEB liabilities over a 25-year period; these are referred to as ‘annual required contributions (ARC).’ Unfortunately, most government managers treat the ARC as merely a suggestion. All the Oregon legislature has to do is pass a one-page bill reaffirming that ‘required’ means ‘required.’ How hard can that be?”
The Cascade report, Unfunded OPEB Liabilities for Oregon Public Employers: A $2.6 Billion Time Bomb, can be downloaded here.