By: Jeff Chang
Now that the general economic situation and public agency finances appear to be improving, a number of municipalities and special districts are once again looking at their unfunded OPEB (other post-employment benefits) liabilities with an eye to getting these liabilities under better control. One obvious way to control the amount of such unfunded liabilities is to fund, or set aside money to pay for, emerging retiree health obligations. When evaluating and establishing appropriate OPEB funding vehicles, it is important to consider whether the employee groups who may be contributing to such funding (typically through negotiated wage reductions) will be willing to “share” a single trust or not.
To put a sharper point on this, picture me, a husky older teenage brother, sitting down for dinner with my three younger, much smaller siblings. Our family frequently dined “family-style” – where one large (or sometimes not so large) plate of the main course was placed in the middle of the table for all to share. I’m learning now, many years later, that my siblings often felt they were in a race with me to get their share of the main course. If they waited too long, Jeff would eat it all up!
I mention this not-so-flattering story to illustrate the important question of whether a public agency should use only one, or more than one, OPEB trust to fund its retiree health obligations. What got me thinking about this was a municipal client of ours that participates in the CalPERS-sponsored California Employers’ Retiree Benefit Trust (CERBT). In discussing the situation with the client and representatives of CERBT, I realized that the current offerings of CERBT may not be a good fit for many public agencies – particularly those with more complicated retiree health benefit structures.
Here’s why. Currently, CERBT provides and allows for only a single funding account, as part of its large multiple-employer trust, for each participating employer. So, for example, a very large city (e.g., Los Angeles) would have one account and a small municipal water district would also have one account. The problem is that a big city typically has many unions with which it negotiates, each with a different level of employee cost sharing and perhaps a differing level of retiree heath benefit. If the firefighters are “contributing” more of their paychecks towards the funding of their retiree health benefits than the police officers are, but the police officers are retiring and drawing on benefits at a faster rate, one can see the beginnings of a “family-style” dilemma as described above. That is, if you have only one trust, then everyone shares in the same funding – regardless of whether they are contributing the same amounts and whether they are withdrawing the same levels of benefits. If asked about it, most unions would not be willing to share their retiree health trusts with a number of other unions.
What can be done? By far, the easiest thing to do is to establish multiple OPEB trusts (or, OPEB sub-trusts). That way the contributions, funding level, and participant utilization will be separate and distinct for each bargaining group. Although the CalPERS CERBT currently does not offer the option of allowing each participating employer to establish multiple sub-trusts for this purpose, there are a number of reputable providers that do provide for such an option, such as the multiple-employer OPEB trust offered by PARS. Our understanding is that there are relatively little if any start-up costs for an agency or city to set up multiple trusts of this sort and that the ongoing costs are very competitive with those charged by CalPERS. Of course, it is up to each employer to determine what is best for it employees, but it may be ill-advised to assume that all of your bargaining groups will be happy with “family-style” retiree health funding.
Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at firstname.lastname@example.org or (916) 329-3685.