Other Post Employment Benefit (OPEB) - The Ticking Time Bomb

From Sean Byrnes's Moblize Middletown Blog:

Many of us have heard the warning cries over the condition of our State's pension system. Estimates suggest we are $50 billion in the hole. Governor Whitman's actions to revalue the pension system's assets and subsequent failures to provide funding have created a canyon-sized shortfall. I am hoping that Governor Christie will act swiftly to end our system of defined benefit pensions and move us to a defined contribution pension system where employees fund their own pensions. We cannot continue to promise employees fixed amounts of money in retirement with no legitimate system for funding these obligations.

But our State's failures when it comes to employee benefits have not been limited to pensions. I recently received Middletown's audit for 2008 and noticed a comment section dealing with Other Post Employment Benefits ("OPEB"). I had not previously seen this term. As it turns out, many employees are counting on OPEB; namely, health benefits during their retirement. And, of course, our State and local municipalities have been promising generous benefits.

Statewide, estimates by PEW show New Jersey at the bottom when it comes to funding these benefits. New Jersey has the highest unfunded actuarially accrued benefit liability (UAAL) among all states. It also has the highest per capita debt with a value of $7,947, which reflects a UAAL of 139.66 as a percent of the state budget and an Annual Required Contribution toward these accrued benefits of 11.85 percent. In terms of real numbers, New Jersey should be contributing $1.88 billion each year toward these benefits, but actually contributes $310 million.

Unfortunately, Middletown's numbers are worse. Middletown promises health benefits for life to those employees who earn a pension. I will confess that I did not have a full understanding of where Middletown stood when it came to funding retiree health benefits. Returning to the Comment in the 2008 audit, I noted that Middletown's "Annual Required Contribution (ARC) for the year ended December 31, 2008 was $10,196,400 of which $1,659,200 was funded by the amount expended for these benefits." I was astounded. If I was reading this correctly and understanding it, we underfunded our OPEB obligation by $8,537,200.

Why has this obligation flown under the radar? Until recently, local entities made these commitments without any requirement to show this obligation on their balance sheets. It has been "pay as you go", meaning that you pay the health benefits as they come due, but you don't set aside funds in advance. But the reporting requirements have changed. Government Accounting Standards Board Statement 45 (GASB 45) now requires disclosure. While these substantial financial commitments remain off the official books of local governments, municipalities must now provide actuarial estimates of what these accrued liabilities amount to. Staring in 2008, municipalities with more than 100 employees were required to provide information concerning their OPEB liability. Local Finance Notice 2009-13R outlined this requirement:

Local authorities are required to recognize the OPEB liability in Statements of Revenues, Expenses and Changes in Net Assets (balance sheets) and Notes to the Financial Statements in accordance with GASB Statement 45.

I recently learned that Middletown had contracted for this required study. We received it in November 2009. Through 37 pages, it reviews Middletown's obligations and explains how the annual required contribution (ARC) of over $10 million is calculated. While someone might quibble with some of the assumptions, there seems to be little question that Middletown's taxpayers have a growing financial obligation that remains severely underfunded.