By: Helen Garten
For Westport,that means the employer’s share of retiree health costs. Under our pension contracts, retired employees and their families may continue to participate in the town’s subsidized medical and drug plans.
Until recently, Westport, like other municipalities, budgeted yearly for retiree medical expenses and didn’t worry about the cost of future promises. But retiree health benefits are compensation, and employees earn their benefits while they serve the town. It makes sense to put aside money now toward future obligations, which is how we fund our pensions.
Government accounting, however, lags behind private sector accounting, and it wasonly several years ago that municipalities were required to calculate their future OPEB liability for all retired and active employees. We’re not obligated to fund all, or any, of this liability, but we should know what it is. And Westport has created a trust to accrueand invest funds to defray future expenses.
Calculating OPEB liability involves actuarial analysis of future health costs, which are discounted to present value. The choice of discount rate depends on how we plan to fund OPEB. We can pay retiree medical costs as they are incurred, but then we must use a discount rate reflecting our borrowing cost. Or we can plan to prefund a percentage of our liability each year (the “Annual Required Contribution”) and invest those funds through our OPEB trust. Then we may use a “market” rate of return.
Our actuaries calculated our liability three years ago and again this summer. Discounted at borrowing cost (4 ½%), our unfunded liability started at $50 million and is now $120 million. Discounted at a market rate (7 ½%), our unfunded liability was $34 million and is now $75 million.
Why the increase? The original actuarial calculations omitted 441 eligible employees. Further, actuarial projections of medical cost inflation were too low.
What does this mean for taxpayers? We still plan to fund this liability over time rather than all at once. But our Annual Required Contribution will be higher, and we have prefunded less than we thought.
When we set the mill rate, we anticipated that our Annual Required Contribution wouldrise, although we didn’t know how much. We arranged to fund the OPEB trust by $4.25 million, doubling past contributions. This, plus sums budgeted for current retiree medical costs, cover about three quarters of the new Annual Required Contribution. The Board and Administration will decide how to fund the remainder.
Actuarial calculations are based on assumptions that may or may not prove true. The factis that our OPEB liability, however calculated, is too high. And given the mistakes in the previous calculation, taxpayers have a right to ask whether another unpleasant surprise isin the offing.
The Board of Finance will not be blindsided again. Overseeing actuarial calculations isnot ordinarily the Board’s responsibility, but we have learned on the job.
More important, the OPEB numbers should be a wakeup call. For two years, we on the Board have covered the bill for employee benefits while keeping services intact and taxesreasonable. We can’t do this forever. There is only one solution—reach a new bargain with employees for a sustainable benefits package. I and other Board members have called for this for years, but this change is not within our power. We need the supportand cooperation of every Westport resident and employee.
Helen Garten is Chair of Westport’s Board of Finance