Harvard’s obligations to its current and future retirees jumped nearly 20% over the past two years, according to the latest actuarial valuation by the town’s consultant.
The report, delivered to the town Sept. 23 by KMS Actuaries of Kingston, New Hampshire, projects that the town can expect to contribute $43.3 million to the health benefits of its retirees through 2114, an increase of $7 million over the previous 2017 estimate of $36.5 million.
The principal culprit was a drop in the interest the town earned on money in its OPEB (other post-employment benefits) trust fund, a savings account established to help with future payments. KMS reports that over the past two years the fund’s interest rate—known formally as the discount rate—fell from 5.54% to 1.33%. Because of that short-term drop, the town will need an additional $11 million over the long haul to cover its obligations. The irony, noted Human Resources Director Marie Sobalvarro, is that while a drop in interest rates is good news when it comes to financing town debt, it’s bad news when it comes to the revenues the town earns on its various savings accounts.
There was, however, some good news in the KMS report. By increasing the amount that retirees and active town employees contribute to their health insurance from 25% to 30% on July 1, KMS estimates the town has lowered its future liability by $3.9 million, somewhat offsetting the drop in interest. Members of Harvard’s Teachers Association are excluded from that increase this year, but their health benefit contribution is certain to be an issue in the negotiation of next year’s contract and could produce future savings.
The post-employment benefits that towns and cities everywhere owe to their current and future retirees have become a fiscal issue throughout the U.S. ever since the Government Accounting Standards Board established new accounting and financial reporting rules for these obligations in 2017. Since then, Harvard has had to report annually the amount it expects to contribute to the health plans of its retirees for the next 95 years. In determining the creditworthiness of towns, rating agencies now look for evidence that they have begun reasonable preparations for those future amounts. Harvard’s OPEB trust fund, established by Town Meeting in 2013, is key to its strategy for the future. The town has increased its annual contribution to the fund from $350,000 to $500,000 annually over the past seven years, helping it earn a AAA bond rating from Standard and Poors for its most recent debt. In an email to the Press, Sobalvarro said the rating signals to lenders that the town is financially prudent, which leads to lower interest rates for the money it borrows to pay for capital projects such as the new school.
Nevertheless, these annual $500,000 contributions weigh on the annual budget, exceeding, for example, the $100,000 the town will spend on building repairs this fiscal year or the $293,000 budgeted for human services, including the programs of the Council on Aging. The OPEB contributions are in addition to the $3.4 million the town will spend from its fiscal 2021 budget to pay its share of the health plan costs of its 212 active employees and 129 retirees and their spouses.
Looking to the future, the KMS report shows that if current trends continue, the fund will have been emptied by 2032, at which point the town—and taxpayers—will have to raise the money it needs by borrowing the amount due. The balance of Harvard’s retirement trust fund as of July 1 was $3.9 million, or 8.3% of the town’s newly estimated liability.
