HARVARD – Controversy has brewed since Annual Town Meeting over the degree of warning given the public about Harvard’s mushrooming liability on municipal post-employment benefits. Routine annual independent audits since 2008 have noted the town’s non-pension retiree financial exposure and have steadfastly recommended the town explore the issue which has come to be known as ‘other’ post employment benefits (OPEB).
To date, no monies have been set aside to cover Harvard’s estimated $29,770,000 million OPEB exposure on funding retiree health and life insurance benefits, with deferred funding costs growing at the rate of $1.8 million a year. At Town Meeting, former selectman Leo Blair set off the alarm, noting the audits have discussed a burgeoning bubble in the retiree situation for Harvard, where the average retiree age is presently 50 and so the town’s exposure, based on life expectancy tables, is to double to $60 million by 2039.
On May 16, the Harvard Finance Committee entertained a presentation from Blair and Keith Cheveralls, who was acting individually and not as a member of the School Committee. The duo ultimately suggested the Finance Committee, and not the Board of Selectmen, take ownership of the divisive issue in terms of exploring a way to pre-fund OPEB costs (versus the town’s current pay-as-you-go approach, which costs some $550,000 a year).
Finance Committee Chairman Marie Fagan placed the presentation on the agenda, “We want to learn as much as we can about this.”
“This has become something of a topical issue,” began Cheveralls. “The goal here tonight is not to tell you how to do your job.”
The two researched the 2004 Governmental Accounting Standards Board standard called “GASB45.” The accounting recommendation suggests government agencies annually report on their OPEB liabilities. It is not a mandate to pre-fund OPEB costs, but Blair has stated its strongly believed such a requirement is just-around-the-corner for all levels of government.
Despite the 2008 start of the recession, Cheveralls said, “My own conclusion? There is never a good time to implement this.”
Cheveralls said OPEB concerns must have a place on the table alongside other proposed town projects jockeying for funding, like renovations to Town Hall, Hildreth House, and other capital needs.
“We’re here tonight to raise awareness and start dialogue and offer suggestions,” said Cheveralls. “It’s not about finger pointing and not about assigning blame. We’re not necessarily looking at where things went wrong.” Rather the idea was to defuse some of the “anxiety” aroused since Blair addressed the April 28 Annual Town Meeting and asked why Harvard’s OPEB exposure is not being discussed in terms of the annual budget building process.
“The sky is not falling. It’s not the end of the world. But it’s a problem,” said Blair to Town Meeting.
Cheveralls said the growing figure “jumps off of the page” of the audit letters. He suggested the Finance Committee empanel a study subcommittee to “investigate and advise” on the issue. The 2008 table discussed a $25.23 million exposure. In the 2010 study, the OPEB gap grew to $29.8 million though there was only a total of ten retirees between the school and town side of government over those two years. “There’s clearly something going on,” despite the fact that medical costs have gone down, said Cheveralls.
“The longer we leave this unfunded, we’re going to get to a point where it’s going to be virtually impossible to catch up,” said Cheveralls. “That’s the core take-away I get from reading the sequential advisory contained in the management letters that accompany each audit.”
The strongest language is contained in the March 2012 auditor letter that states the impact to operating budgets can “no longer be ignored. When the town auditor adds that language, there has to be valid concern there.”
Town like Wellesley and Reading are “attempting to tackle it,” said Cheveralls. Acton Town Meeting voted $500,000 this spring for OPEB costs. For Harvard to maintain favorable financing terms and it’s double A+ bond rating, “We’re going to have to keep up with what other towns are doing,” said Cheveralls.
Cheveralls said one report stated the “town has chosen not to pre-fund.” Cheveralls admitted that statement “ticked me off a little bit.”
“I’m not sure where they got that from. I don’t believe this town has ‘chosen’ not to fund. I don’t believe this town has been given the choice,” said Cheveralls. “We need to bring information to the town in an intelligent and thoughtful way so they can make decisions on whether or not to fund it.”
“Good evening, my name is Chicken Little,” Blair deadpanned before redirecting, “As we dug into it more and more, certain things seemed to be in dispute that to us seemed indisputable.”
There are 283 employees in the program, with 85 retires and 199 presently employed. Because Harvard provides an attractive work environment, Blair said in short order the OPEB problem will “reach a tipping point” and grow from 84- to 175 retirees. The actuarial reports and their OPEB calculations don’t factor in that coming retiree bubble, said Blair.
It’s no small sum, stressed Blair. “This is $17,400 per household this is a massive liability.”
“OK, it’s a deal we made” with retirees, said Blair. “But there are ways to lessen the impact.”
Blair recommended the Finance Committee skipper the drifting OPEB ship. “This is the right place for the hard work that’s necessary. You guys are experts at this. We think it should start here.” Blair also suggested the commissioning of an updated actuarial report and challenging other pieces of data like wage assumptions and that medical cost would only increase at the rate of 5 percent a year. “I don’t know if that passes the smell test.”
Blair also recommended the creation of an irrevocable OPEB trust account, which would segregate the funds and reflect the town’s commitment to preparing for financial concern. “Seven figure” funding should flow annually – starting in Fiscal Year 2014 – from Town Meeting into the account via a separate budget line item, said Blair. “We feel it deserves a place in our budget The clock’s ticking.”
Blair wouldn’t prioritize the importance of OPEB funding against other town projects, but noted the jockeying for funds means “money may be hard to come by.”
The options are cutting spending or an override to fund pension liabilities. “This is going to be an interesting ride,” said Blair.
Blair suggested funneling a million dollars a year 8-10 years. “It’s still a lot of money, but it’s not $4 million a year. That’s never going to happen and I think everyone knows that.”
“We do not have an agenda. You guys are the experts,” said Blair before signing off slyly. “Frankly, you’re much nicer people than the Board of Selectmen.”
Finance Committee member George McKenna said the OPEB issue must be blended into the committee’s 5-year forecasting. “They’re connected to each other. I don’t see the state saying ‘Don’t worry about this and let it accumulate on your balance sheet.”
“But I don’t agree we have to fund it 100 percent,” said McKenna. He said retirement systems fund less than 65 percent “and that’s accepted not only in Massachusetts but nationally in terms of the bond market. But in terms of doing nothing? That’s not an option.”
Great unknowns exist on capital projects and determining what role, if any, Harvard wants to have in governing Devens lands.
McKenna urged the committee form an OPEB study group as soon as possible to at least take “baby steps.” McKenna offered to lead that subcommittee to “build a dialogue.”
McKenna pondered “how far you want to go” in creating a permanent- or temporary- funding mechanism. Perhaps a dedicated Proposition two and a half override could fund an OPEB irrevocable fund.
Another piece of the puzzle is to reduce costs going forward. Town Administrator Tim Bragan suggested the $3.9 million health insurance cost covered by the town is largely ($3.3 million) to provide health coverage for school teachers who pay 10 percent of the Group Insurance Commission (GIC) cost while the town shoulders 90 percent of the cost.
Meanwhile on the town side, municipal employees pay 25 percent of their Minuteman Nashoba Health Group pooled health insurance cost and the town pays the remaining 75 percent. Bragan suggested the teachers migrate into the MNHG from the more costly GIC-style program.
“It makes a difference,” said Bragan. “That is something that needs to be done or looked at.”
While Cheveralls noted he’d again recuse himself on school contract negotiations because his wife is a school teacher, Cheveralls noted the schism on benefits does bring the School Committee into “close proximity” on the overall OPEB issue.
“We appreciate your presentation and your homework,” said Fagan to Cheveralls and Blair before taking the information under advisement.
“But it needs to be on the plate,” appealed McKenna. “Else it will get buried again and forgotten.”
“I don’t think it will be buried again,” responded Fagan.
Follow Mary Arata on twitter.com/maryehadad.