Panelists: Muni Issuers Promised Their Employees Way Too Much

LOS ANGELES - Municipal bond issuers have measured their other post-employment benefit liabilities, reported them on their financial statements, and come to a conclusion: Most can't pay what they've promised.

Speakers and attendees at The Bond Buyer's Fourth Annual Pension and OPEB Financing Conference here discussed strategies for issuing bonds to fund the massive retiree health care liabilities they were forced to acknowledge in the wake of Governmental Accounting Standards Board Statement 45. They discussed ways to manage newly created OPEB trust funds and debated the desirability of jumping into the stock market while prices are low.

But more than anything, issuer officials say they've realized their predecessors promised too much. That means they must tackle the painful negotiations with workers to reduce benefits to a sustainable level, and they're not likely to take on funding or to issue much in the way of OPEB bonds until they've gotten costs down.

"We're all going through the stages of grief, starting with denial, but not starting to grapple with reality," said Maryland Treasurer Nancy Kopp. "We are not closing off anything, but we are not eager to turn soft liabilities into hard liabilities. We are not eager to freeze in costs until we are absolutely sure that they are the appropriate costs."

Maryland has an unfunded accrued actuarial OPEB liability of about $9 billion to $15 billion. That's one to two years of general fund spending. Most of its OPEB liability is for health care for retirees past the age of 65. Since Medicare covers most of their hospitalization expenses, the state's share and liability is largely driven by pharmaceutical costs.

Discoveries of huge health care liabilities have been the norm since GASB 45, promulgated in 2004, forced municipalities to start to report their OPEB burdens. In California, where this year's conference was held, the state has a $48.2 billion unfunded OPEB liability, Los Angeles County owes $20.3 billion, the city of Los Angeles owes $2.3 billion and the Los Angeles Unified School District owes $10.6 billion, said David Hitchcock, an analyst at Standard & Poor's.

Kopp, like other officials, said her state will pay what's owed, but it is taking a hard look at what it's really obligated to pay and is considering ways to reduce the liability through cost controls. While pension benefits are generally hard obligations to pay specific, formula-driven dollar amounts, governments' health care promises are not written in stone.

An elected official and a Democrat, Kopp believes in defined benefit pensions and retirement health care benefits. She worries about their demise in the private sector.

"These are real people - these are not numbers," she said. Most of Maryland's state worker retirees work until their 60s. They earn less than private sector counterparts, and they do that in part because they've been promised good retirement benefits.

But as a state treasurer, Kopp has to make them affordable.

"We have an obligation, we believe, to pay retiree health benefits, but the components of that package change year to year, as do active employee benefit packages," she said. That means future changes will have to reduce costs, despite the pain involved in reducing benefit levels.

Many issuers are considering such reductions, including pushing back retirement ages and increasing eligibility requirements to include more years of service.

Recovering from a pension and OPEB disclosure scandal that rocked city government in 2004, San Diego has gone further than most. In the face of its $1 billion OPEB liability, it closed its retiree health benefit system to new members in 2005. New employees are no longer promised retirement health care. For existing members of the plan, the city's going to battle over whether it has really has to pay retiree health care.

"We're taking the position that this is not a vested benefit, except regarding retirees," said Jay Goldstone, the city's chief operating officer.

That means the city thinks it has the right to also cancel retiree health benefits for workers who aren't retired yet. It's negotiating to offer a less generous defined contribution plan for all current workers

"I suspect, if we were to take it away tomorrow, we would be sued," Goldstone said. "Those bargaining groups aren't going to just sit back and abide or agree with that."

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