GASB 45, OPEB, SOD. What is this and why does it matter?

The Red Wing School District is faced with some very difficult choices regarding the funding of retiree health care benefits, also referred to as “Other Post Employment Benefits. (OPEB).  This post will concentrate on the current problem and how it might be addressed.  A discussion of how this District, and most other Minnesota school districts, ended up with such a substantial liability will be left for a separate post.

Background: The Government Accounting Standards Board issued a ruling (GASB 45) in 2004 requiring units of government to do an actuarial study of their potential liability for OPEB, which again,  is primarily the cost of retiree health care costs.  GASB 45 basically requires reporting of that total liability, and to list it as a long term liability on the unit’s balance sheet.  It does not tell the unit how to pay for it. It is estimated that there is nationally $1.45 trillion in unfunded OPEB liabilities.

The Red Wing School District’s actuarial accrued unfunded OPEB liability is $14 million. Actuarial Accrued Liability (AAL) is for current retirees and employees that have earned the right for benefits by their service.  This is the liability the district is required to carry in their audit.  The total present value of accrued benefits (AAL) plus future benefits expected to be earned by employees is $21 million.  (Note:  The District ended paying for retiree health care costs for new hires in its last teacher’s contract.)

Issue: The annual cost to the District is rising rapidly as more employees retire and health care costs continue to soar.  For example, in 2007, the District’s cost for OPEB was $856,000.  Current 2009 OPEB costs are estimated to be $1,064,000. In 2011, the District’s liability is estimated to be $1,304,000. (This includes implicit costs.)  Go here to read explanation of implicit costs: https://minnesotafamilylaw.wordpress.com/2009/08/01/districts-annual-opeb-costs-implicit-rate-subsidy/

Current OPEB costs come out of the District’s operating budget unless some other mechanism is used, such as bonding.  Many districts until recently have used a pay-as-you-go (PAYGO) approach, but for many districts, like Red Wing, that approach is no longer feasible.  It’s not feasible because increasing OPEB costs requires either severe budgets cuts, or the district goes into Statutory Operating Debt, (SOD), which is not a good place to be for a district.

Options: PAYGO is an option that would result in increasing OPEB costs until they peak in about 2021 and start to decrease as the number of retirees begins to decrease.

ARC: The District could pre-pay future obligations at a rate of $1,500,000 annually based upon their actuarial study.  This is known as the Annual Required Contribution (ARC).  This would likely result in immediate, significant budget cuts.  Funds would be invested and interest earned would go to help pay OPEB future liability.  This amount represents about 5% of the District’s operating budget.  Given prior District budget cuts, and the low expectation of increased funding from the State, it’s hard to imagine how this approach wouldn’t require further teacher layoffs, and increased class sizes.

Bonding: The Legislature in 2008 passed a bill that allowed school districts to sell bonds, without a referendum, to finance their total OPEB liability.  The ability to do this ends October 1, 2009 for bonds not sold by that time.  After that, districts must have a referendum for future bond sales. Our District must make a decision at its August 17th Board meeting if it wants to make this choice. This issue will also be on the Board’s August 3rd agenda for discussion.  The result of bonding is that it is added to property taxes, but current and future OPEB costs are no longer part of District’s operating budget.

If the District does nothing, OPEB costs will continue to erode its ability to fund district operations.  If it votes at its August 17th meeting to sell bonds, it does so without voter approval.  The District could put the issue out to the voters for a referendum at a later date, but then risks going into Statutory Operating Debt if the referendum is not approved, and must immediately start making significant cuts in staff and programs.  The District may have some ability to negotiate future retiree benefits, but they are likely bound by agreements made to current retirees.

I’ve tried to present this issue objectively. Any misstatements are unintentional.

Link to MN State Auditor report on OPEB:

https://minnesotafamilylaw.wordpress.com/?attachment_id=38

I started a group on facebook where you can go for links to documents, such as the State Auditor’s report on school district OPEB liability,  and to further discuss the issue: Please join the group and then I’ll be able to get updates out to you more easily.

http://www.facebook.com/group.php?gid=97235928343

Kent Laugen

Red Wing, MN

July 21, 2009

kdlmac@mac.com