'Real eye-opener': York County tackling $83M in unfunded retirement benefits
By the end of 2016, York County had an unfunded employee benefit liability of about $135 million.
Just a few years later, that liability has been reduced to about $83 million, and it will go down even further with the release of the county's new actuarial report within the next couple of months, county administrator Mark Derr said.
"No one has ever set any money aside until the existent board of commissioners," Derr said.
Other post-employment benefits, also known as OPEB, were introduced by the York County commissioners in 1983 as an incentive to attract and retain good employees. Those retirement benefits include health care, life insurance, vision care, dental care and prescription drug coverage.
In 1989, the new York County Board of Commissioners recognized that the county could not afford to pay for those benefits and voted to cease offering the coverage to new hires. But there was no going back on the benefit promises made to those employees hired prior to 1989.
This left York County in an expensive pickle.
The county pays about $7 million a year to cover OPEB costs of retired employees, who were promised those benefits decades ago, and until recently the county operated on a pay-as-you-go system rather than paying out of a designated fund.
To better prepare for the future, the current commissioners established the OPEB trust fund in December 2016, beginning with a $2 million investment.
The purpose of the OPEB trust is to address the county's unfunded benefits liability by investing money and collecting a return on the investment, thereby paying less over time than originally projected.
In June 2017, the county put an additional $6,075,740 in the fund, followed by another $2 million in November 2017, for a total contribution of $8,075,740 that year.
Based on the above investments, the county's projected remaining OPEB liability at the end of 2017 was about $83 million.
In order to come up with all of these figures, the actuary assumes the following:
- County employee salaries will increase 4.5 percent annually.
- Investments will have a 7 percent rate of return.
- Inflation will increase about 2.5 percent annually.
- Qualifying retirees will die, and thus cease collecting benefits, at rates consistent with national mortality statistics.
Investment returns: One of the most significant factors that allowed York County's liability to decrease from $135 million to $83 million was an increase in the estimated rate of return on county investments, Derr said.
Up until December 2016, when the commissioners made the first investment to the OPEB trust, the estimated rate of return on the savings account where county funds were stored was about 4 percent. But Derr said the county wasn't even making that much, and that the 4 percent figure was based on the standard municipal bond rate.
When the commissioners moved those funds into the OPEB trust for investment, the anticipated rate of return jumped to 7 percent.
The next actuarial report, set to be released within the next couple of months, will reflect the county's 2018 OPEB investments, totaling about $18 million, and the projected liability will be even less.
Nursing home: About $7.4 million of the $18 million invested in 2018 came out of the sale proceeds from Pleasant Acres Nursing and Rehabilitation Center.
The county sold the nursing home, which it had been heavily subsidizing, for $33.5 million in 2018. The projected total OPEB obligation for qualifying nursing home employees was about $21.9 million, so the commissioners decided to take $21.9 million from the sale money and invest it in the OPEB trust.
But before the commissioners felt comfortable investing the full amount, Derr said, they decided to put $7.4 million of the $21.9 million into the OPEB trust, and keep the bulk of it — about $14.5 million — as cash flow for daily county operations until the county's real estate tax income is collected in April.
Once taxes are collected in April, the county will replenish the $14.5 million and invest it in the OPEB trust.
Transparency: One factor that has motivated county governments to take a closer look at their OPEB liability was a recent requirement issued by the Governmental Accounting Standards Board, which establishes accounting and financial reporting standards for U.S. state and local governments.
Under GASB statements 74 and 75, governments must disclose their OPEB liabilities in their public financial statements, something that wasn't previously required.
Derr said York County has already disclosed its liability publicly, but that for a lot of local governments, OPEB liabilities will be included in their financial statements for the first time in 2019.
"It’s going to be a real eye-opener for a lot of municipalities and counties," Derr said.
Up until 2012, employees of nearby Lancaster County were guaranteed future OPEB coverage after only five years of employment. In 2012, the then-Lancaster County Board of Commissioners voted to increase the employment threshold to a minimum of 20 years, but those employees who qualified were still then guaranteed full OPEB coverage upon retirement.
Lancaster County Controller Brian Hurter said his county's board of commissioners recently voted to cease offering any OPEB coverage to employees, effective Jan. 1, 2019.
"In my opinion, up until that step was taken, I believe we should have been doing more to address the liability," Hurter said.
Hurter said OPEB coverage was an incentive that many businesses offered in past decades to attract good employees but that most employers —including governments — have been moving away from any type of benefit that will incur unknown future costs.
"For me, it was hard to continue adding to that unfunded liability when we already have this huge unfunded liability on the books," Hurter said. "We should put an end to adding more liability on top of that."
The Lancaster County commissioners have discussed the possibility of establishing an OPEB trust, Hurter said, but at this time have chosen not to go that route.