Tisbury’s finance and advisory committee has debated whether to begin funding the town’s other post-employment benefits (OP-EB) liability, estimated at between $13- and $20 million, depending on certain assumptions.
To start funding the OP-EB liability will mean increasing real estate taxes and putting funds into a dedicated trust fund for this purpose only. And, it will mean that those funds are not available to the town for any other purpose. Here are the arguments we have heard.
Point: The OP-EB liability is significant. We should begin funding it sooner rather than later, because it’s only going to grow.
Counterpoint: We don’t know how big the liability is — it’s very difficult to estimate with any degree of accuracy, because we have to make predictions (“assumptions”) about things like how long people will live (“life expectancies”) in future decades and future rates of interest and inflation. It would be foolish to start funding it without knowing what we’re going to have to deal with.
Point: We don’t have to know exactly how big it is to begin funding it. It is pretty certain we’re going to owe something. Besides, we have independent actuarial studies that give us a good sense of the scale of the liability. If we know it’s at least $13 million, we should start funding at least that level.
Counterpoint: Several things could happen to reduce that liability: first, medical costs may stop escalating faster than inflation, and they may even go down.
Point: Medical costs show no signs of slowing down, in spite of widespread outrage.
Counterpoint: Second, the retirees who get this benefit may be required to turn first to Medicare, taking a significant burden off the town.
Point: Medicare doesn’t and won’t cover everything. Our retirees would continue to need supplemental insurance, which is not cheap. While the town continues to try to reduce the cost of OP-EB, the liability isn’t going away.
Counterpoint: The state may allow towns to join the Massachusetts Group Insurance Commission (GIC), reducing our insurance liability.
Point: That would be one way to help reduce the OP-EB liability, but it would not make it go away. As it is, the town is looking at several means to reduce the cost of health insurance and thereby reduce the cost of the OP-EB liability.
Counterpoint: The town may be legally relieved of some or all of the OP-EB liability.
Point: You mean that the town might be allowed by the state to renege on its commitment to give this benefit to retirees? However improbable that may be, legally or practically, it’s hard to think that this town would opt for that way out, even if it were available. If we tried, it’s a good bet that the town would amass significant legal expenses defending itself in court.
Besides, the concept of bankruptcy is incorporated in federal not state law and starts with the premise that the assets available to the debtor are insufficient to satisfy all the obligations to all the creditors. We don’t like to say this out loud, but the assets available to a governmental entity with taxing power consist of the entire tax base. Statutory restrictions on rate and expenditure increases complicate matters, but we can’t assume that the state legislature can simply pass a decree to exempt towns and their taxpayers from this particularly expensive OP-EB obligation.
If the state or federal government were to take this burden from the town, the state or federal taxpayers would be the ones paying for that liability — and we are the taxpayers. Remember too, every level of government has this liability — towns, counties, states, and even the federal government.
Counterpoint: This is not a good time to start funding OP-EB. The economy is shaky, we have just been through a deep recession, and oil prices are rising again.
Point: We have built this liability for over 30 years, and yet we’ve never seen a good time to start funding it. Better to start now than to keep putting it off.
Counterpoint: Why not put it off for another year or two or five? We can’t prove it will be worse if we wait.
Point: Left to themselves, most bad things get worse. The independent actuarial study forecasts that the OP-EB liability will continue to grow faster than inflation.
Counterpoint: Why make the town vote an override now? The state may someday grant towns authority to raise property taxes for this purpose without having to vote an override.
Point: The state may or may not grant that authority, so, with or without an override, if it’s the right thing to do, we shouldn’t wait for the state.
Counterpoint: The state may help fund the liability, and if it does, it might penalize towns that have started to fund on their own by giving them less state aid.
Point: If somehow the state did find the revenues to step in and help towns fund their liabilities, it is hard to see how we would be worse off for having started to fund on our own. In any case, it is unlikely that the state will help towns fund OP-EB. The state is in dire financial straits. State funding to towns and schools is falling. Under the circumstances, it seems foolish to hope for the state to step in with help in the form of money.
Counterpoint: It’s foolish for us to put money away to pay for this liability. Inflation will eat up the value of those dollars — better to pay later with inflated dollars.
Point: Money we put up to fund OP-EB should be invested to at least grow with inflation, if not faster. The OP-EB liability is growing faster than inflation, so we need to get as much of a head start as possible.
Counterpoint: The main reason against the pay-as-you-go method of funding employee benefits is that companies can go out of business, leaving future benefits unfunded. Governmental entities are not perpetual, but they are pretty well assured of lasting as long as the rules of law that created them and enforce the obligations they incur. So, given that assurance of continued existence and the ability to tax the entire tax base within their jurisdictions, governmental entities should be allowed to continue to push this cost forward, just as they have done for decades.
Point: Ultimately, this is a question of fairness. By not funding the OP-EB liability, we are pushing the cost of current employees off on to our children. We get the benefit of those employees’ work, but we don’t pay all the cost. Right now, we are paying the cost of insurance for retirees, but we don’t get the benefit of those employees efforts — they retired, some of them many years ago.
Counterpoint: First, we are doing as our parents did to us — and we’re carrying the cost just fine. Second, many of our residents are moving here in retirement, so they wouldn’t have the benefit of those retirees’ work anyway.
Point: The fact that we haven’t funded in the past doesn’t make it the right thing to do. The fact that people retire here doesn’t justify making them pay for the cost of work done years ago. We are carrying the cost of OP-EB on a pay-as-you-go basis, which has allowed the liability to grow to that $13-20 million dollar monster. I don’t call that doing just fine.
Jon Snyder is chairman and Bruce Lewellyn a member of the Tisbury finance and advisory committee.