At a special meeting of the Board of Selectmen this week, the town’s auditor repeated his recommendation that the board plan “sooner rather than later” for how Harvard will deal with an expected change in state accounting rules that will require Harvard to begin appropriating money in its annual budget to pay for the retirement benefits of its currently employed teachers, police, and other municipal workers.
—Anthony Roselli, auditor
Anthony Roselli, of Roselli, Clark & Associates, Harvard’s contract auditor, appeared before the board at the request of Selectman Ron Ricci, who wanted to hear an explanation of the recommendations made by his firm in its March report to the town. But Harvard’s town administrator and finance director also weighed in with a three-page report of their own that defended their approach.
”Harvard has not ignored [the problem]…as has been intimated by some of our residents,” they wrote.
Leonard: “We’ve met our obligation”
The increased attention being given to the future health and life insurance benefits of town employees (known as “other post-employment benefits,” or OPEB) is due to a combination of events. Traditionally, towns such as Harvard have paid their OPEB benefits each year, as a portion of their operating budget, an approach known as “pay as you go.” For example, Harvard has allocated $587,000 of its $21-million fiscal 2013 budget to pay for the health and life insurance benefits of its 84 retirees.
“We’ve met our obligation every year,” Finance Director Lorraine Leonard told the Selectmen. “We’ve never had a problem.”
But a change in government accounting rules known as GASB (Governmental Accounting Standards Board) 45 says that towns must estimate the amount of their future obligation and soon will be required to set aside money to fund it. The new rules were adopted by Massachusetts in 2004, and since then towns have had to estimate the amount of their OPEB liability every two years and report it on their balance sheet. Finance directors throughout the state expect that the legislature will soon take the next step and require towns not only to report their liability, but to fund it.
Harvard’s OPEP liability was estimated in 2011 to be $29 million. But because the average age of its 199 current employees is approaching 50, and their average years of service is close to the 10 needed to qualify for full benefits, the liability is expected to balloon to $49 million. Leonard and other officials, however, have questioned the quality of the latest actuarial report because it provided only a three-year forecast of expected annual payments, unlike the detailed 30-year analysis provided by a previous analyst two years ago. Moreover, the study does not take account of changes to retiree insurance plans that became effective this month.
Roselli: “You need good numbers”
Out of the 351 cities and towns in Massachusetts, “less than 20 are being aggressive right now” in dealing with the coming changes, auditor Roselli told the Selectmen, while another 20 to 80 municipalities are studying how best to respond. The rest, he said, are taking a wait-and-see attitude, saying “when it happens, it happens. The state will bail us out.”
“Just thinking about it…puts you in that elite group [of towns] that’s trying, that recognizes the problem,” Roselli said.
The problem with continuing to pay-as-you go and allowing the liability to grow unchecked, Roselli said, is that bond raters may begin to question the safety of other town debt and lower their ratings. In his experience, he said, the cost of OPEB benefits is doubling every 10 years. If that trend continues, he said, Harvard’s annual appropriation could increase to $1.2 million by 2022.
Roselli had four recommendations for the Selectmen. He repeated the recommendation he has made in his annual audits, that Harvard form a committee to study ways the town can reduce its future liability, including changes to its retiree plans.
Roselli also recommended that the town create an irrevocable trust to which dollars can be added annually to save for the future payments. One of the benefits of using an irrevocable trust—a trust from which money cannot be withdrawn for other town purposes—is that it has a “tremendous effect” on the discount rate used to estimate the future size of the OPEB liability, Roselli said. Discount rate is an estimate of how much yield the town can expect from investing its savings.
The discount rate that can be used for an irrevocable trust is 8 percent, Roselli said, while the rate for an ordinary trust is 4 percent, because such money is subject to the whims of the town and cannot be invested in longer term bonds. For towns that are “pay as you go,” the discount rate is 2 percent.
Third, said Roselli, the town should contract for a fresh valuation of its liability.
“You need good numbers,” he said.
Then the town must figure out, “what you can afford,” he concluded.
“Even if you were to put $300,000 to $400,000 a year [into a trust],” Roselli said, “it would begin to affect your actuarial study because they’re seeing something come in and they use those [amounts] as plan assets, which again drops your liability.”
Bragan: Throwing money at the problem is not the solution
In their own report, Leonard and Town Administrator Tim Bragan asked rhetorically, “Can we do more?”
“Absolutely,” they answered. “In fact, we are required to do more.” But “throwing money at the problem,” as they put it, was not a solution, because “funding the liability is but one method” of dealing with the problem.
“Tackling the issue requires both funding and nonmonetary responses,” they wrote.
Some actions, such as funding a trust with appropriations from the annual budget and negotiating with town employees to decrease Harvard’s share of OPEB premiums, can be initiated by the Board of Selectmen, Bragan said. Other more sweeping changes, such as those recommended in a 2011 whitepaper by the Massachusetts Taxpayers Foundation, will need action by the Massachusetts legislature.
“It is the responsibility of the Selectmen to put forth a committee,” Bragan and Leonard wrote in their report. “Employment and post-employment benefits are the responsibility of the Selectmen, and the percentage of health insurance paid by employees falls under Selectmen and the School Committee, both of whom are charged with negotiating contracts with the various [teacher and municipal] unions.”
Next steps
At the Monday meeting, Bragan volunteered to put together an ad hoc committee to study the problems and make recommendations to the Selectmen. Further discussion and a decision are expected at the next formal meeting of the board later this month.
Meanwhile, residents Keith Cheveralls—a member of the School Committee—and Leo Blair continue to press the Finance Committee to take the lead. In his email to Selectmen, Cheveralls wrote: “I call upon the Board of Selectmen to afford the Finance Committee open and unfettered access to [the town auditor].”
“Further, I call again on the Finance Committee to assert independent leadership. I call on them to discharge fundamental fiduciary responsibilities by thoroughly and independently interrogating the extent of unfunded OPEB liabilities and to then provide timely and complete disclosures to the town before we again ask voters to approve operating budgets and other financial commitments of substance.”
