Updated: 03/07 at 5:36 p.m.
By Ryan Ekvall | Wisconsin Reporter
MADISON – Readers of Wisconsin Reporter are probably familiar with the Moby Dick-like unfunded public pension liabilities swallowing up municipal and state budgets throughout the United States.
But have you met the other insatiable budget leviathan?
They’re called OPEBs — Other Post-Employment Benefits — promises governments make, using taxpayer cash, to pick up the life insurance and health care premiums of government workers. In many cases, that means taxpayers are paying for the health needs — dental, vision, prescription and other benefits — of public-sector employees from early retirement to Medicare age.
That’s usually around a decade of other post-employment benefits costs.
Rep. Jeremy Thiesfeldt, R-Fond du Lac, is trying to put an end to that.
His bill, Assembly Bill 23, would require municipalities who offer OPEBs to fund them on an actuarial, rather than a pay-as-you-go basis. An actuarial funding method requires government employers to set aside projected benefit costs while the employee is working – as they do with pensions – rather than pay the bills as they come due.
Billions in benefits
A Congressional Budget Office study found the 50 states and 39 largest municipal governments had more than $530 billion in unfunded OPEB obligations in 2009. A recent Pew Center on the States study estimates Wisconsin had $2.5 billion in unfunded OPEB benefits.
With an earlier retirement age, police and firefighters can collect 15 years of benefits in some municipalities, depending on collective bargaining contracts.
“Many municipalities have promised the world,” said Thiesfeldt Wednesday during a Committee on Economic Development and Local Government meeting. “With this change, local officials couldn’t push those costs onto future budgets.”
In the past decade, the Government Accounting Standards Board started requiring governments to report, but not fund, the cost of these future benefits as a part of the cost of providing public services today.
The City of Eau Claire, a town of about 65,000, for example, in its 2011 Comprehensive Annual Financial Report offers some insight into the potential OPEB’s create for future budgetary sinkholes.
In 2009, the city’s OPEB cost was just south of $3 million. By 2010 it was $4.77 million, and a year later almost $5 million. Because the city didn’t fully fund those costs on an actuarial basis, the OPEB obligation ballooned $8.45 million in just three years.
The city’s unfunded actuarial amount as of Jan. 1, 2012 was $49 million, or nearly 150 percent of the city’s payroll.
That’s not a cause for concern, according to the city’s finance director.
“To me this is something we have paid successfully on a pay-as you-go-basis,” said Rebecca Noland, Eau Claire’s finance director. “Our (OPEB) costs are about $2 million each year. To set aside $49 million in an irrevocable trust to me is not a wise use of taxpayer money.”
The bill would apply only to future employees, but Noland’s point is that the city has met its obligations as they’ve come due in the past and should be able to meet them in the future.
She contends the Governmental Accounting Standards Board requirement was meant for informational purposes, not a liability to be funded.
“The issue really is, what is the appropriate level of post-employment health care that should be provided?” she said.
In the days following Gov. Scott Walker’s collective bargaining reforms, known as Act 10, local governments previously bound by collective bargaining contracts can choose not to offer OPEBs at all. That is, except for police officers and firefighters.
Those protective class employees were spared from the Act 10 ax. Because those employees can retire starting at age 50, Noland says they account for 65-70 percent of the unfunded liability.
Jennifer Gonda, city of Milwaukee intergovernmental relations director, said municipalities would have to go back and bargain with police and firefighter unions to remove OPEBs, or the state would have to change the statute.
Milwaukee pays $34 million a year on a pay-as-you-go basis for its other benefits, about 9 percent of payroll last year. But the city’s actuarial unfunded liability is a whopping $916 million.
Jeremy Gold, a pension expert and independent actuary consultant, said private employers have long offered OPEB’s, but they always had a “rip cord.”
“They always had a clause saying we can stop this any time we want and we don’t owe anybody anything,” Gold said. “Many corporate employers over the past 15 years have been reducing benefits or increasing employee contributions.”
Gold estimates unfunded OPEB liabilities might be closer to $1 trillion nationally, but the promises aren’t ironclad like public pension promises.
“It depends on a state-by state-basis and union contracts how strong those promises are. I think they’ve proven to be weaker than pension promises,” he said.
Gonda, who also opposes the legislation, said the change would cost the city $1.2 million next year, an amount that would grow after that.
“It’s changing the rules in the middle of the game,” Gonda said. “For us, we don’t object to the concept, it’s ‘how do you come up with money?”
The administrator wonders why the legislation only takes aim at local governments when the state, too, is on a pay-as-as-you go plan.
After publication, Thiesfeldt’s office provided Wisconsin Reporter a letter from Department of Employee Trust Funds Secretary Robert Conlin refuting Gonda’s assertion.
“Regarding any legislation mandating actuarial funding of OPEBs for state employees, the sick leave conversion, duty disability, and the retiree life insurance programs all meet that standard. We would generally expect that such a proposal would therefore not impact the way the state funds these benefits,“ Conlin wrote.
Contact Ekvall at email@example.com