School system working to mitigate $634 million liability for retiree benefits

Dec. 03--The Frederick County Board of Education is exploring a task force to help mitigate a $634 million liability for school system retirees.

The board has nearly $635 million in unfunded promises for health insurance, life insurance and dental insurance to Frederick County Public Schools employees, an actuarial study revealed Wednesday.

The Government Accounting Standards Board (GASB) issued a statement that was implemented in fiscal 2018 that required government entities to account for the unfunded liability of "other post employment benefits" on that entity's balance sheet. This will likely result in a negative net position for the school system, as it will for most government systems, said FCPS Chief Financial Officer Leslie Pellegrino in an email.

The school board has contributed $92.8 million to its OPEB fund, which puts the school system at around 15 percent funded. Kevin Binder, actuary for Bolton Partners Inc., said that level of funding is not uncommon for most school systems, though FCPS should begin looking at ways to fund OPEB, because costs could soon begin to outpace the school system's operating budget.

Binder ran 27 scenarios to see how much funding would be required to get to a certain level of the OPEB trust. The minimum amount ended up to be about $26 million over the next 30 years to get to a 50 percent funding level of the trust.

The board contributed about $14 million to the OPEB fund in this year's budget, which is about $12 million short of Binder's recommendation.

"I had hoped we'd find some good numbers here that we could put together a good plan for the board to ramp up to some type of funding, but unfortunately we did not find those results. It was quite eye opening," Pellegrino said.

"In a phone call with Kevin, he said 'you're either going to have find a way to fund this, or you're going to have do something to mitigate it.' The likelihood of being able to fund this at $26 million a year is probably very slim."

This could mean that school board may have to change its policies on what it promises its employees. The school board could change the length of time employees have to work in order to receive the benefits, or change the percentage of the benefits the system pays for.

"We're not in an immediate crisis situation; we've put the future in a crisis," said Board President Brad Young. "Whoever is sitting in these chairs 15 to 20 years from now is going to have some pretty grim decisions to make."

With people living longer and medical costs increasing, OPEB costs are expected to quadruple in the next 30 years, increasing from $2,300 to $9,400 per teacher, according to Binder's report.

"Every time we review this, it's very depressing," said board member Colleen Cusimano. "We could absorb this if our budget was increasing by about 10 percent a year, but our budget is increasing by around 2 or 3 percent a year."

Binder said he wouldn't recommend the board attempt to get to 100 percent funding, but he would expect them to make some sort of contribution.

"If you want to deliver on promises and you have people making financial decisions based on these promises, I think you do need to have some money set aside," Binder said. "I think I can say professionally, it's more than 50 percent."

Young used the analogy of an individual preparing for retirement.

"If you wait to save for retirement until you're 50, you're going to have to put [away] a lot more money than if you were to start when you're 20. And we're getting to be about 50," Young said.

"We're getting to a bit older than that," Binder responded.

Board member April Miller said the board had contributed money to the OPEB fund in the past, but it was used in recent years to support salary increases for teachers.

"I don't want to dwell," Miller said. "But I hope we're ready to listen and have a serious conversation about this."

The board reached a consensus to have a workgroup come forward in a few months with options for the board to mitigate the responsibility. Superintendent Terry Alban said a preliminary report could come before the board in April.

It's unlikely to make a decision before the next budget cycle, Pellegrino said. It would possibly be ready for the 2020-2021 school year budget.

"It's going to take quite a while," she added.

Binder added that he didn't think the liability would affect the county's AAA bond rating.

Follow Allen Etzler on Twitter: @AllenWEtzler.

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