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BENEFITS BEAT
Needed: Stronger OPEB Laws
Many states need new laws to minimize retiree medical costs. Two have already done it right.
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Much has been written recently about the $1.5 trillion nationwide problem of "Other Post-Employment Benefits," which is the catchword for retiree medical benefits plans of state and local governments. Since the Governmental Accounting Standards Board issued its Statement 45 requiring disclosure of OPEB liabilities and costs, states and municipalities have been scrambling to obtain actuarial reports to fathom the depth of the hole in their treasury. A few are now starting to address the problem, but many are paralyzed like deer in the headlights as they face a new budgetary cost for OPEB just at the same time as their revenues erode in the real-estate recession.
What haven't been mentioned anywhere are the structural deficiencies of most states' laws — or the total absence of laws — under which public employers must operate their OPEB plans. In most states, the only statutes that govern long-term benefits plans and investment portfolios were written years ago for pension funds only, before anybody even thought about OPEB as a separate and similar category.
In some states, there are provisions for trust-fund investments that enable the state treasurer to make long-term investments. And in some states, there is either "home rule" law, which permits localities to operate as they please as long as the state doesn't supersede them, or "Dillon's rule," which does not allow a municipality to take action unless it is explicitly allowed in state statute. Some states have some kind of general trust-fund authority that was often written for another unrelated purpose, which has dubious applicability.
Thus, for many states, there is a glaring absence of clear legislative authority and guidance to (1) establish an OPEB trust fund and provide for its governance, (2) make investments for the long term in a widely diversified, prudent-person investment structure with professional management, and (3) permit long-term funding solutions such as OPEB bonds without eroding legal debt limits.
Fortunately, there are at least two states that have grappled with this issue. The two worth studying are Minnesota and Virginia. The Minnesota statute (scroll down to Article 10, Sec. 18) provides the necessary authorities needed by state and local officials seeking to establish a prudent OPEB trust fund, make investments and, if appropriate, issue OPEB bonds without impairing the employer's borrowing authority for traditional public finance projects. The Virginia statute provides for a finance board to operate the trust but permits other entities and structures such as the existing pension or deferred compensation board.
Without proper legal authority, state and local officials are justifiably cautious about moving too aggressively to tackle their OPEB funding problems. But they can't wait too much longer. If funds are set aside for OPEB purposes and invested under the existing state laws which govern general (short-term) treasury assets, the arrangement may fail to meet GASB tests of an irrevocable trust, and it may also fail to include an appropriate long-term diversified investment policy necessary to obtain the most favorable discount rate — resulting in higher liabilities and annual costs. Thus, taxpayers will suffer for the failure of the financial leaders and professional associations in such states to step forward and persuade their legislatures to act quickly and enact appropriate enabling legislation.
Finance officers, school officials, municipal leagues, county organizations and state officials should begin working quickly to fill the legal voids. Fortunately, the path-breaking statutes available in Minnesota and Virginia can serve as reference points when drafting state-specific legislation.
Here are the key elements to include:
1. Trust structure and governance. The statute should provide flexible authority to establish a trust in whatever form the employer chooses as long as it meets GASB requirements and federal tax considerations. Governance generally should include a majority of taxpayer and management representatives, to avoid conflicts of interest which are now arising in the pension world where trustees are granting themselves benefits increases. If employers wish to delegate the investments or other aspects of governance or operations to a pension board, they should be allowed to do so on terms of their choosing.
2. Investment authority. Preferably the statute should establish investment authority under the "prudent person" rule with broad latitude — and if not that, then the same investments as allowed for pension funds or other long-term investment trust funds. A written investment policy should be required.
3. Bonding authority. Not everybody agrees that OPEB bonds are a good idea, and I for one think they should only be used at specific times in the market cycle. But while laws are being amended, it is a good idea to follow Minnesota's lead and include a section for OPEB bonding and especially a provision that exempts these bonds from the traditional legal debt limits — so that they do not reduce the employer/issuer's ability to borrow for conventional municipal financing purposes such as roads, schools, city halls, parks, etc.
Prominent local bond counsel can be a big help in this drafting. For those concerned about runaway use of OPEB bonds, I suggest including some of the language provided in my previous column on ill-timed pension obligation bonds, which would help assure that such debt is used prudently and on a timely basis.
If any state or local government professional or policy association seeks help with this, I will be happy to help. Just e-mail me at girardinmalibu@charter.net.
Girard Miller, an analyst of benefits and investments with 30 years of experience in the public, private and nonprofit sectors, can be reached at Girardinmalibu@charter.net. His general market observations and institutional investment strategies are his own and should not be construed as investment advice or recommendations concerning specific securities.
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