San Benito County’s “Other Post-Employment Benefit Program” – or OPEB, pronounced oh-peb – is a perfect example of a generous and expensive program that was a lot easier to get into than it will be to escape.
OPEB dollars are negotiated post-employment benefits in addition to pensions. They are costing the county $3.3 million annually to cover lifetime healthcare benefits for current and projected retirees.
In the April 2011 Valuation Report, the county had an unfunded “OPEB Actuarial Accrued Liability” of $28.5 million against $6.1 million in “Actuarial Value of Assets” – and the result is a funded ratio of 17.7 percent. For perspective, CalPERS retirement programs have funded ratios between 62.8 percent and 69.5 percent, or three and a half times better.
One problem with post-employment benefits is that renegotiation with retirees is essentially impossible and, if the system is underfunded, the county has to make up the discount rate, now 7.75 percent, as well as current direct payments.
The county can negotiate changes with active employees, but it has almost no leverage with the 139 current retirees. Retiree costs are now at $880,000 annually and they are projected to rise to $1.4 million annually by 2020. Employees expected to retire between now and then will draw an estimated $1.7 million annually by 2020, totaling $3.1 million a year in actual benefits. This does not include payments against liabilities for potential future retirees.
The projected cost – annual required contribution – to cover current benefits and amortization of future liabilities paid over a 30-year period is estimated at 12.4 percent of payroll. Put another way, it will cost $7,771 per employee per year as of June 30, 2012 just for OPEB. That $3.3 million is in addition to CalPERS retirement contributions and current health care costs.
Or put it this way: County OPEB costs equal more than 60 percent of the county’s annual budget deficit.
The county is obligated to contribute toward the cost of retiree medical coverage for the retiree’s lifetime or until the retiree discontinues it. A surviving spouse and other eligible dependents may also continue coverage and receive the county contribution. The county has a two-tier OPED entitlement system.
Retirees hired before January 2010 are vested after age 50 with five years of state or public agency service or approved disability retirement. The county pays 100 percent of the medical premiums for employees and their eligible covered dependents, not to exceed amounts based on coverage level. The maximum amounts for 2011 retiree family coverage is $928 a month.
Retirees hired on or after Jan. 1, 2010 are covered by a vesting plan where the county’s contribution is determined as the lesser of 100 percent of the medical plan premiums and the vesting formula maximum benefits (caps). The cap amounts vary by coverage level, adjusted annually.
For 2011, the caps are $542 (employee), $1,030 (employee plus one) and $1,326 (employee plus family) multiplied by a percent, based on the retiree’s years of CalPERS membership.
The percent varies from 50 percent starting at 10 years of qualifying service to 100 percent at 20 years. Unlike retirees hired prior to 2010, those covered by the vesting resolution who complete at least 20 years of service with the county are entitled to these subsidized medical benefits even if they terminate employment prior to reaching age 50.
Due to the stock market bounce back, investment returns have exceeded expectations, but the retiree cost factor increased even more than the returns. According to the report: “The net effect of these changes, including a significant increase in the number of retirees, was an increase in OPEB liabilities.” That liability increase was $2.2 million.
