Facing the Challenge of Retiree Health Care: Liabilities and Responses of State and Local Governments-A conference summary

Chicago Fed Letter, May 2008 by Mattoon, Richard H

* Increasing the vesting period for new employees, spouses, and dependents.

On the funding side, while the county has always contributed based on the ARC, there was still a substantial unfunded liability by 2006. To reach full funding, the county issued $557 million in trust certificates of participation in July 2007. This created an annual debt service of approximately $48.5 million over the 20-year life of the certificates. However, the county's trust certificate issuance provided a considerable savings over the estimated $60.2 million annual payment that would have been required to meet the ARC.3 Daddow estimated that over the 30-year period to fully fund OPEB at the ARC, this will save the county approximately $150 million.

Daddow concluded that issuing OPEB debt may not work for all entities. It was appropriate for Oakland County because it had done significant prefunding, had a favorable bond rating, and had taken steps to limit future benefit costs. Finally, Daddow cautioned that debt market conditions have to be favorable (i.e., the debt rate must be significantly less than the expected return on long-term investments in the retiree health care trust fund) for this strategy to work.

Herb Bergson, former mayor, Duluth, MN, described the political challenges in dealing with OPEB. Bergson ran for mayor on a platform that he would address the city's spiraling OPEB liabilities. The cost of the obligation had reached $4,000 per capita in the city, and the city clearly lacked the fiscal resources to pay for this. Bergson described the defined benefit health plan as being quite generous. For example, the plan covered dependent children up to age 25.

Bergson began to address this issue by freezing the hiring of new employees to ensure that the estimated liability of between $310 million and $320 million would not grow. He also passed a measure that he and future mayors would not draw a pension. Bergson promised not to run for reelection in an effort to develop support for his reform measures.

Ultimately, a six-part plan was implemented. It included:

* Creating an irrevocable OPEB trust;

* Reinvesting money from another fund (the Community Investment Trust) into the OPEB trust;

* Seeding the OPEB trust with $12 million in city revenues;

* Earmarking money raised through the TIE (tax increment financing) district for the OPEB trust;

* Allowing the state board of investments to mange the trust's funds; and

* Requiring union concessions.

Bergson shared that this process was highly contentious. He concluded that it is critical that elected officials recognize the magnitude of OPEB issues and be held accountable for developing plans to meet the challenge.

Illinois and OPEB

Pedro Martinez, chief financial officer, Chicago Public Schools (CPS) system, discussed the OPEB liability facing the system. The CPS is the third largest school system in the U.S. with over 400,000 students and an operating budget of $4.8 billion. The system adopted GASB statement No. 45 in fiscal year 2006. The system's estimated OPEB liability grew from $213 million in fiscal year 2006 to $425 million in fiscal year 2007.