The San Benito County Board of Supervisors is once again toying with the notion of diverting payments from the severely underfunded OPEB trust fund to pay for current operations. It’s time to kill this very bad idea before it kills the county’s future.
OPEB – “Other Post Employment Benefits” – are lifetime healthcare benefits for retired public employees. The OPEB trust fund payments are a tempting financial cookie jar because the board can pay the obligation or divert the payments and pass the increased debt to next year or the next board.
The county’s trust fund is already severely underfunded with a funded ratio of only 26 percent. For comparison, the 2010 CalPERS plans have a funded ratio was 65 percent. County OPEB projections for June 2013 put the long-term unfunded liability (shortage) at $25 million and the next annual payment of a whopping $3.2 million. Any diversions will increase that overall liability and required payments for the following years.
One reason the current contribution is so high is that some previous boards kicked the can down the road: now it’s back and it’s bigger and bigger than ever. To put this year’s payment in perspective, they equal employer contributions of $7,380 per active employee, or 11.6 percent of the entire county payroll.
To be fair, this board has made some trust fund contributions but they are also very late in taking actions, such as a 1 percent sales tax in the unincorporated areas, renegotiating Williamson Act contracts, or resolving the $2 million audit dispute with the state, to shore up funding for critical services.
The OPEB payment consists of three parts; $1.5 million allocated to the current year to cover employees future needs, $1.4 million for the unfunded accrued liability (previous shortages), and $226,000 for interest. There is no free money. If they divert $1 million from OPEB those payments, they just get larger in the future.
OPEB has been compared to mortgage payments – that’s a valid comparison for current year costs only. Having a huge unfunded liability, as we do, is like having a second mortgage – you may have used the funds to go on vacation, but you still have to pay them back with interest.
Trust fund projections are based on an estimated annual discount rate of 7.61 percent. A $1 million payment would generate more than $2 million in compound interest in 15 years. If that payment starts just three years later, it generates only $1.4 million in interest in 12 years; the missing $600,000 interest must be paid in addition to the principal.
Vested payments are legally guaranteed for retirees. If the board diverts funds, the excess interest costs are the same as a tax on services – except the taxpayers did not get a chance to vote on it.
It appears the lure of reachable money – another credit card account – is irresistible. It’s unreasonable to claim we’ll be able to pay it back in better times; when times were great we never caught up in the past. If we have to pay enormous deferred bills and interest in the future, times will never get better.
OPEB is a fiscal time bomb and since everyone appears to agree that it is unsustainable, why would we make it worse by failing to pay the bills before we fix the problem? The county should not divert any payments until we change our contracts and healthcare plans and we are out of the danger zone on tens of millions in unfunded liabilities.
Marty Richman is a Hollister resident.
