Question of the Week: Selectmen Candidates Talk About Long-Term Debt
Dan Scharfman and Andy Rojas discuss the $183 million debt obligation.
How would you approach the $183 million debt obligation the town currently faces in other post-employment benefits?
Benefits for retired employees present staggering financial challenges for cities and towns across Massachusetts. The largest is the anticipated cost of “OPEB”, or “other post-employment benefits.” The current estimate of $183 million in anticipated liabilities grows more urgent every year. This is overwhelming for Belmont.
It’s also overwhelming for retirees, most of whom cannot afford the radical cuts in benefits suggested in some approaches to the problem. Any solution needs to balance their needs and Belmont’s capacity to pay.
In my career I have spent 30 years solving complex problems for complex organizations. This one may be the toughest yet. But every other municipality must solve it too — and I know Belmont can find a way.
Option 1: Set aside enough money today.
Belmont would have to set aside $183 million today to have enough money to pay those future costs. That obviously isn’t feasible.
Option 2: “Pay as you go”.
We currently pay our annual costs of around $7 million. But as health care costs grow and more employees retire, that figure will quickly grow. It will starve our operating budget until we cannot provide critical, core services. Thus the current practice is not sustainable.
Option 3: Pay enough to fund obligations over time
Fully funding our future obligations would cost $16 million annually, an increase of $9 million over current payments. That’s $1,000 per Belmont household per year. Voters are unlikely to approve an increase of that size. It would, however, be worth learning whether the solutions in Wellesley and Needham could apply to Belmont.
Option 4: Refuse to pay
I agree with the Town Treasurer that Belmont would be wise to demonstrate that we intend to pay our bills. The size of our obligations may change as health care costs fluctuate, but obligations they are — and we must start to meet them, in policy and in practice.
Option 5: Hope that someone else solves the problem
The state legislature knows that virtually every community faces this problem. They may help with regulatory reform, health care cost control, and additional freedom to make benefit changes. But our state house has neither a magic wand nor a treasure chest. We will have to shoulder a large burden in the long run.
Finding a solution: what our community has to offer Belmont’s Treasurer, Warrant Committee, Retirement Board, Town Accountant, and Town Administrator have remarkable skill and knowledge. The Board of Selectmen must convene them, and bolster them with the formidable expertise of our citizens – I note that our Town Moderator, Mike Widmer, has written the book on OPEB liabilities at the Massachusetts Taxpayers Foundation.
Belmont must and can find a prudent, legal, reasonable path forward. With consensus we will chart the course and stick to it. The OPEB plan must become part of the multi-year financial plan I have mentioned in previous writings.
The acronym OPEB refers to Other Post-Employment Benefits, that is, benefits owed to retired town and school employees other than pensions - primarily health insurance. The $180 million unfunded liability, or debt, referred to in this question is based on a July 2010 estimate of the costs of future benefit obligations to Town and School retirees as well as to current employees expected to retire in future years.
Like most cities and towns, Belmont pays for retiree health insurance costs on a pay-as-you-go basis, each year budgeting for those insurance costs expected to be incurred during that year. However, with the exception of some $1 million appropriated out of free cash in recent years, Belmont has not contributed any amounts to offset its liability for future benefits.
Several factors are causing this liability to increase at an alarming rate, including:
• Health care cost increases significantly higher than the inflation rate,
• Generous retiree health insurance plans,
• Increasing life expectancies for retirees, and
• Early retirement provisions that allow certain employees to retire at age 55, ten years before they will become eligible for Medicare, making Belmont their only health insurance provider.
Addressing such a huge unfunded liability is daunting, and, since accounting rules only require that the liability be reported, and not that it be addressed, most cities and towns have not addressed it in any significant fashion, and the problem continues to grow. According to a presentation made by Treasurer Floyd Carman to the Warrant Committee last fall, the current $180 million liability will grow to $262 million in 10 years if no steps are taken to address it.
As a candidate for Selectman, I do not believe that we can continue to ignore this issue. At the same time, I believe addressing it through an override is neither sound policy nor politically realistic, as it would require multiple overrides of significant size over many years. (Recall that, two years ago,
Belmont voters did not approve a $2 million override to support current town and school programs.)
My approach for addressing this liability includes two components.
• As Treasurer Carman recommended last fall, the Town should appropriate annually an amount not to exceed $500,000, the precise amount depending on the free cash balance. Such contributions represent only a small portion of the liability, however, as Mr. Carman noted, it is important that the Town acknowledge the liability and institute a policy for addressing it.
• To be most effective, and to ensure that the burden is shared by all, such a contribution policy should be accompanied by a redesign of retiree health care benefit plans to yield savings without jeopardizing health care.
As Selectman, I commit to working with all parties to fashion a solution to this issue that is fair to all.