Can I Borrow $500 Million Please?
Posted by David Keelan on Saturday, December 30, 2006
That is basically what the County has been doing for many years and the payment has finally come due.
The County has a big problem to solve. I think this problem is driving the review of the Senior Tax cut. The County may actually need every dollar of revenue no matter how small it is after all we don’t have $500M sitting around – unless you look at the taxpayer for a bailout.
OPEB = Post Employment Benefits
GASB = Governmental Accounting Standards Bureau
Put them together and you get GASB statements 43 and 45. What is that? It is a change in accounting rules in how state and local governments must report and fund current and future retirement benefits. Hang in there. This is actually important and if we don’t understand it some people might try to take advantage of our ignorance.
Howard County, like most local governments, has been paying retirement benefits (mostly health care and NOT pensions) when they are due – when the employee retires and begins collecting those benefits we begin budgeting and paying for them then and not a moment sooner. What these rule changes require is that we must fund and/or pay for these benefits for all current and retired employees now. This is a estimated to be a $477M problem. We don’t have $477M sitting around.
Why did the rules change?
The intent of these rule changes is to show what local and state government’s full retirement obligations are for these benefits. Obviously, this represents a major change in how these obligations are viewed. As I stated earlier, Howard County has been paying retirement benefits as they come due a.k.a. “pay-as-you-go” (when the employee retires). This dramatically understates the real cost of our county employees as we only pay out immediate and not future expenses. Since we do not recognize the future retirement expenses of employees while they are active employees and wait until the employee actually retires we are actually accumulating an obligation/debt that has never been funded or on our books as an obligation. We fully fund our pension costs for employees, but not retirement benefits (mostly health care benefits). Currently, 388 retired employees meet the eligibility requirements to participate in the plan. The County accounts for these benefits on a current funding basis, at a cost of $1,386,211 for fiscal year 2005. Assuming these employees live for another 20 years then we would have to fund $20 million today just for them. We have almost 9,000 (or more) current employees between the government and school system.
Going forward when we hire a new teacher or police officer today we must not only begin paying their salary, taxes, pension, we have to fund their retirement benefits immediately. In addition we have to go back and look at our existing employees and calculate their future benefits and fund them now, fund our current retiree benefits and continue to pay current retirement benefits. All of this has to come out of today’s budget and not a future budget.
With these changes we will get an idea of the true cost of our government. And it will make negotiating future employment agreements more colorful because in the past, we viewed the obligation to pay retiree benefits on a “pay-as-you-go” basis—a commitment of future dollars. It was easier to promise generous retirement benefits because we didn’t have to pay for them for 20 or 30 years. Now due to these changes, post-retirement benefits will compete for today’s dollars with every other budget item. This will have an immediate impact the amount available for contract negotiations. The more we give at the bargaining table the more other programs could suffer. An increase in retirement benefits at the bargaining table by just $1.00 per employee could mean millions of dollars that we would have to put into a trust fund as soon as the contract is signed.
How will this work?
Going forward contributions toward the annual cost are going to be made through payments to the insuring agency (as they are today), and contributions for new and current employees will be made to an irrevocable trust fund whose assets will be held for future premium payments. Why? Because employees are not using these benefits until they retire, but we have to pay for them now rather than wait until they retire to pay for them. This trust fund does not become an asset on our books for accounting purposes. This is a future obligation that has been pre-paid so we have to amortize it.
How do you know the problem is that big?
According to Jim Robey’s budget Chief Sharon Greisz,
“This change in reporting requirements (for retired county employee health benefits) means that, for the first time, governments are required to actually budget for the future costs of retirees healthcare like we currently do for pension benefits. The price tag for Howard County today is $477 million, $320 million of which is for the school system alone.”
I don’t know what that price tag means. Is that what we will owe current employees only or current employees and current retirees? That number is not getting smaller either. It keeps growing every month an employee is on the payroll. We reduce classroom sizes, add more full day kindergarten, put more police on the streets. All relatively necessary expenses. The problem with retirement benefits is that it is mostly health care benefits and those costs are going up dramatically. How do you project future liabilities on costs like those with inflation rates like those? What is required of Howard County at this point? That, my dear reader, is the question.
Now, not all employees are going to participate in the retirement plans either because they get their benefits from their spouses employer are don’t meet eligibility requirements. When does Medicare kick in and does it? That has to be figured out.
Howard County has a 1/2 billion dollar funding problem for retirement benefits. Get this Maryland has a $20B problem. We are potentially in for a squeeze. Fortunately, we have surpluses and Robey earmarked $38 million for funding these benefits because he recognized the problem, but that is less than 10% of the current liability.
How is this issue resolved? It depends but there are options and each option has a consequence. So it comes down to what Ken Ulman will be willing to live with and what the County Council is willing to live with. These are smart people (for the most part) and they have smart people to help them figure it out.
- We could, but should not, ignore the new rules. If we don’t fund these obligations then we can’t have our financial statements certified. If our statements are not certified then the bond rating agencies will not give us very good ratings. That means our interest rates will increase and as such so will our cost to service our current obligations of almost $1 billion. The longer we ignored the rule the worse our books would look and the worse our bond rating would become.
- Since these post-employment benefits are subject to change at any time employees could be required to pay more into the system.
- Current retirees could be made to pay more.
- They could eliminate the benefit altogether and put them on Medicade.
- Raise Taxes (this is my bet)
- We could see the elimination of tax benefits ie: The Senior Property Tax Cut
- We may not see any decrease in taxes
- We could get across the board budget cuts
- We could eliminate Ken Ulman’s Executive Protection Unit, the tailoring bill for the bullet proof vest, the vest itself, the 24/7 police driver/escort. Over 8 years that could amount to about $1M. (this is tongue in cheek – I regret that it is detracting from the content of the post)
- Maybe they can borrow the money and pay for it like they do on a bond? Problem may be that this really isn’t a capital expenditure.
I don’t know what else we can do other than increase revenue or decrease expenses. I think Ken Ulman is going to seek new sources of revenue. This is going to be tough because like thousands of other HowardCounty residents I just received the new assessment notice on my home and it went up 157K. That will be phased in over three years but I will start paying $500 extra a year now and in three years $1,500 then they will reassess my property again. This just might solve the problem. If 90,000 homes are going to be paying an additional $500 to $1,500 per year in property taxes over the next three years then we just got (roughly speaking) $45,000,000.00 per year in new revenue. The unfortunate part is that all the people with their hands out wanting more money don’t seem to realize that $45M has already been spent. All this on top of an expected increase in our water rates (I predicted this in an earlier post and Jim Irwin confirmed it later).
Either way some or a lot of people are going to be unhappy. This is an issue a lot of people may not care about or bother to try to understand – however, unless something else happens this is going to be the defining local issue of 2007.
Interestingly enough, the recent budget hearings held by Ken Ulman had a lot of people clamoring for money and funding. I don’t think they had the big picture in mind. I know from pre-election statements that Ulman made that he is well aware of this issue. Chris Merdon talked about it too. I can only imagine what Ulman must have been thinking as people were coming to him with their hands stretched out looking for money. This will be a real test of Ken Ulman and our County Council.