What Is OPEB And Why Should You Care About It?

By: Tim Wood

Topics: Municipal Finance

Chatham currently has an other post-employment benefit liability of more than $17 million, while its OPEB trust fund has a balance of less than $1 million. 

 

CHATHAM – The acronym OPEB has been popping up more and more often in municipal finance discussions. It's one of those arcane accounting elements that makes the eyes glaze over, but in actuality has a significant impact on the town's finances. Last week the town's OPEB trust fund board of directors held a forum to educate the public and provide background on the topic. The following information was gleaned from the forum as well as separate interviews. 

What is OPEB?

Other post-employment benefits are, simply put, health insurance and other benefits that the town owes retired employees for their lifetime. Until fairly recently, most municipal employees did not pay into Medicare and are therefore not eligible for those benefits. Retirees' health insurance percentage paid by the town are fixed; for Chatham that figure is 75 percent. Right now Chatham has 208 retired employees eligible for the benefits, and 123 benefits-eligible current employees, some of whom pay a larger percentage for health insurance.

Why all the attention to OPEB now?

These long-term obligations have always been around, and towns have covered them in annual budgets, a pay-as-you-go system. But as health insurance costs rose and retirees lived longer, the amount of the future obligation began to increase.

“There was not a lot of attention to the long-range obligation and the cost for lifetime health insurance benefits from either the private sector or the public sector,” said Geoff Beckwith, Executive Director of the Massachusetts Municipal Association. In 2006, the Government Accounting Standards Board began to require that municipalities report OPEB liability on annual balance sheets. Shortly thereafter bond rating agencies like Standard and Poor's began looking closely at how communities were addressing the unfunded liability.

The total OPEB liability for all municipalities and state government is $30 billion, Beckwith said.

What options to towns have to fund OPEB?

Most towns fund OPEB through the pay-as-you-go method, taking care of each year's obligation through the annual budget. But Beckwith said this isn't a realistic long-term approach, because as that amount rises, it can begin squeezing the budget, due partially to the restrictions of Proposition 2½. Only a couple of municipalities in the state have completely funded their OPEB liability, he said.

“The vast majority of communities just don't have the resources to do that,” he said.

Like Chatham, many towns have established OPEB trust funds and make annual contributions toward the unfunded liability. Money in the trust fund is invested.

How is Chatham handling its OPEB obligation?

Chatham's current OPEB liability is $17.2 million, according to Finance Director Alix Heilala. That's considerably lower than when it was first calculated in 2006. At that time it was $44 million and included the benefits owed to retired teachers. When the Monomoy Regional School District was established, it took on the obligation for current teachers, lowering the town's liability by $22 million.

The town has been putting $150,000 a year into its OPEB trust fund since it was established in 2012, and currently has a balance of $954,677.

“That's still a long way from our liability of $17 million,” Heilala said.

The OPEB trust fund board of directors last year proposed several approaches to generating revenue to more fully fund the obligation. Two – repurposing half of the 3 percent land bank tax surcharge when it expires in 2020, and imposing a tax on the transfer of real estate above $425,000 – went to town meeting. The real estate transfer tax was defeated, but repurposing the land bank passed and in December, Governor Charlie Baker signed the home-rule legislation into law.

The 1.5 percent property tax surcharge will generate an estimated $500,000 annually. It is slated to sunset in 10 years and should contribute at least $5 million to the town's OPEB trust fund.

That's still not enough to completely cover the liability. At last week's forum, members of the trust board of directors reviewed several other options to generate revenue for the OPEB fund, including resurrecting the real estate transfer tax; increasing estimated local receipts; a one-time increase in the tax rate; tapping the overlay surplus account; and increasing the local hotel/motel tax from 4 to 6 percent. Chairman of Selectmen and trust fund board member Dean Nicastro noted that opposition to that approach was expressed by lodging establishments because it did not include short-term rentals. However, with the recent passage of legislation extending the room tax to short-term rentals, there may be less opposition to that approach, he said.

Repurposing the land bank tax was “an innovative approach” that most town's can't take advantage of, Beckwith said, since only a few still have a separate Cape Cod Land Bank tax. Most Cape towns folded the land bank into the community preservation fund when that opportunity arose.

“What Chatham is doing is ahead of where most communities are,” Beckwith said.

There may be support in town for adopting one or more of the options spelled out by the trust's board last week.

“I think we need to look at all of those proposals,” resident Tom Wilson said at the forum. He called for the town to move as quickly as possible to close the funding gap.

Related Articles

Governor Signs Chatham OPEB Legislation

CHATHAM – In a step toward covering the town's $17 million other post-employment benefit liability, Gov. Charlie Baker last week signed legislation authorizing a property tax surcharge to help addre...