December 18, 2016

Randell: OPEB contributions leave much to be desired

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Recently, there has been talk about how good of a job the city is doing dealing with its unfunded OPEB (Other Post-Employment Benefits, beyond pensions) liabilities. Although the current budget allocates $500,000 toward the deficit from the general fund and about $1.6 million was allocated from “free cash” last year, this is merely a drop in the bucket.

Bill Randell

Bill Randell

If you don’t believe me, watch last week’s City Council meeting [at the 1:53:40 mark, for about one minute] and listen to the mayor’s comments about the unfunded liability. If you think that “$780 million liability” he mentions must be right, well, you’d be wrong. It is actually $860 million — which means, as much as I hate to say it, we are not registering on the radar with these insignificant payments and are no closer to sufficiently closing this gap.

The latest report on OPEB referred to in last week’s City Council meeting outlines this liability increasing from $782,443,543 to $860,873,100 from July 1, 2014, to July 1, 2015. How do you feel about that $2,140,000 contribution, now knowing the liability increased more than $78 million in one year?

The truth is that this unfunded liability was buried in the footnotes of municipal budgets for years, but recently GASB [Government Accounting Standards Board] has changed the standards so that municipalities need to disclose this liability front and center. Now municipalities are being rewarded by bonding agencies for merely acknowledging the liability and making the effort to increase funding for it, while in the past no such effort was made.

This will not, however, last much longer. If you worked for a bonding agency and saw a liability increase $78 million in one year while about $2 million was put aside to deal with it, would you continue giving that entity a high grade?

Now, the next question you’d probably ask yourself is: How much has this liability gone down since the first time we heard the acronym OPEB — it must be a lot, right? Back in 2008, it was in fact more than $1 billion, but that was reduced significantly when then-City Manager Mike O’Brien was able to get the City Council to vote for Section 18, which forced eligible retirees over to Medicare Part B and off the City of Worcester Group Plan.

Since then, nothing really substantial has been done — and I suspect nothing would have been done if not for the changes by GASB. (In fact, looking back, the adoption of Section 18, which has and will literally save the taxpayers of Worcester hundreds of millions of dollars, is probably the greatest contribution O’Brien made to the city during his tenure.)

Now what??

According to Fitch, in 2010 the city’s OPEB liability was $765 million and now it is at nearly $861 million in 2015. Other than the adoption of Section 18, Worcester has actually gone backwards since 2010 by almost $100 million!

How does the city deal with it? It has two choices:

  • Allocate more money each year in the budget toward the OPEB trust;
  • Increase the percentage that retirees pay for their portion of their Medicare Supplement plans.

There is no third option. City officials can go on pretending that Worcester is closing the gap, but the bond-rating agencies will end this honeymoon sooner rather than later. It will be interesting to see how the city’s leadership team deals with this financial time bomb.

Stay tuned.

Bill Randell served on a PILOT task force for then-Mayor Tim Murray and is a current member of the Holden Town Meeting Finance Committee. Bill started and operates the local news website Worcester Herald, and is the owner and author of FlyORH, a website dedicated to Worcester Airport. He is also president and founder of Worcester-based businesses Advantage Benefits and ABG Real Estate.

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