Ocean City Today

Schools’ fund for retirement looking weak

Shortfalls predicted without cash infusion
By Brian Gilliland | Oct 19, 2017

(Oct. 20, 2017) Retirement benefits for the Board of Education employees could face “major funding shortfalls within the next six to eight years” if the current payment schedule continues without adjustment, county Treasurer Phil Thompson told the Worcester County Commissioners Tuesday.

Thompson said Worcester is unusual among other counties in the state in that it counts the Board of Education in its “Other Post-Employment Benefits,” or OPEB, accounting.

A reason for this could be that Worcester itself is unusual among counties, in that a large portion of the schools’ budget comes from county residents, and not the state itself, as is done in most other areas of Maryland.

However, even counties that do get significant education funding from state government often leave their schools on a pay-as-you-go model, where contributions are made at the same time and in the same amount as retirement costs. OPEB are defined as employer payments or services, other than a pension, a retired employee receives at the beginning of retirement, often including such costs as healthcare coverage.

Worcester County established a trust to fund these costs in 2009, though it began making payments towards these costs in 2006, Thompson said. Following the 2008 financial crisis, payments were significantly reduced until 2014, he said.

Because Worcester County property is broken into three areas for tax assessment purposes, the effects of the crisis took longer to be realized here, and the recovery has come slower.

Ocean City, where the majority of the most valuable property is, will be reassessed for fiscal 2019, starting July 1, 2018. While officials hoped the county’s recovery from the crisis would show a “V” shape when drawn, based upon projected tax revenue from resort property, the 2016 reassessment didn’t bear those predictions out.

All told, Jennifer Swanton, assistant county treasurer said, the county needs $256 million to fund its OPEB obligations for the next 30 years. Right now, the county has $67 million socked away for those expenses, she said.

Swanton said the numbers appear daunting, but the county’s payroll is currently $90 million, and $3 billion will pass from employer to employee during that time.

Part of the reason for the urgency, Thompson said, is ever-escalating costs. Healthcare cost inflation routinely hits 10 percent each year — so regularly that it should be considered the norm, not the outlier, he said.

Also, Thompson said the Affordable Care Act “was not our friend” plus last week’s executive order from President Donald Trump regarding healthcare coverage will “make things worse.”

Also coming into play is how the Board of Education employees make use of their OPEB healthcare benefits.

Employees routinely begin their careers with the county in their mid-20s, making full retirement possible by their mid-50s and well before Medicare kicks in at age 65. At that age, Thompson said, it’s entirely possible to still have dependents and spouses also on county coverage — in all, nearly 70 percent of expenditures are in that age cohort.

Three financial factors describe the county’s position on OPEB costs, Thompson said. First, returns on investments, which have done well in Thompson’s estimation by earning about seven percent annually, though he did warn that he’s beginning to suspect the market is overvalued. After that was the level of funding the commissioners were adding to the OPEB trusts, which he said wasn’t nearly enough. The last factor was healthcare inflation, which is out of the county’s control, he explained.

“I get what you’re saying — we best start doing something,” Commissioner Jim Bunting said.

Thompson said the commissioners and staff would  be talking more on this topic during budget season next spring, or a work session could be scheduled in the near term.

The commissioners took no formal action on Thompson’s suggestion.

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