Daily Archives: February 11, 2010

Other Post Employment Benefit (OPEB) – The Ticking Time Bomb

From Sean Byrnes’s Moblize Middletown Blog:

Many of us have heard the warning cries over the condition of our State’s pension system. Estimates suggest we are $50 billion in the hole. Governor Whitman’s actions to revalue the pension system’s assets and subsequent failures to provide funding have created a canyon-sized shortfall. I am hoping that Governor Christie will act swiftly to end our system of defined benefit pensions and move us to a defined contribution pension system where employees fund their own pensions. We cannot continue to promise employees fixed amounts of money in retirement with no legitimate system for funding these obligations.

But our State’s failures when it comes to employee benefits have not been limited to pensions. I recently received Middletown’s audit for 2008 and noticed a comment section dealing with Other Post Employment Benefits (“OPEB”). I had not previously seen this term. As it turns out, many employees are counting on OPEB; namely, health benefits during their retirement. And, of course, our State and local municipalities have been promising generous benefits.

Statewide, estimates by PEW show New Jersey at the bottom when it comes to funding these benefits. New Jersey has the highest unfunded actuarially accrued benefit liability (UAAL) among all states. It also has the highest per capita debt with a value of $7,947, which reflects a UAAL of 139.66 as a percent of the state budget and an Annual Required Contribution toward these accrued benefits of 11.85 percent. In terms of real numbers, New Jersey should be contributing $1.88 billion each year toward these benefits, but actually contributes $310 million.

Unfortunately, Middletown’s numbers are worse. Middletown promises health benefits for life to those employees who earn a pension. I will confess that I did not have a full understanding of where Middletown stood when it came to funding retiree health benefits. Returning to the Comment in the 2008 audit, I noted that Middletown’s “Annual Required Contribution (ARC) for the year ended December 31, 2008 was $10,196,400 of which $1,659,200 was funded by the amount expended for these benefits.” I was astounded. If I was reading this correctly and understanding it, we underfunded our OPEB obligation by $8,537,200.

Why has this obligation flown under the radar? Until recently, local entities made these commitments without any requirement to show this obligation on their balance sheets. It has been “pay as you go”, meaning that you pay the health benefits as they come due, but you don’t set aside funds in advance. But the reporting requirements have changed. Government Accounting Standards Board Statement 45 (GASB 45) now requires disclosure. While these substantial financial commitments remain off the official books of local governments, municipalities must now provide actuarial estimates of what these accrued liabilities amount to. Staring in 2008, municipalities with more than 100 employees were required to provide information concerning their OPEB liability. Local Finance Notice 2009-13R outlined this requirement:

Local authorities are required to recognize the OPEB liability in Statements of Revenues, Expenses and Changes in Net Assets (balance sheets) and Notes to the Financial Statements in accordance with GASB Statement 45.

I recently learned that Middletown had contracted for this required study. We received it in November 2009. Through 37 pages, it reviews Middletown’s obligations and explains how the annual required contribution (ARC) of over $10 million is calculated. While someone might quibble with some of the assumptions, there seems to be little question that Middletown’s taxpayers have a growing financial obligation that remains severely underfunded.

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Filed under health benefits and pension, Middletown NJ, Moblize Middletown, Other post employment benefits(OPEB), s, Sean F. Byrnes, state pension system

Budget Woes in Middletown

From Sean Byrnes’s Moblize Middletown Blog:

For anyone interested, the budgetary challenges that Middletown faces this year are formidable. A perfect storm of events makes tax increases almost inevitable. But the cycle of tax increases need not continue indefinitely. Unfortunately, apathy toward what’s happening in local government guarantees continued increases.

Local government is broken. Taxes take somewhere between $6,000 and $7,000 on average from every household in Middletown, but few pay attention to how that happens. Sure, schools are expensive, but that’s a lame excuse for high taxes. Our locally elected officials continue to follow a governance model that will ensure financial deficits for the foreseeable future. It’s time to trash that model. It’s time to think outside the box. It’s time to view the tax money collected as a resource that must be spent wisely with an eye toward the entire Township, not just one public entity’s corner of it.

What I mean by that is we need to consolidate our operations and thinking. The Board of Education maintains property and the Township Committee maintains property. The Board of Education buys supplies, the Township Committee buys supplies. We provide benefits to employees and so does the Board of Education. We support artistic and cultural activities and so does the Board of Education. We hire lawyers, engineers and other professionals, and so does the Board of Education. Are you seeing a theme here? These two public entities operate in the same town completely separately from one another. Worse than that, they barely get along. And anyone who tells you that they cooperate on certain issues and work together is missing the point. The weak efforts to meet occasionally and discuss some common areas of interest produce almost no savings for the taxpayer. And, oh, we also have a Township Sewerage Authority that has its own lawyers, auditors, engineer, etc. Last year that the Sewerage Authority spent approximately $800,000 on one engineering firm. If that sounds like alot of money, it is.

To be fair, state statutes make consolidation efforts challenging. These distinct public entities are governed by different statutes. But that’s really no excuse. Locally, we have the ability to work together and share services. The Sewerage Authority, which also pays salaries, health benefits and pension benefits to its very part-time Commissioners (all seven of them) could be assimilated by the Township. In a Township with vacant land and lots of new construction, a Sewerage Authority might be necessary to deal with the activity associated with new neighborhoods all connecting to a sewer system in quick succession. We’re beyond that in Middletown. Our Public Works could take over the operations of the Sewerage Authority and save hundreds of thousands of dollars just in the costs associated with professionals. It’s time to do this.

That’s just one example of consolidation. Here’s another. We have an Arts Center that cost somewhere around $7.0 million to purchase and build. We spend hundreds of thousands of dollars every year to keep it open. (We also spent tens if not over a hundred thousand dollars to clean up the property because it was contaminated when we purchased it — and we knew it). Did we really need to take on this expensive capital project? Did the Township Committee look into leasing space at other local theaters, or working with the County, which already has arts programming taking place in close proximity to Middletown? Nope. A small group of influential elected officials wanted it, and they got it. Almost $7.0 million borrowed to get it done. It has been running at a deficit ever since, even when you don’t count the yearly payment on the bonded debt. Meanwhile, our Library, which reports to its own Board of Trustees, offers arts programming. Check out the calendar on their website. Performances, readings, movie discussion groups, teen art, cooking classes, “cartooning in clay”. Do we need two separate groups running two very expensive buildings who have nothing to do with each other? It is insane. Consolidate them. The Art Center is underutilized. How about offering some daycare there for all the commuters who jump on trains right next door every working day. You can still do Arts programming, but how about generating some revenue.

Here’s a real crazy idea. How about we make engineering firms bid for the capital projects we do every year, like roads, flood remediation, etc.? What do we do? We appoint one engineering firm every January (it just so happens that the same firm gets appointed every year, if you like, you can see them every election night at Republican Headquarters celebrating another victory with local Republicans). For any of you that have been on this earth more than a few years, here’s a question. Do you think the Township will get its best price by guaranteeing one firm all the engineering work? Or do you think we might do a bit better by making 5 or 6 firms compete for every one of these projects? I proposed just that at our Reorganization Meeting in January, but could not get any of my four fellow Committee members to second my motion. (I also had the nerve to try and limit our Township attorney to $15,000 per month flat fee retainer [which is on top of the $50,000 he gets as a salary] and that too died for loss of a second to my motion — by the way, the $15,000 per month I proposed equates to almost 1800 hours of legal time per year, that’s our attorney working all year on nothing but Middletown’s work!).

But I’ve lost my way in this blizzard we’re having, we were discussing shared services and consolidation. If this State (and this Township) has any prayer of recovering from the budget disaster we are all facing, we need real change. In addition to the proposals outlined above, we should consider consolidating the police departments of Middletown, Keyport, Union Beach, Highlands, Atlantic Highlands and maybe even Keansburg. No good reason for all those separate departments, separate municipal courts, separate judges, prosecutors, public defenders, etc. Ditto on the school systems. Red Bank, Shrewsbury, Little Silver, Rumson, Fair Haven, Sea Bright should all be one school district. Ok, if that’s too radical, why not make the grade school districts match up with the high schools. The County should take control of all major parks. They have more resources, more people and a good track record for running parks.

These ideas are just for starters. We don’t really have a choice in my opinion. The wealthiest among us are changing residency or simply relocating, and they are taking the tax revenues with them. We have way too many public employees and all taxpayers are carrying their salaries, top of the line health care plans, both during their careers and during retirement. (Middletown currently owes approximately $106 million in accrued benefits to employees and retirees and we have no trust account or plan for how we pay for that — it’s pay as you go). In 2008, we should have set aside $10 million for these benefits, we paid $1.6 million. And that’s separate from our pension obligation. We only paid half of our required payment last year and face a staggering payment this year. Meanwhile large commercial tax appeals from prior years will drive down revenues as property values plummet.

It’s time to wake up. What has our Township Committee done in response to this? Layoffs? No. Shorter weeks? No. Forced professionals to take less money? No. Special meetings to discuss the looming financial crises? No. Consolidation? No. Reorganization? No. We haven’t even had a CFO for almost 8 months! Our 2008 audit found material problems. We ran out of money for health claims in 2008 to the tune of $1.4 million and had to push those payments into 2010. You can’t make this stuff up. We need to make hard choices and fast, or we will be facing substantial tax increases in 2010. I’ve proposed a finance committee at just about every meeting I’ve attended since my swearing in in January 2008. Large corporations have them, non-profits have them. It makes sense.

But I’m over that. I just want action. I don’t care what organizational structure produces that action. We need residents to swarm our meetings and demand change. I fully expect that the wave of conservative sentiment sweeping this Township and C0unty will escort me from my seat on the Township Committee this November. And my world will not end when that happens. But I will leave frustrated; frustrated that I could not effectively deliver my message to residents. Frustrated that I was unable to convince my fellow Committee members that our current system for delivering services is broken and that bold, courageous steps are necessary to protect our residents from additional taxes that they can ill afford.

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Filed under budget deficit, consolidation of services, Cultural Arts Center, Middeltown Board of Education, Middletown, municipal tax rates, Sean F. Byrnes, Sewage Authority