Additional Costly Education Benefits

The next topic on my list of issues critical to the future of public schools is school district post-employment costs called OPEB. The OPEB issue is similar to the pension issue in that its existence is mandated and accounting for its costs is regulated by Government Accounting Standards. To be clear, neither OPEB nor school pensions are going away; I am addressing them as significant parts of the current financial landscape in which public schools operate; these components will create the futurescape for public PreK-12 education, along with population trends, declining enrollment, and the other issues remaining to be highlighted in this series. 

OPEB stands for Other Post Employment Benefits, meaning, not pensions, but including medical insurance, Medicare Part B, and dental benefits provided to retirees and their dependents.  This includes 50% to 100% of the costs of medical benefits and reimbursement for the full cost of Medicare Part B for school employees paid for by school districts & their taxpayers.

Unlike TRS, which is a multi-employer, defined benefit pension plan with joint and several liability for funding the plans’ obligations being shared among all school districts for the entire pool of all participants, OPEB is a single employer defined benefit plan, administered by NYSHIP, (NY State).  Each school district is solely responsible to fund the liabilities of the NYSHIP Plan for their own employees and retirees. Boards of Education have the authority to establish and amend OPEB benefit provisions for their Districts.  Unlike ERS & TRS, school districts are prohibited from pre-funding or establishing reserves to fund OPEB obligations.  School districts must pay for OPEB on a pay-as-you-go basis.

This last feature, in conjunction with the GASB 45, makes for terrible public policy.  I fully agree with GASB 45, which requires school districts to recognize OPEB costs in their financial statements.  That leaves the ‘terrible’ part of the public policy with the actual funding mechanism and policy for OPEB.  Why?

A huge unfunded liability has built up over the years because of the NYS prohibition against pre-funding OPEB costs.  GASB 45 requires the computation of an ARC (Annual Required Contribution), or the amount a school district would have to pay each year in order to amortize their unfunded OPEB liability over a 30-year period, plus interest to carry the unfunded obligation plus current year costs of the benefits.

For Wantagh, the 2012 OPEB ARC was $7.98 Million.  However, Wantagh only actually paid $2.73 Million in 2012.  This may sound like a good thing, and it was, as far as the 2012 school budget was concerned.   However, the portion of the OPEB ARC that was not paid amounted to roughly $5 million, which then got added to Wantagh’s (prior) ongoing unfunded OPEB liability. That brought Wantagh’s new current Net OPEB Obligation (NOO) to $20.7 Million, up from $15.7 Million in 2011.  However, GASB 45 takes this accounting, reporting and recognition requirement one step further, ultimately to a 30-year Unfunded Actuarially Accrued Liability (UAAL), which, for Wantagh, now stands at a whopping $83.6 million, which is larger than the entire school budget, and 237% (more than double) the entire covered payroll of the District.  These results are typical for LI School Districts and can be found in each district’s annual external auditors reports.

OPEB is not going away, and neither is Wantagh’s $20.7 Million NOO.  But here is a cautionary tale:  the magnitude of this obligation demands better long-range financial planning by all NY school districts; the existence of OPEB and the ‘Pension Bomb’ both hang together like the sword of Damocles over public schools, their students and their taxpayers in NY and elsewhere.  While no immediate danger is posed by either, keep in mind the role played by similar obligations in the sagas of General Motors and Chrysler, especially as competition arose in their industry, competition that was unencumbered by such large-scale, long-term obligations.

Remember also that the immediate future soon enough gives way to the intermediate future, with the eventualities of declining enrollment and persistently bad public policy concerning public education coming to fruition.  The proper time to recall what I have here written is when discussions ensue about closing school buildings, or the issuing of government-funded school vouchers that parents can “spend” in other than local public schools.

Isn’t there anything that can be done to ameliorate a school district’s huge overhanging OPEB liability?  You could go back and take note of the fact that school boards can establish and amend OPEB benefits.  Negotiations would then be the proper place to have that discussion, but all such negotiations are confidential.

The other possibility would be for NY to back off of its unremitting 100% pension funding policy, going to, say 90%, while requiring school districts to schedule larger OPEB payments out of each year’s budget and placing the excess of current years cost into a mandatory restricted OPEB reserve account.  You should be asking, what good would that do?  Well, if districts were required to reserve for their OPEB UAAL, then that money would be sequestered to protect the taxpayers from a future calamity caused when their pay-as-you-go OPEB outlays grow from a $2.3 Million to $23 million.  But more importantly, that money would be taken off the table, meaning, that money would not be available to school boards to negotiate spiraling raises or to maintain cadres of non-critical, non-teaching positions in NY’s school districts.

It bears repeating that OPEB will not be going away.  Although not a believer in school district consolidation (primarily because direct consolidation is not going to happen), I submit that huge and disparate OPEB UAAL’s serve as a deterrent to almost any school district merger, in my opinion.

These remaining issues on the Public Schools critical list will be addressed in additional blogs over the coming weeks:

• Out-migration of (native) New Yorkers
• New York State and Long Island’s cost of doing business & cost of living
• The economy & bad public policy (“Financial Insolvency” of school districts)
• Efficacy of public schools in Nassau County, on Long Island, and across NY State (“Educational Insolvency”)
• A constitutional issue
• Competition and alternatives challenging traditional public schools
• Changes in the world of work and careers, in a globally competitive employment market
• Organization and governance of public education in NY State

Contact the author at chriswendt117@gmail.com for additional information.

Prior blogs in this series include: Bad News on the Doorstep, Bad News on a Rising Wind, and Time to Pay the Piper.