OPEB reform must be a top priority

From The Beacon, December 2013

Over the next 30 years, communities and the Commonwealth will face a combined unfunded liability of $46 billion to pay health insurance benefits for their retired employees, a staggering burden that is clearly unaffordable for taxpayers.

$46 billion.

To put the issue in perspective, this means that over the next three decades an average family of four would have to pay more than $30,000 in taxes just to fund health insurance benefits for public employees who are retired or who will retire during that time, in addition to any other taxes they pay for essential services. It is hard to see how taxpayers will agree to pay this much, considering that 90 percent of private sector workers have no access to similar retiree health benefits from their employers.

We are not alone. Many states and localities across the country are beginning to understand the heavy burden that “other post-employment benefits” (these are the non-pension benefits provided to retirees, consisting mainly of health insurance, called OPEB for short) will place on their budgets.

Unlike defined-benefit pensions, which are funded using a tightly regulated model adopted by the state in 1988, retiree health benefits are funded on a pay-as-you-go basis. But because the cost of medical care is rising much faster than inflation or local revenues, pay-as-you-go is not sustainable. Unabated, the cost of retiree health insurance will consume a larger and larger share of municipal budgets and push out spending on vital public services, including education, police and fire protection, road repairs and much more.

A few communities have started to salt away a small amount to prefund a portion of their liability, but in spite of this good intention, this prefunding offsets less than 1 percent of the problem.

The reality is this: The only way to responsibly control OPEB costs will be to adopt a package of strong and meaningful reforms to moderate the current system and make it affordable for cities, towns, the state and taxpayers.

The MMA and local officials strongly support providing excellent health benefits for employees and retirees. This benefit offers essential security for public workers and their families, and is an important strategy in recruiting, retaining and rewarding a high-caliber workforce. Yet, without reform, it is very likely that taxpayers will take aim at these benefits and eliminate them, as has happened in many states.

The bottom line is that reform is needed for several reasons: to protect local taxpayers, to preserve an important benefit for retirees, and to ensure that cities and towns can provide all of the municipal and school services that citizens deserve.

In late October, the Joint Committee on Public Service held a public hearing on OPEB legislation filed by Gov. Deval Patrick. The MMA testified in favor of some aspects of the bill, and strongly objected to other parts of the measure that would strip away local authority to control costs and impose unaffordable unfunded mandates on dozens of communities. These disagreements are outlined in another article on page 1 of this issue, and the MMA’s testimony can be read in full on www.mma.org. We strongly believe that these issues must be resolved in order to make the reform bill acceptable and meaningful for cities and towns.

The larger point, however, is that local officials and the Patrick administration are in complete agreement that OPEB reform must be a top priority on Beacon Hill. At the recent hearing, the governor’s secretary for Administration and Finance, Glen Shor, made a compelling case that reform is necessary in order to make our system sustainable for future generations. Local officials and the Massachusetts Taxpayers Foundation underscored the urgency of the issue, and articulated the need for any reform bill to preserve municipal authority to control costs.

Yet, there was also a parade to the microphone by people and interest groups opposed to any action at all. The initial response from many of the lawmakers present and hundreds of state workers jammed into the hearing room was to downplay the need to act right away.

But here is the simple math: right now, cities and towns spend more than $800 million a year to fund retiree health insurance benefits. Without reform, these costs will skyrocket to $1.4 billion annually in 10 years, based on expected medical and health care inflation. That’s a 75 percent increase. No one expects that property taxes or local aid will increase by 75 percent in the next decade.

Unabated, these ballooning OPEB expenses will trigger deep reductions in other parts of the budget, cutting essential services and forcing communities to lay off valued and valuable public employees.

Time is of the essence. The earlier we embrace real and meaningful OPEB reform, the easier the solutions will be. Delaying or adopting a weakened package of reforms will only kick the can down the road and impose a greater burden on the next generation of citizens, employees, retirees and taxpayers.

For all of these reasons, OPEB reform must be a top priority on Beacon Hill and in every city and town hall in the Commonwealth.