Part Two of Two

By JACOB SZETO

In the first part of this series, it was shown that Oregonians collectively owe at least $3 billion in Other Post-Employment Benefits (OPEB), which cost $300 million annually.

The magnitude of OPEB debt and costs were unknown, at least to the general public, until recently when the Government Accounting Standards Board (GASB) required disclosure. What was speculated and then revealed was that governments have been running budget deficits for years, resulting in an immense buildup of debt that remains off the books to this day.

Government officials have long been aware of OPEB budget deficits. The Financial Accounting Standards Board (FASB), the private sector version of GASB, required disclosure and the accounting of OPEB almost two decades ago. Founder and CEO of the Institute for Truth in Accounting Sheila Weinberg says: “They knew they were circumventing the balanced budget requirements by using deferred compensation tricks to reduce the costs they had to include in the budgeted expenses.”

In Oregon, if the true costs of OPEB were to be included in budgets, deficits would reach at least $149 million annually. Budget rules have not changed with regard to OPEB, and most of Oregon’s governments have not volunteered to include the true cost of OPEB. Instead, they have chosen to accrue debt.

Funding Liabilities

Of the $3 billion of OPEB liabilities in Oregon, only 7.25% has been funded, leaving an unfunded balance of $2.8 billion.

If the total cost of OPEB were to be budgeted, a portion of that money would go to current direct payments, such as insurance premiums. The remaining portion would be set aside in a trust account to offset both the current costs of active employees (that will be paid later when the employees retire) and debt from past services that have not been paid or funded.

Funding a trust account not only would reflect the true cost of public employees in the budget, but it also could reduce costs. Similar to a retirement account, assets in these trusts can gain interest and earnings. Proper planning and investment can offset some of the costs of OPEB and reduce the burden to taxpayers.

Just as OPEB is considered when assessing the financial health of the private sector, bond rating agencies consider these same liabilities when issuing ratings for governments. For example, if a city does not fund its OPEB, the city’s financial viability is considered riskier. This could lead to downgrades in bond ratings which subsequently would increase interest rates and costs to the city.

Lehman Brothers released a paper in 2006 entitled Preparing for the OPEB Tsunami, in which they stated: “Failure to adopt and implement a credible funding plan is likely to exert downward pressure on ratings.”

Lowering the costs of OPEB and other government expenses is not the only reason to fund OPEB. Securing a future stream of cash for expenses incurred today ensures that Oregon governments will be able to pay in the future, without having to raise taxes or to cut other services. Secured funding will protect future taxpayers and retirees.

Generational equity is often overlooked as an aspect of funding OPEB liabilities. Since these liabilities represent past services and thus past costs, not funding them transfers these costs to later generations. OPEB is not required to be legally funded, and it is easy for short-term goals such as political gain or an appearance of a balanced budget to take priority.

Controlling Liabilities

Funding OPEB may be important, but it does not lower actual healthcare costs. There are, however, several actions that can lower these costs.

Benefits can be changed or limited. Governments have various levels of OPEBs. For example, TriMet pays the full cost of medical, vision and dental insurance premiums for all of its eligible retirees and their spouses. In contrast, the city of Gresham’s OPEB is limited to the minimal level the law permits of allowing early retirees under the age of 65 to purchase from the same insurance plan as current employees at equal cost.

Compared by current employee head count, Gresham has $17,084 of OPEB debt per employee; TriMet has $261,890. TriMet’s OPEB debt per current employee is more than 15 fold than that of Gresham. The difference is their benefits, usually a result of labor negotiations. Gresham has managed to keep additional OPEB benefits out of their agreements with employee unions, whereas TriMet basically has settled on the full amount possible.

Adjusting eligibility requirements can have a significant impact on OPEB costs. Governments commonly require that a retiree be at least 55 years of age and have worked for 10 years to be eligible for OPEB. If either age or years of required service were to be adjusted upwards, costs of OPEB would decrease. These eligibility requirements are usually determined by labor negotiations and thus are adjustable in the long run.

Oregon Law and the required subsidy

Gresham’s level of coverage is mandated by Oregon Revised Statute 243.303, which requires all local government employers who offer health insurance to current employees also to offer it to early retirees at equal cost until age 65, when they become eligible for Medicare.

Premiums are based in part on the age of the insured. The early retirees who are allowed to continue their insurance plan beyond their employment cause the premiums of current employees to increase. Because healthcare is usually offered at no expense to current employees, taxpayers pick up the tab for the increased healthcare costs. This, in effect, creates an implicit subsidy for retirees.

For example, the expected monthly health care cost of a 60-year-old female retiree from the city of Gresham is $656, and the average monthly gross premium for an active member is $341. The difference of $315 is the implicit subsidy Gresham is paying to the 60-year-old female retiree by allowing her to remain on their plan.

If this law were to be repealed, the potential savings to Oregonians would be at least $84 million a year. Although implicit to retirees, the costs to Oregonians are very much explicit. In total, at least $744 million of existing OPEB obligations would be eliminated by shifting the higher cost of health insurance of retirees from local governments to retirees.

History tells a tale of two sectors

Although public sector reporting requirements are not the same as the private sector, the impacts of OPEB will be the same.

In 1992, accounting standards changed to require the private sector to recognize and account for OPEB liabilities and costs on their balance sheets and income statements. GM and Ford took some of the largest hits from this change in standards.

Union contracts from decades before gave generous OPEBs to employees, such as fully paid premiums for retiree medical and dental insurance, similar to those of TriMet. These benefits cost the company little at the time because the true costs were kept off the financial statements and pushed into the future. But as time went on, the costs for services previously rendered came due. It became apparent that OPEB costs were having a detrimental effect on automakers’ financial health.

Detroit and Oregon are no different in principle when it comes to OPEB costs, planning and control, with exception to their respective source of revenues: Detroit depends on car sales for revenue, and Oregon depends on taxes.

Below is a list of the OPEB details for the 100 Oregon governments discussed in this article.

Alphabetical Order

By government type

Ranked by OPEB annual required contribution

Ranked by OPEB unfunded liabilities

Ranked by OPEB percentage funded

Ranked by OPEB percentage of covered payroll

Ranked by covered payroll

For more information please contact [email protected]

To see Part One of this series, click here.