OPEB problem? What OPEB problem?

Five years ago, City Manager Debra Kurita (with the assistance of Interim Finance Director Ann Marie Gallant) alerted City Council that Alameda had an “OPEB problem”:   It had agreed to provide health benefits to retired public employees (and, in the case of firefighters and police officers, their spouses) for life – without setting aside any money to pay for them.

Kurita presented four alternatives for addressing the “OPEB problem.”  And City Treasurer Kevin Kennedy, the chair of then newly appointed Fiscal Sustainability Committee, chimed in with the committee’s recommendation that the City begin paying down at least a portion of the OPEB (which stands for “Other Post-Employment Benefits”) debt.

What action did Council take?  Absolutely none.

Nor has it taken any action since then – except to approve new contracts with the public safety unions that continue to provide medical benefits for all retired firefighters and cops at the City’s expense.

Next Tuesday, City Manager John Russo will jump into the fray.  He has submitted a report with a grabber of a first sentence:  “The inadequate funding of OPEB is the largest threat to the long term fiscal stability of the City of Alameda.”  And even those who tend to discount Russonian hyperbole cannot dispute that the numbers have gotten bigger since Kurita, Gallant and Kennedy sought to get Council off the dime.

Here’s a table comparing the data from the City’s Comprehensive Annual Financial Reports:

Fiscal Year 2007-8

Fiscal Year 2011-12

“Annual Required Contribution” (“ARC”)

  $6,029,000

  $7,571,000

Annual Payment

  $1,792,302

  $2,424,959

“Unfunded Accrued Actuarial Liability”

$75,377,000

(as of January 1, 2007)

$86,416,000

(as of January 1, 2011)

Even this table doesn’t tell the whole story.  The annual payment by the City goes only to pay that year’s insurance premiums for already-retired employees.  No money is set aside to pay the future costs of continuing to provide retiree health benefits to that group – or to pay the future costs of providing such benefits to current employees.   (These are the components of “ARC”).  As a result, the “unfunded accrued actuarial liability” – i.e., the total debt – continues to grow.

In his staff report, Russo presents a menu of potential solutions to the “OPEB problem” and seeks “direction” from Council.  But the chances that this Council will regard OPEB reform as any more urgent than did the October, 2008 Council – whose members included both Marie Gilmore and Lena Tam – depend upon the answer to this highly technical question:  Why should anyone care about OPEB?

To date, the politicians have handled OPEB as if it were a credit card with no limit and only a required minimum payment.  Every year, the City keeps charging the cost of providing retiree medical benefits for current employees on the card.  It does nothing to pay down the balance owing from past charges.  The only cash it forks over is the amount of the annual insurance premiums for already-retired employees.

Under this state of affairs, everybody’s happy.  Retirees get Cadillac health coverage.  Current employees pay nothing toward the future cost of the medical benefits they’ll get when they retire.  And the politicians can crow about “balancing the budget” without worrying about paying off debts that won’t become due until they’ve gone on to higher office.  Be honest:  If someone gave you a credit card like this, wouldn’t you buy as many expensive gifts as you could for your favorite nieces and nephews whom you expect to support you in your old age – or in the next election?

And let’s be clear:  the primary beneficiaries of the existing OPEB system are current and retired members of the fire and police unions.  According to the staff report, the City pays as much as $2,166 a month for medical benefits for a retired firefighter or cop and his or her spouse.  For other public employees, the figure is $115 a month (and doesn’t include spouses).  Altogether, the City paid $2,550,000 in health insurance premiums for retired public safety workers in FY 2012-13 – compared to $222,000 for other public employees.  Undoubtedly, this disparity results solely from the superior negotiating skills of IAFF Local 689’s Dom Weaver and Jeff delBono.

Of course, there are some who persist in contending that the City does have an “OPEB problem.”  But these nattering nabobs of negativism consist primarily of financial analysts, and, what’s worse, Republicans.  And the “principled” arguments they raise are easy to dismiss.  They claim that a city, like a homeowner, ought not to run up debts without arranging to pay them.  Just who do they think they are – Benjamin Franklin?  Or they claim that our legislators ought not to “kick the can” down the road so that the burden falls on future generations.  Why not – that’s what Congress does all the time?  And they even claim that the City shouldn’t be making promises to its employees that it might not be able to afford to keep.  Well, them’s the breaks.

Nor is the financial argument to which the staff report alludes any more compelling.  Sure, a bond rating agency – Standard & Poor’s  –  didn’t give the City of Alameda’s general obligation bonds its top “AAA” rating because of its concern about the City’s “above-average” annual pension and OPEB payments as a percentage of total governmental fund expenditures.  So what?  S&P gave the bonds an “AA” rating – the next best.  Someone with an M.B.A. might tell you that ratings affect interest costs – the lower the rating, the higher the interest rate – but Alameda isn’t planning to go into the bond market anytime soon.  (At least as far as we know).

No, the only way to get the politicians to consider taking action on OPEB is to tell them that, unless they act, the time is coming when they’ll have to do something voters won’t like: cut back services in order to reduce expenses or bump up taxes in order to raise revenues.  Any chance of OPEB reform depends on convincing at least three members of Council that that day is just over the horizon.

At first glance, this may look like an easy sell, especially for an advocate as eloquent as Russo.  The staff report lays out the basic facts:  The annual OPEB payment from the general fund – which, remember, covers just the bill for this year’s insurance premiums for retired employees – has been going up steadily every year.  And it is expected to skyrocket.  Take a look at a graph based on the CAFR data and staff’s projections:

OPEB data

So where’s the extra money needed just to pay the burgeoning bills for the current year’s insurance premiums going to come from?  According to the presentations made during the recently concluded budget process, staff has squeezed every drop of fat out of the general fund budget.  (Even the poor Rec/Park department is looking emaciated these days).  There’s no guarantee that Assistant City Manager Liz Warmerdam will be able to find any more money hidden in obscure governmental funds.  And Finance Director Fred Marsh may not have any more cards in his deck to shuffle among the various city accounts (all consistent, of course, with standard municipal accounting practices).

Bear in mind, we’re not talking – for now – about implementing any of the dramatic structural reforms identified in the staff report, like going to a defined contribution plan or buying out retirement benefits.  All we’re talking about is staunching the bleeding from the general fund budget.

Yet, somehow, one hesitates to be optimistic about the odds of even this action getting done.  It wasn’t so long ago that Mayor Gilmore publicly trashed Kennedy and City Auditor Kevin Kearney as being “irresponsible” for warning that Alameda could go the way of Vallejo unless the policymakers got the City’s financial house in order.  (Re-reading the Mayor’s op-ed in the Sun is a hoot:  She says she and Councilwoman Tam had been eager to take the public safety unions up on their offer “to be part of the solution” to the City’s financial problems – but their efforts were thwarted by . . . Ann Marie Gallant!)  And it was only a few weeks ago that Russo himself insisted, in the same paper, that, “Alameda doesn’t just have an expense problem with issues like pensions and healthcare; Alameda has a huge revenue deficit.”

Tuesday’s Council meeting will be well worth watching.  It will be interesting to see whether Russo makes the case for OPEB reform with the same passion he mustered when he urged approval of the public safety union contracts last fall.  It also will be interesting to see how the Council reacts – not just the two members who were there five years ago but also the three new members, two of whom got endorsements as well as cash from IAFF Local 689’s Political Action Committee.  If all any of them manages to say is that she or he heartily supports sustainability and transparency, it’ll be déjà vu all over again.

Sources:

FY 2007-8 CAFR: 2008 CAFR

FY 2011-12 CAFR: 2012 CAFR

July 23, 2013 staff report: 2013-07-23 staff report re OPEB

S&P ratings letter: S&P ratings letter

About Robert Sullwold

Partner, Sullwold & Hughes Specializes in investment litigation
This entry was posted in Budget, City Council, Firefighters, Pensions and tagged , , , , , , , , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s