Municipal leaders in recent years have grappled with mounting underfunded liabilities for public employee pension plans, but there is an even more pernicious fiscal challenge just around the bend. “Other post-employement benefits,” or OPEBs, are health or life insurance or other post-employment benefits provided to employees after retirement, and these liabilities have largely been neglected by municipalities. New updates to accounting standards will bring OPEB obligations onto municipal books, forcing local leaders to reckon with this funding liability.
How OPEB costs are currently handled
Beyond paying the current year’s premiums on a “pay as you go” basis and reporting them in financial statement notes, OPEB liabilities are often ignored. Many municipalities have not made the actuarially recommended contribution to fund liabilities incurred, and many have not even established an OPEB trust. With the change in accounting standards and increased financial reporting, there are clear financial repercussions for municipalities that have neglected to consider OPEB obligations.
In June 2015, the Governmental Accounting Standards Board (GASB) approved the issuance of the first new statements related to OPEB in nearly a decade. GASB statements No. 74 and No. 75 upend prior standards with the unprecedented requirement that governments now report OPEB liabilities on the face of their financial statements.
When do these changes take effect?
Statement No. 74 is effective for fiscal years beginning after June 15, 2016, and Statement No. 75 takes effect with fiscal years beginning after June 15, 2017. However, municipalities should begin to adapt as early as possible to the financial repercussions of this accounting change.
What will this mean for my municipality’s financial situation?
Generally speaking, many OPEB plans are completely unfunded. For plans that are even partially funded, there is immense pressure on OPEB plan investment returns to keep pace with the health care inflation rate. The “pay as you go” approach pushes the cost of benefits promised to and earned by current employees down the road for future generations to foot the bill.
Additionally, bringing unfunded OPEB liabilities to the forefront has the potential and likelihood to drag down a municipality’s credit rating. A lower credit rating could result in higher borrowing costs, which are ultimately passed on to the taxpayers.
What can municipal leaders do now to prepare for this change?
Local governments should act now to account for OPEB liabilities. Here are tactics to help municipal leaders prepare for this new liability on their books:
- Set up an irrevocable OPEB trust: Governments can create an irrevocable trust to place assets that are restriced for use solely to pay OPEB benefits. Separate from other municipal funds and legally protected from creditor claims, OPEB trust assets are a dedicated pool of resources to meet these obligations.
- Understand the promises made: Many governments do not realize the long-term financial impact and cost of benefit promises made. Meet with your financial professionals to review and discuss the potential financial burden of OPEB and related funding requirements.
- Plan ahead: In addition to funding promises already made, consider the financial impact of future promises. Before making the commitment to provide new or additional benefits to employees, discuss with your actuaries and accountants the impact these benefits could have on your municipality’s financial statements.
OPEB shortfalls can have cascading impact throughout a municipality, from property taxes to credit ratings to liquidity issues. While bringing these largely ignored liabilities onto the books presents a daunting challenge for municipal leaders, required OPEB accounting changes are also an opportunity to raise funding concerns and to develop a plan to address the costs of providing promised benefits.