Unfunded Liabilities

[X-POSTED from my campaign website]

Tonight was the final Council meeting before the election.

I’ve attended every Council meeting this Fall except the special Friday morning one. I go to quite a few Council meetings in general, so attending this Fall’s during my run for office was not much of a stretch. Penny Rich and Augustus Cho usually show up to catch what’s going on directly (Augustus was there this evening, Penny was participating in UNC Healthcare’s Tickled Pink event to benefit cancer research). Watching the meeting on TV or via the Web is just not quite the same.

Over the last eight years it has been interesting to see which candidates do show up – it seems like you would want to make sure you really want the job given the time commitment, to get up to speed on the relevant issues so you can hit the ground running, to learn a bit more of the nuts-n-bolts of how the Council operates so you can fit into the process fairly quickly – yet cycle after cycle it’s only a few that show.

While the media will probably focus on the Kidzu presentation, the approval moving Glen Lennox’s neighborhood conservation district (NCD) forward, Jim – on election eve – asking the Town to enforce Northside’s NCD (which I talk about in my recent brochure) or Council letting their next incarnation decide on Strom’s replacement, probably the most consequential issue on tonight’s agenda will not get word one.

Ken Pennoyer, the Town’s director of business management, was proposing a change in the structure of staff benefits. All new employees hired after June 30th, 2010 would get a defined benefit plan covering retirement health coverage. Existing employees would retain their Town guaranteed benefit, the payout based on term of service and retirement age.

What’s the big deal?

The existing plan, which is a “pay as you go” approach paid out of general revenues, has increased from $400K to $891k in 5 years – more than doubling our current obligation. To fully fund our commitment to our retired workforce would take $32M to $56M, roughly $3+ M or more per year, for a couple decades!

While the Town has set aside $400K in designated funds over the last two years, the forward obligation makes those contributions pale in comparison. $3-4M per year is equivalent to $0.05 to $0.07 of Chapel Hill’s tax rate – an additional $150 to $210 per year on a $300K home tax bill. This unfunded liability is just one of a number of other obligations – like the $3M affordable housing maintenance fund – which has been allowed to grow and grow over the last 6 years.

Tonight is the first attempt to truly grapple with that overhanging debt to our valued retirees. There are risks inherent in moving new employees to a defined benefit plan but the alternative, scrambling to find funds each fiscal cycle to adequately maintain that obligation, is not sustainable.

As the staff report points out, new regulations (OPEB) require the Town’s accounting to take into account this forward liability. This is one difference (of a few) between governmental and business budgets – and one reason why ones acumen in business doesn’t necessarily translate into success in managing a town budget. After working the Town’s numbers six years, applying my business experience, I well understand that difference.

Here’s the crux of the problem, as laid out by Ken Pennoyer:

New accounting rules for Other Post Employment Benefits (OPEB), effective for the fiscal year beginning July 1, 2008, required the Town to acknowledge health care and life insurance benefits that will be provided to current and future retirees, in a manner similar to a pension obligation. The future cost obligation is, in effect, a liability that the Town will need to address. To the extent that we can provide funding to address the liability, we will reduce the impact of the rise in the annual cost of benefits., We also have the opportunity to make changes to the benefits structure to reduce the growth of the liability. These new accounting rules, also known as Government Accounting Standards Board Statement 45 (GASB 45), have significantly changed the Town’s financial statements as we account for and report the liability for the future cost of providing these benefits. Based on the most recent actuarial study the Town’s current unfunded liability, discounted at 4%, is $32.4 million. In order to fully fund this liability on an actuarially sound basis the Town would need to make an annual required contribution (ARC) of $3.0 million.

As a member of Council, this is the type of problem I will be able to more effectively tackle, and tackle in a timely fashion.