The retiree health benefits of Harvard’s municipal workers were suddenly in the news this week, following a decision by the Board of Selectmen to increase the age, years of service, and months of employment immediately prior to retirement that are needed to qualify for town-subsidized health and life insurance.
After months of discussion behind closed doors, the board adopted the new policy by a unanimous vote at their March 4 meeting and announced it to department heads the following day, upsetting union and non-union employees alike. Unless the board decides to grant an extension, the changes are scheduled to take effect April 1 (see sidebar in article “Town employees shocked by changes to retiree health insurance rules”).
A first step
But the new eligibility requirements are only the first of four initiatives the town has planned for the 2015 fiscal year to deal with the estimated $27 million it will take to subsidize the health and life insurance benefits of its retired workers over the next thirty years. The remaining actions can be found among the more than two dozen articles of the 2014 Town Meeting warrant. These include a $425,000 payment to the trust fund established by the town to cover the future costs of retiree health insurance; a home rule petition to grant the town more power to determine who qualifies for health insurance and how much they must contribute; and finally, a request for a new actuarial study to recalculate the size of the town’s obligation.
While the selectmen were able to make this month’s policy change unilaterally, the remaining three initiatives require the approval of Town Meeting. But all four share a single purpose: to reduce the town’s future liability by either setting aside money to pay for it or shrinking its size by cutting back the benefits available to future retirees.
OPEB defined
Harvard provides its retired teachers and municipal workers with two benefits: a pension, and health and some life insurance. Pensions are regulated by the Massachusetts Public Employees Retirement Administration Commission (PERAC), which sets the terms for the plans of all towns in the state. Health benefits, however, have always been optional, left to the discretion of local governments, along with life and sometimes dental insurance. Collectively, such benefits are referred to as “other post-employment benefits,” or OPEB. By adopting portions of Massachusetts General Law Chapter 32B in 1959, Harvard agreed to provide its future retirees with subsidized health and life insurance. That decision is irrevocable. A small number of towns provide no health insurance at all for their retirees.
The situation faced by Harvard is not unlike that of parents who have promised their children a college education. It’s a cost that won’t be faced for years, but it’s a real liability. When a child finally enters college, those monthly tuition and room and board fees must be borrowed or paid for out of current income. For the average family, those payments have become so large they can severely restrict the rest of a household budget.
A family has two choices: establish a trust fund to save some or all of the future expense; or look for ways to reduce the cost. A 529 investment account for each child is one solution; limiting the search for a four-year education to community and state schools is another.
An unfunded liability—until now
That’s Harvard’s predicament. A 2012 actuarial study found that over the next 30 years, Harvard may need to come up with as much as $27 million to pay its share of the OPEB benefits it has promised its retirees. Until last year, no money had been set aside for that purpose, with Harvard paying for the insurance of its current retirees out of its annual budget.
The town is not alone. A state commission created by Gov. Deval Patrick to study the situation found that the combined OPEB liability of the state’s 354 towns is approximately $30 billion, an amount that is largely unfunded. “Without further action,” the commission stated in its January 2013 report, “the Commonwealth and its municipalities will have increasing difficulty paying for retiree health benefits while adequately funding other investments, including transportation, infrastructure and education.” It added: “The Commission recognizes that this problem was not caused by retirees and believes that retirees should have access to quality and affordable health care coverage.”
The commission recommended a number of changes to state law to make it easier for towns to deal with this burden, but a bill to implement them is stalled in the Joint Committee on Public Services, opposed by the state police and fire unions as well as the Massachusetts Municipal Association (MMA), which lobbies the legislature on behalf of towns. Harvard’s representatives, State Senator Jamie Eldridge and Representative Jennifer Bensen—a member of the public service committee—believe that change is necessary, but neither supports the bill in its present form.
Taking matters into town’s own hands
“Rep. Benson has concerns with some aspects of the bill,” her district director, Meagen Greene, told the Press this week. “In particular, the representative is concerned with how the bill will impact current employees and retirees.” In an informal hallway conversation Tuesday night, Eldridge said he opposed the bill in its present form “because it took away benefits of current employees.” But he said he was optimistic a compromise bill that addressed these concerns would make its way out of committee before the current session ends.
The home rule petition that appears as Article 47 on the 2014 Town Warrant is an attempt by Harvard to take matters into its own hands. If approved by the Legislature, Harvard would be able to set a number of parameters currently beyond its authority, such as prorating its contributions to health insurance premiums based on the average number of hours worked over a defined period of time. The proposed bylaw would let these actions be taken without collective bargaining, though they would almost certainly lead to concessions by the town in other areas, such as hourly compensation and the size of annual or other STEP increases.
The problem with OPEB, says Town Administrator Tim Bragan, is that “there’s no way we can fund our way out of this.” The town will pay roughly $503,000 for retiree insurance this year, $395,286 for retired teachers and $108,000 for town workers and non-teacher school employees, and according to the latest actuarial report, those costs will continue to grow over the coming years.
‘We have to change the dynamic’
“The dynamic [of rising health care costs, a growing retiree population, and longer lifespans] is working against us. We have to change the dynamic,” Bragan said.
Harvard’s four initiatives are among the most aggressive in the state. By moving now to change eligibility requirements and asking for the power to do more through its home rule petition, the town hopes to gradually reduce its total obligation over the coming years. Last year the town created an OPEB Trust Fund and made a first deposit of $250,000. The Finance Committee has proposed a second deposit of $250,000 plus an additional $175,000 drawn from a surplus that has accumulated at Minuteman Nashoba Health Group due to costs there that are lower than the premiums paid for municipal employee health insurance. The town hopes to continue making annual $425,000 deposits to the trust fund indefinitely.
Finally, state law requires the town to complete a new bi-annual actuarial study this year. The hope of town officials is that a growing trust fund, changes to the design of retiree health plans, and new eligibility requirements will sharply lower the $27 million unfunded liability estimated by the last report, dated July 2012.
