The Benefits of Funding Retirement Healthcare Benefits
By Scott A. Petri
As a result of long-standing financial prudence, the Philadelphia Parking Authority (PPA), a state agency, has recently been able to fully fund the present-day value of its post-retirement healthcare benefits for employees. Why is that important?
When I served on the state Appropriations Committee, I saw firsthand how increasing pension and employee healthcare costs crowded out other priorities in the budget. The same is true for authorities and city governments. The PPA’s Board of Directors was fiscally wise in creating a self-restricted account to hold funds in a separate bank account, which gave the PPA the ability to quickly comply with Government Accounting Standards Board (GASB) requirements relating to the reporting of post-retirement health care liabilities. Unlike many government entities that did not plan for the day of reckoning, the PPA had foresight.
Recently, the Authority transferred funds that were set aside for post-retirement health benefits into an other post-employment benefits (OPEB) restricted trust. This enabled the PPA to improve its financial statement and reduce its liability under GASB 75. Funds that are set aside in a trust and invested are given credit toward the actual determined liability. GASB 75 is intended to improve accounting and financial reports by state and local governments OPEB. Effective for fiscal years beginning after June 15, 2017, the funded and unfunded portions appear on financial statements. Like the disclosure of pension costs, this provides transparency to taxpayers, the financial community, and to management. As a result of the set aside trust, we are also able to reimburse our approximately $1.2 million budgeted this year for OPEB expense. These funds will be available to the Philadelphia School District and the City of Philadelphia for distribution this year.
The statistics regarding those that have failed to set aside funds are alarming. According to information provided by our consultant, the vast majority of government entities are on a pay-as-you-go method of funding OPEB. A 2018 S&P Global Report, “Rising U.S. States’ OPEB Liabilities Signal Higher Costs Ahead,” identified an increase in unfunded liabilities among all states of $63 billion in fiscal 2017 alone. Total OPEB liabilities are now $678 billion across the nation, according to this report. Kicking the can down the road ties your hands and limits your ability to innovate, and we are at a critical time for innovation in the parking industry. Developing a plan to address reducing such liabilities is the first step. You might not have the luxury that the PPA had in transferring funds in one shot and you may have inherited this cost as a legacy, but you will need a plan to address this requirement. It may even seem like an impossible task. My advice is to contact a consultant, develop a plan and stick to the plan.
In addition to the benefit of acting prudently, the primary benefit of pre-funding future OPEB costs is ensuring that employees know that their future retirement benefits are fully protected. Decades ago, I attended a meeting as a legislator of retirees of a large private company that went bankrupt and learned their pensions were essentially gone. Helpless to right this wrong, I knew and understood the responsibility of private and public employers to keep their promise to employees by properly funding retirement benefits. For the PPA, that is the most important reason to set aside funds in an investment account. It’s simply the right thing to do.
Scott A. Petri is executive director of the Philadelphia Parking Authority.