The new Boogieman: OPEB

Many people have been following the financial and budget discussions surrounding OPEB (Other Post Employment Benefits) in Radnor, which mirror similar discussions facing virtually all governments at every level in America. While the numbers sound incredibly large -- even scary -- it is important to contextualize the issue and the discussion and avoid being misled by alarmist hyperbole.

Before I go any further I want to assure you that I do take this matter seriously, as reflected by my votes on action the Township has taken thus far. That being said, OPEB is not “the end of the world” issue that some people would have you believe. Our Citizens Audit Revue and Financial Advisory Committee (CARFAC) has determined that the we have unfunded liabilities of $236 million[1], which is indeed a large number.  However, it is imperative to put this in perspective. The concept of an unfunded liability can be a little confusing, and must be understood as something different than debt.  Unfunded liability -- such as future OPEB liabilities -- are obligations that will be due at some point in the future (in over 60 years, in some cases), and couldn’t be paid today even if fully funded.  They are obligations we know we will have and can reasonably estimate, due at some later date. We currently pay these liabilities on a pay as you go basis, which has not caused an undue burden to the budget thus far.

Some examples may help: Suppose you buy a new home for $600,000 and mortgage $500,000 of the price at 5% for 30 years. You now have an unfunded liability in the amount of approximately $1,000,000 representing the total payments you will make over the life of the loan. Also note that the supporting asset (the house) does not cover the total unfunded liability. Another and perhaps more meaningful, example: suppose you have a child born today and it is your desire that they attend a top notch University when they grow up. Given the rate at which tuition is increasing you now have an unfunded liability of approximately $500,000. Another large and scary number and there are no assets dedicated to this liability.

So given these huge liabilities, do you hunker down, sell off all of your assets and stop living your life? No, of course not, you plan and act prudently from a fiscal perspective. In the case of the mortgage you make affordable monthly mortgage payments, and for the college education you set up a 529 college saving account for the child and begin making deposits of up to approx $1,000 each month. Of course if you get a windfall, perhaps a bonus, you can deposit additional money in the 529 or pay down your mortgage.

The options are similar for the Township. We can make periodic payments to a dedicated account to address the unfunded liability and we can make additional payments in the event of windfalls. To this end we are establishing an OPEB Fund and authorized the transfer of over $3 million into this account already. We have also enacted an ordinance requiring that excess general fund balances be transferred to the OPEB and capital funds. In addition to planning for the payment of our current OPEB liabilities, we continue to work with our excellent staff to control the escalation of this liability in the future by adjusting benefits offered to new hires.

This coming year we will take under consideration the practical (logistical) manner in which we will fund the liability. Will we choose to build the OPEB fund balance rapidly? Will we continue to use a “pay as you go” methodology? Or perhaps we will develop a hybrid approach? How will we reduce the growth of these liabilities and what are the options to mitigate the uncertainty of future compensation costs? What assumptions will we make in our analysis in that there is high sensitivity inherent in these values? The outcomes depend on the assumptions made, particularly those around investment returns and future inflation. 

What will this mean to you, the individual taxpayer? I believe taxes will have to be increased slightly in the future but I do not know the magnitude of the increase. That is because the magnitude of the increase will be based on the assumptions used and the manner in which we spread out the payments. No elected official is pleased to increase your taxes but sometimes it must be done and we have a responsibility to do it correctly, meet the need and minimize the impact.

Please remember that it took us a long time to run up these liabilities and it will take us a long time to rectify the situation. What is important is that we are well aware of the issue, the facts are all in the open, and we are actively addressing the matter.

 - John Nagle

Bryn Mawr

[1] CARFAC OPEB Report is available on the Radnor website.