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The new Boogieman: OPEB

Other Post Employment Benefits are facing virtually all governments at every level in America.

 

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.

Brendan McGowan January 31, 2013 at 05:42 PM
http://www.radnor.com/egov/docs/1355176497_877014.pdf John, I urge everyone to read the PDF link above from CARFAC as well-it is excellent. The split of the $236M in unfunded liabilities is roughly $22M pension and $214M OPEB (other post employment benefits). The OPEB problem primarily is a result of the civilian and police employees of Radnor receiving health care benefits for themselves, their spouses, and dependents for life. The net present value of this future $214M OPEB liability that will be paid over time is $54M. If the retirement health benefits were limited to age 65 instead of for life for both police and civilian employees, the report estimates savings of almost $2M/yr. If you use a 30 yr period at 4.5%, the net present value of the savings would be $38M or 70% of the unfunded present value of the current OPEB plan liability. If you increase current employee contributions to health costs and force retiree contributions as well, the liability could almost be 100% offset. When viewed in light of the fact that only 6 out of 64 municipalities in the Delaware Valley Health Insurance Trust offer retirement health to both civilian and police employees and that 50 out of 64 municipalities offer NO retirement health benefits, limiting to age 65 would still be more than generous in comparison to our peers. Maybe these hard decisions should be considered as an alternative to raising taxes given that these health benefits are still better than most residents enjoy.
I Lived Here for 25 Years & Finally Moved Out January 31, 2013 at 08:45 PM
John.....very well written article, thank you. I agree with the suggestions in Brendan's comments above. Authorizing "the transfer of over $3 million" into an OPEB fund is spending our tax dollars. Many hard decisions are taken every day in the private sector, it is time that the Commissioners make hard decisions about reducing the benefits that current Township retirees receive (reduce age to 65 vs life, charge the retiree for spouse coverage, and cancel some coverages). The retired Township employees should go onto the same Obamacare that the private sector will ultimately enjoy. And they should be happy to do so, less they believe they are somehow superior to the rest of the population. Don't raise taxes to solve this problem, reduce taxes and provide/modify benefits to be similar to those provided in the private sector.
Daniel Sherry February 01, 2013 at 09:08 PM
I believe I can translate Commissioner Nagle's 800 word column - which he completed using examples that would be deemed too simplistic for nursery school - into a solitary sentence: "Please-oh-please-oh-please-oh-please DON'T LOOK at the actual numbers associated with OPEB or other unfunded liabilities, 'cause doing so will make it far less likely you'll support incurring twenty million dollars of debt to buy a chunk of Ardrossan (which I've been ogling ever since I was Executive Director of the Radnor Conservancy)."
Martin Heldring February 01, 2013 at 11:25 PM
I commend Mr. Nagle for bringing these financial issues to the attention of Radnor residents. And I like his example of saving for the coming expense. If a family saved $1,000 a month for 18 years, it would have just short of the $500,000 needed for college. This assumes that over those 18 years, the family is earning 8% on funds they put into this account. Few families I know have earned that over the last ten years and less would assume that for the next 18 years. But that is what Radnor does. And that same family would assume that it needs to set aside funds for other common and expected expenses; house repairs for example. Unfortunately, Radnor is also largely on a pay as they go plan for the storm water system. Some of the system is 100 years old and experts suggest the township should be putting aside $3 million per year for capital improvements. The back log of required improvements is probably around $60 million. And Radnor leased off one of their fields last year to Agnes Irwin because of an inability to maintain it and they are under discussions now on the Willows for the same reason. And absolutely, with this scenario, this prudent family would never consider adding another asset to an existing portfolio of assets that it can't afford to maintain. Nope again. Mr. Nagle is on record as wanting to buy more open land. Radnor taxpayers can only hope that their commissioners exercise the same financial discipline that they do in their every day lives.
Frank February 25, 2013 at 04:01 PM
Please ignore the man behind the curtain - nothing to see here!

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