Author: Financial Management Resource Bureau
Other postemployment benefits, or OPEB, is the term referring to the benefits other than pensions that public employees receive after they retire, the most significant being health insurance, but also life, vision and dental insurance depending on the providing entity. In Massachusetts, a municipality that has accepted a certain statute (M.G.L. c. 32B, § 9A, § 9E, or § 10) has made the commitment to pay 50 percent or more of the premium costs for group insurance plans for its eligible retirees.
Like pensions, employees earn these benefits as retirees over the course of their working careers to receive it when they retire, and therefore OPEB is an ongoing part of the annual cost to provide public services. Accordingly, the Governmental Accounting Standards Board (GASB) has issued statements (Nos. 74 and 75) requiring governments to recognize these liabilities as they are accrued rather than accounting for them only on a pay-as-you-go basis. GASB’s guidance additionally calls for biennial calculations of a government entity’s OPEB liability and provides rules for reporting it in financial statements. For a city or town intending to accumulate appropriations and investment income dedicated to those costs, GASB also sets forth criteria for OPEB trust funds. In Massachusetts, communities can establish an irrevocable OPEB trust fund by accepting M.G.L. c. 32B, § 20.
The OPEB obligation constitutes a major financial liability that is broadly underfunded among the state’s municipalities. One reason for this is the lack of a legal requirement similar to the requirement under M.G.L. c. 32, § 22F that all retirement systems be fully funded by the year 2040. It can also be harder for local decision makers to grasp the OPEB liability because projections can seem hazy considering the unknown effects of future societal factors, such as healthcare inflation, changes in prescription drug use, and increases in life expectancy. Nevertheless, any community that neglects to formulate a strategy to address its OPEB liability runs the risk of future benefit expenses becoming so large that they overwhelm budget planning to the detriment of service capacity. We therefore encourage communities to start saving for these costs as soon as possible.
Establishing an OPEB trust fund is a sound first step in pursuing this goal. Beyond that, we recommend that each city and town with an OPEB liability adopt a formal policy with provisions that prescribe a financing strategy for annual appropriations to the trust fund, however small they might be initially. Some options include:
- Begin appropriating into the fund from on-going revenues and annually increase the amount by a set percentage (e.g., 2.5%).
- Determine a percentage of the annual free cash certification to appropriate each year.
- Transfer unexpended funds from insurance line items to the trust fund.
- Appropriate amounts equal to the community’s Medicare Part D reimbursements.
- After the community has fully funded the pension system, on a subsequent annual basis, appropriate to the trust fund the amount equivalent to the former pension-funding payment.
In addition to a financing plan, an OPEB Liability policy should incorporate investment goals and parameters, either in the policy itself or by reference to a separate Investments policy. As an alternative to locally procuring investment management services, a community can explore investing its OPEB fund through the state’s Pension Reserves Investment Management Board, as explained here.
The significance of an OPEB strategy is such that credit rating agencies often make note of whether or not a community has an OPEB trust fund and related funding policy when determining a bond rating. It is also why the DLS Financial Management Resource Bureau includes OPEB Liability as a core topic in the policy manuals we draft for client communities (click here to view samples).
OPEB by the Numbers
Existence of OPEB liabilities statewide:
- 327 communities have an obligation to provide these post-retirement benefits, 93%, and 24 do not, 7%.
- All 59 cities in the state have a liability, while 92% of all 292 towns do.
- Among the 24 towns that do not offer these benefits, the average population is 1,742 and average total operating budget is $6.3M.
OPEB funding in the 327 communities with a liability:
- 283 cities and towns (87%) report revenue and expenditure data for an OPEB trust fund to DLS on the Schedule A. It is not known how many of these are GASB-compliant OPEB trust funds, as opposed to basic reserve funds.
- Only 15 communities (5%) have an OPEB liability that is at least 40% funded.
- Based on currently available data, only 3 communities have fully funded their OPEB liability, all of them towns: Colrain, Stockbridge, and West Newbury.
The top three cities in OPEB funded ratio are Boston (28%), Leominster (18%), and East Longmeadow (15%).
Data sources for the above numbers: DLS report of OPEB trust revenue and expenditures drawn from the annually submitted Schedule A; audited financial statements provided to DLS by cities and towns; and MA Public Employee Retirement Administration Commission’s most recent OPEB Summary Report (2021).
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| Date published: | October 17, 2024 |
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