Part One of Two
By JACOB SZETO
SALEM – New information has shown that Oregon’s state and local governments owe an additional $3 billion in benefits to their retirees.
Other Post-Employment Benefits (OPEB) debt has reached at least $3 billion statewide but will not be found on government balance sheets. The annual cost for OPEB is $300 million, of which only half is paid, resulting in budget deficits near $150 million every year.
OPEB are public employee retiree benefits other than pensions and can include benefits such as life insurance, stipends and healthcare. In Oregon, like most other states, retiree healthcare makes up the bulk of OPEB obligations. Often, these benefits are very generous because the real costs have been pushed to the future and ignored on government financial statements and budgets.
Until recently, it would have been impossible to know about these expenses and debts, but new accounting rules have shed light on the extent of OPEB. These new accounting standards have shown that governments have been running budget deficits for decades, accumulating massive amounts of debt that still remain off the books today.
Founder and CEO of the Institute for Truth in Accounting Sheila Weinberg questions why it took so long for these standards to come about and why they still don’t require the liabilities to be included on balance sheets: “They knew they should have been a liability on their balance sheets. Why did they not demand that these liabilities be revealed?”
Oregon Politico collected information from 100 of the largest counties, cities, school districts, and other government entities to capture a snapshot of the approximately 1,725 Oregon local governments and their OPEB liabilities and costs.
Reporting and Budgeting Requirements
Previous to new reporting requirements, governments had been using a pay-as-you-go system. They only reported their current direct premium payments on their financial statements. The Government Accounting Standards Board (GASB) determined that the pay-as-you-go system needed to be replaced because it failed to “recognize the cost of benefits in periods when the related services are received.”
OPEB benefits are earned during employment but not paid until after employment. In the absence of standards, governments had been treating these future promises as nonexistent in their financial reports.
With the implementation of GASB 45, government managers are no longer allowed to completely ignore the OPEB balance. This new standard requires governments to report the details of what they owe in footnotes. The cost of OPEB must now be included on the income statement, but the accumulated debt from past employee services are still left off the books, which creates an appearance of less debt. For instance, if the Portland Public School District were to include their OPEB debt on their balance sheets, total debt would increase 30 percent from $584 million to $761 million.
GASB only sets standards for audited government financial reports; they do not set the standards for budgets. OPEB continues to be budgeted as it has in the past. Only the direct payments for OPEB are accounted for, not the entire cost. Because the cost of OPEB is almost always more than the direct OPEB payments themselves, current costs for employee compensation are pushed into the future.
Years of failing to budget for the full cost of OPEB have led to an accumulation of at least $3 billion of debt. Gresham-Barlow School District board member Dan Chriestenson, speaking on his own behalf, calls the accumulation of debt a “ticking time bomb that is going to affect all of us.”
Debts and Deficits
If the true cost of OPEB were to be included in budgets, most government budgets in Oregon no longer would balance. Only 13 percent of Oregon governments currently reporting OPEB make contributions and payments equal to their OPEB cost, or annual required contribution (ARC).
In 2009, total OPEB ARCs were equal to $300 million, but Oregon governments only made $154 million in contributions, only half of the total requirements. This resulted in budget deficits of $146 million last year alone.
If the $146 million were to be budgeted, it could be set aside in trust accounts to be drawn upon when costs incurred now come due in the future. This is similar to how the Oregon Public Employee Retirement System (PERS) is funded. The sharp distinction between PERS and OPEB is that PERS is legally mandated to be funded, while OPEB is not.
Of the $3 billion of OPEB benefits accrued by public employees for services already rendered, 93 percent or $2.8 billion is unfunded.
The Gresham-Barlow School District is one of only 12 contributing their entire ARC or to have accumulated any assets in a trust fund. Although their OPEB is only four percent funded, it is a distinction from a majority of Oregon governments who have not funded at all. As Chriestenson puts it, “Many entities are literally not addressing this in any meaningful way… To me the responsible thing is to fully fund the required contribution on an annual basis instead of throwing the debt to unknown people at an unknown time.”
Of all the Oregon governments, TriMet is the leader in OPEB debt with an accumulated $632 million, or 21 percent of the total statewide OPEB liability. Of this half a billion dollars, not a single dollar is funded. TriMet’s OPEB debt is so large it is 484 percent of its annual covered payroll. This measure eclipsed any other government examined for this article; no other government exceeded 115 percent, and the statewide average OPEB percentage of payroll was a mere 15 percent in comparison.
TriMet’s OPEB cost for 2009 was $55 million. TriMet only paid $13 million, leaving a $42 million deficit, a cost for current services pushed to future taxpayers.
The unusually large debt of TriMet can be attributed to the failure of management to set aside money for the cost of generous benefits for unionized employees. In accordance with TriMet’s collective bargaining agreement, TriMet covers 100 percent of medical, dental and vision insurance premiums for retirees and their spouses.
In contrast, Clackamas County, with a similar covered payroll size, has $51 million of OPEB debt, representing 45 percent of their covered payroll, and an annual OPEB cost of $6.4 million. This shows that OPEB cost is mostly a function of contract negotiations with employees, and TriMet unionized employees enjoy generous fringe benefits.
Calls to TriMet for comment were not returned.
The second largest single debt in Oregon was the State government Public Employee Benefits Board system (PEBB) with an accumulated $323 million of OPEB debt, representing 15 percent of their covered payroll, and 11 percent of the statewide OPEB debt. The State’s OPEB cost in 2009 was $36 million, of which only $16 million was paid, leaving a deficit of $20 million.
Although new reporting requirements have revealed the extent of OPEB liabilities and costs, government managers have always known that they were not accounting and budgeting for the true balances and costs. Today they continue to ignore the true costs of retiree benefits and have demonstrated that they are willing to borrow from the future to pay for the present.
Sheila Weinberg agrees: “We would not be on the hook for these liabilities now, if governments would have been required to include them in the balanced budget requirement and fund them as they promised them.”
Part 2 of this article series will discuss the advantages of funding OPEB liabilities and cost control measures.
Below is a list of OPEB details for 100 of Oregon’s largest governments.
Ranked by OPEB annual required contribution
Ranked by OPEB unfunded liabilities
Ranked by OPEB percentage funded
Ranked by OPEB percentage of covered payroll
For more information please contact [email protected]
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