Harvard needs to strike a balance in determining the amount of money it puts into a trust fund each year to cover future health benefits for town employees, says Bruce Nickerson, a member of the town’s Finance Committee.
In an interview this week with the Press, Nickerson, a retired actuary, said his main concern is keeping the town’s financial obligation for what are termed “other post employment benefits” (OPEB) “under control” for the next 30 years. That means putting enough money into an OPEB trust fund to keep the “accrued liability” from rising, but not so much money that other town priorities cannot be met.
Nickerson made the comments in the wake of a report last month that projected that Harvard’s unfunded OPEB liability would nearly triple over the next 30 years, from about $23 million as of the start of the current fiscal year to $66 million as of fiscal 2044.
A ‘responsible’ plan
OPEB is a category of municipal costs that covers medical, dental, and life insurance benefits for retirees. It is separate from employee pensions, another retired employee benefit that results in future liabilities for local governments.
Nickerson maintained that the town is funding its employee pension plan “in a responsible manner” as part of a multi-town consortium. On the other hand, until recently, Harvard, like other municipalities, had not addressed the OPEB funding issue. That situation changed in the wake of a standard set by the Governmental Accounting Standards Board (GASB), a nonprofit organization that applies generally accepted accounting principles to state and local governments. GASB maintains that OPEB is a form of deferred compensation and its costs should be recognized while the employee actually renders services rather than when the benefits are paid many years later.
Nickerson said he believes that the GASB rules for calculating the annual contribution to the OPEB trust fund are inappropriate for town management because they are geared to paying off the entire current liability over 30 years. But that does not recognize, he said, that unlike pension costs, OPEB costs can rise or fall, depending on a number of economic factors, such as changes in benefit plans through negotiation, changes in laws, and trends in health care costs.
“Any actuarial projection is really nothing more than a set of assumptions,” Nickerson said. “OPEB benefits themselves are not unchangeable. What happens with regard to health insurance nationally will affect our liability in due course.” Fully funding the liability, he says, is “a dumb idea,” which will “lock up the money even if [health care] costs go down.”
On the other hand, Nickerson maintained, the amount the town paid to the trust fund last year ($425,000) is too low to keep the liability from rising to an unacceptable level over the next 30 years. He was basing that assessment on the projection provided to the town last month by KMS Actuaries. Nickerson’s suggestion for an appropriate trust fund contribution is about $600,000 a year.
Nickerson spent his career as an actuary, a profession that evaluates the financial impact of risk and uncertainty in fields such as life and health insurance. He developed actuarial software programs for life insurance companies and worked for many years in Washington, D.C., where he lobbied agencies such as the Securities and Exchange Commission and the IRS on behalf of the life insurance industry. He also served for five years as managing actuary for the New Jersey Department of Insurance.
While the town has a large existing OPEB liability, Nickerson maintained, it also has an existing method of paying it off, known as pay-as-you-go. Under this method, taxpayers in future years will need to pay ever-increasing amounts to support OPEB costs for current employees as they retire. Nickerson noted that pay-as-you-go applies to both current year’s OPEB benefits for existing retirees and current year’s benefits for active employees. The additional funding that the town needs to put aside each year is to cover the accrual of anticipated post-retirement benefit costs for present active employees.
The assumptions used in projecting the OPEB liability include interest rates, the age at which town employees retire, how long they will they live, and the trend in the cost of health insurance. “Changing any one of these assumptions throws the projections off widely,” Nickerson said. “The magnitude of the numbers is a wild guess. But speaking as an actuary, making reasonable assumptions about those factors and updating them at regular intervals will enable us to keep costs under control and keep them from increasing. That’s the best service we can do for the taxpayers of this town. My personal best guess is $600,000 a year.”
Nickerson added, “There is a practical issue of perception. We need to do enough, to have it be sufficient so that when the town borrows money, it is perceived by the market to be responsibly addressing the issue. We need to do enough to maintain that perception. We currently have a superlative bond rating. We don’t have to go to full funding [of the OPEB liability] for that.”
