CHICAGO - The triple-A rated Metropolitan Water Reclamation District of Greater Chicago established an irrevocable trust late last year under a plan to partially pre-fund its $443 million other post-employment benefit unfunded liability, a move that puts the issuer out in front of its fellow Chicago-area governments.
The district moved early to address the new rules from the Governmental Accounting Standards Board that require local and state governments to report their unfunded actuarial accrued liabilities for health care and non-pension other post-employment benefits. Historically, most governments have accounted for OPEBs on a pay-as-you-go basis, reporting only the cost due in that particular year.
The water district in 2003 hired a consulting firm to estimate the unfunded liability and two years later took steps to contain costs by increasing employee and retiree co-pays, according to deputy treasurer Mary Ann Boyle, who spoke about the district's experience at an OPEB conference in Chicago yesterday hosted by the Civic Federation of Chicago and the Federal Reserve Board of Chicago.
The district's board developed a partial funding strategy in 2006 and sought state legislation that would allow it to establish a trust. As a non-home rule government in Illinois, the district needed state clearance. The measure was signed last August, and at the close of last year, the district made an initial deposit of $25 million in the trust.
Under the partial funding plan, the Water Reclamation District will contribute $10 million annually for the next five years, with future contributions based on a percentage of payroll. The goal is to achieve a 50% funded ratio in 50 years. Based on current estimates, the district will also continue making pay-as-you-go annual payments until 2023 when it is anticipated that the trust's assets will then kick in to cover OPEB costs.
"We believe with this partial funding plan that we are making progress towards reducing a large unfunded liability," Boyle said.
While most Chicago-area governments have disclosed at least preliminary OPEB figures, none had previously adopted plans to shift from a pay-as-you-go funding structure. Civic Federation president Laurence Msall called the unfunded pension and OPEB liabilities of local governments here a "crisis."
The federation, in a recent report, said the unfunded OPEB liabilities of eight funds managed by Chicago-area government totaled $3.4 billion in fiscal 2006. That figure is included in a growing total unfunded pension liability of $18.7 billion.
Chicago Public Schools reported an unfunded liability of $213.3 million in fiscal 2006. That nearly doubled to $425 million last year, according to CPS chief financial officer Pedro Martinez, who also spoke on a panel. The district's health care costs for retirees are currently capped at $65 million, but that number can be raised by the state General Assembly. By the end of fiscal 2008, CPS anticipates that it will hit the cap in order to meet its obligation to cover 70% of retirees' health care costs.
Martinez said an OPEB bond issue is a "compelling" option, but for now officials will wait.
"We feel something is going to give in the next 12 to 24 months," he said. As more attention is paid to the issue locally, the chances improve for legislatively approved benefit and contribution reforms, Martinez said.
Chicago Mayor Richard Daley also earlier this year formed a commission to come up with recommendations to improve the city's pension funds and any recommendations could impact CPS.
With the deadline looming for implementation of the new rules, "nobody should be embarrassed by having a zero funded level," said GASB research manager Dean Michael Mead.
Using the accrual method, governments must also take into account the cost of paying for benefits for future retirees and the annual required contribution or ARC that is needed to amortize the liability over 30 years. Governments must report the difference between their current funding level and the ARC.
Governments with revenues of more than $100 million must report their actuarial accrued liability in the fiscal years that end after Dec. 15, 2006. By the end of 2009, all states and localities are expected to adhere to the new reporting standards.
