OPEB reform must re-emerge as a top priority

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From The Beacon, Summer 2016
Several years ago, momentum was gathering on the issue of OPEB reform. A special commission had calculated that communities and state government are facing a combined unfunded liability of $46 billion to pay health insurance benefits for their retired employees, a staggering burden that is certainly unaffordable for taxpayers.
In 2014, general awareness of the issue was growing across the country, as taxpayers and elected officials began to recognize the heavy burden that “other post-employment benefits” (the non-pension benefits provided to retirees, consisting mainly of health insurance, commonly known as OPEB) 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 will push out spending on vital public services, including education, police and fire protection, road repairs and much more.
Unfortunately, efforts to address the looming crisis through legislation were derailed, as interest groups were able to insert measures that would have maintained the status quo for the next 15 years, deferring any meaningful savings until 2030 and beyond. In addition, the legislative draft would have stripped cities and towns of the only power they hold to control OPEB costs today, by preventing local officials from changing the employer-retiree premium contribution percentages.
Burdened with the weakening provisions, the pending bill languished, primarily because the major groups supporting real reform, including the MMA and the Massachusetts Taxpayers Foundation, rightly pointed out that passing a flawed bill would only deepen the problem. Excessive grandfathering, removal of local decision-making over retiree contribution ratios, and other negative aspects of the bill would have pushed the savings too far into the future, burdening future generations with a deeper and more intractable problem.
It’s time to re-start the campaign to enact true OPEB reform. The reason why is pretty clear: Massachusetts taxpayers cannot afford further delay. At the local level, communities face an unfunded OPEB liability of $30 billion over the next 30 years, and state government is looking at approximately $16 billion in obligations.
Unless these costs are reigned in, 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 more than 90 percent of private sector workers have no access to similar retiree health benefits from their employers.
Many communities are establishing OPEB trust accounts to pre-fund a portion of their liability, but in spite of this good intention, this pre-funding offsets less than 1 percent of the problem. The reality is that 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. But 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.
But here is the simple math: based on previous estimates, cities and towns now spend close to $900 million a year to fund retiree health insurance benefits. Without reform, these costs will skyrocket to more than $1.5 billion annually in 10 years, based on expected medical and health care inflation. That’s a nearly 70 percent increase. No one expects that property taxes or local aid will increase by 70 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.
The first step in this process will be for the Legislature to sustain Gov. Charlie Baker’s veto of Section 45 of the fiscal 2017 state budget. Section 45 would interfere with local officials’ decision-making authority to act on behalf of their taxpayers on the basic issue of contribution levels for retiree health insurance. This provision would penalize all cities and towns that have used the 2011 municipal health insurance reform law to reduce the cost and financial burden of health insurance for employees, retirees and taxpayers.
Specifically, this language would strip these cities and towns of their legal authority to decide whether to adjust contribution percentages for retiree health insurance, by unilaterally extending a freeze in contribution ratios. There was a three-year freeze in the original consensus reform law, and, unfortunately, two years ago the freeze was extended to five years. Now, Section 45 would extend the freeze to seven years – an unacceptable imposition on local authority that would have the state interfere with responsible health insurance policy decisions in each community.
Section 45 would reverse planned contribution changes in some cities and towns and would delay the ability to take action on retiree contribution percentages in many others. Simply put, this outside section would impose significant budget problems in many communities and interfere with sound fiscal planning. The original short-term temporary freeze was part of the compromise brokered by House and Senate leaders in 2011 that led to the enactment of the landmark municipal health insurance reform bill. Repeated extensions of the freeze would undermine that agreement and would clearly undermine the ability of cities and towns to control health insurance costs and save municipal jobs.
For all of these reasons, we ask our legislators to let Gov. Baker’s veto of Section 45 stand, and we urge all stakeholders to agree that full-scale OPEB reform must re-emerge as top priority on Beacon Hill and in every city and town hall in the Commonwealth.