A recent Marin grand jury report found that 21 of 39 public agencies in Marin do not set aside any money to fund employee health insurance after retirement, or Other Post-Employment Benefits (OPEB). Now is the time to deal with the true costs of OPEB for new employees and to fund what has already been promised to existing employees.
This topic can be confusing, so let’s begin with an example. Consider an employee hired at age 30, working to age 60, and enjoying retirement until age 91. Years ago, employers simply paid the insurance bill each month and didn’t worry about setting aside money for future costs from age 60-91. This pay-as-you-go approach was common when health costs were low.
As insurance costs rose, accounting rules changed and agencies are now required to record this expense sooner. In our example, if the rule change occurred when the employee was 40, the expense for that year would include both an allocation for some of the future costs to be paid for age 60-91 (normal costs) and an allocation to help catch up for the prior service costs earned from age 30-39, not previously accrued.
The amounts are estimated using a rational allocation approach determined by an actuary. They take into account such things as anticipated employee turnover, mortality, health-care cost trends and earnings on any invested funds to determine the Annual Required Contribution (ARC).
Agencies are not required to put cash in a trust, just recognize the expense and related liability if the ARC is not paid. The accounting goal is to have the cost of providing health insurance in retirement fully expensed by the time the employee retires.
The agency also pays the bill for providing health care each year to current and retired employees.
In my opinion, it is unfair to employees and taxpayers to not contribute the ARC to a trust in cash each year. Otherwise, future taxpayers will bear the OPEB costs after the employee retires, while current taxpayers enjoy the employee’s services today. Today’s employee is also less secure, relying on the agency being solvent when the insurance bills come due in retirement.
There is a solution. Mill Valley tackled this issue in several steps.
In 2013, the city negotiated a longer service period for new employees’ eligibility and lowered the benefit to exclude spouses. In 2014, we began a practice of fully funding the ARC obligation to a trust in cash. This payment is roughly 4 percent of our general fund budget.
Last month, we negotiated the elimination of OPEB for all new employees, and instead make a fixed contribution to a defined-contribution retirement health savings account for them. OPEB coverage is now limited to a “closed group” of existing employees and retirees. Our approach should have the trust fully funded in 22 years.
We also changed our oversight and governance process. The actuary now reports directly to City Council. This independence ensures that estimates made by the actuary are reasonable rather than optimistic, which could push costs down the road.
It helps to have a council member with financial experience and familiarity with actuarial methods, but a good actuary can explain their proposed decisions to any council member willing to do some homework.
I encourage all public agencies to consider fully funding their OPEBs ARC now. Delay makes solutions more expensive and putting cash into a trust now allows assets to earn income, reducing ultimate costs.
John McCauley is a Mill Valley City Council member, a retired CPA and retired partner with PricewaterhouseCoopers LLP.
