And now I’d like to take a few moments to talk about something near and dear to all of our hearts: Other Post-Employment Benefits (OPEB) liabilities. I know, topics as sexy and provocative as this are rarely suitable for even alternative papers, but hey–we’re all adults here, right?
Basically, we’re talking about government employee pensions and benefits, which make up a surprisingly large and increasingly unstable part of most municipalities’ debt burdens. The reason I’m bringing this up is because of an Oct. 25 FitchRatings report on a new $71.2 million* General Obligation Bond for the County of Maui (I know, reporters shouldn’t be allowed to have this much fun). And that report, which is generally very positive about the county’s financial situation (it got a vaunted AA+ rating, after all), does contain the following disturbing sentences:
“The weakness in the county’s otherwise sound debt profile is its pension and OPEB liabilities. The county participates in the state pension plan, which is poorly funded at just 59%, with a 7.75% investment assumption. However, the funded level deteriorates to 55% with the 7.00% return assumption Fitch uses to enhance comparability between pension systems.”
That’s actually bad news. A safe level of funding for pension liabilities, most economic experts agree, is about 80 percent–meaning the state actually has assets equal to 80 percent of the pension debt. Nothing like that is apparently happening in Hawaii, though, since 80 is way higher than the 59 percent (or 55 percent) currently seen here. This is also worse than the 61 percent funding figure cited in the Associated Press’ June 19, 2012 article on state pension liabilities, which also reported that Hawaii racked up $18.5 billion in obligations and is among the 10 worst states in the nation in terms of such debt.
“Over the past couple of years the board of trustees has been initiating legislative proposals to deal with the significant and escalating pension liabilities,” says Wes Machida, administrator of the State of Hawaii Employees’ Retirement System, in the AP story.
They’ve done, FitchRatings says, by “increasing contribution rates incrementally through fiscal 2016, starting a second tier for new employees, and eliminating pension-spiking opportunities.”
Of course, that seven percent rate of return used by Fitch seems optimistic. In an Oct. 23, 2012 Bloomberg article on pension problems that postulates a $2 trillion gap between municipal pension obligations and funding, Peter Orszag (who ran the Office of Management and Budget for President Barack Obama) assumes a more realistic six percent return on investment in his calculations.
The reason for such debt problems? Orszag says it probably lies in a mix of public employee union intransigence (which has long negotiated extremely lucrative benefit packages) and a lack of simple fiscal discipline.
In any case, the FitchRatings report says the County of Maui has actually been dealing with the debt in a financially responsible way:
“The county’s unfunded OPEB liability is substantial at $344 million (1.1% of AV [assessed valuation]). “However, the county has been proactively addressing its liability by contributing 100% of ARC [actuarially required cost] to an OPEB fund since fiscal 2007.”
But even that fiscal responsibility has a cost. To put all this very arcane accounting into human terms, the more cities, counties, states and school districts have to spend on pension and benefit obligations to retired employees, the less they have to spend on things like road and wastewater improvements, public schools, libraries, health care, social services for poor people and so on.
And those things are all important to a functioning democracy, right? Right??
Photo of old accounting machine: Chris Kennedy/Wikimedia Commons
*This article originally reported an incorrect bond amount.