Explanation of the Pension Funds and OPEB Funds
This document is meant to provide a basic understanding of how the Town's Pension Funds and OPEB Trust Funds function.
There are four funds - The Police and Fire Pension Fund, The Employee Retirement Fund, The Police and Fire OPEB Trust Fund and the Employee OPEB Trust Fund. The Police and Fire Pension Fund is authorized and managed per the Town Charter. The other three are set up and managed per the Town Code (or Ordinances). There is a Board for each fund that is charged with the responsibility to invest and manage the fund.
The Pension Funds:
These funds are set up to pay Town Employees Pensions upon retirement. There are guidelines defining how long one has to work to be eligible and how much one is paid upon retirement.
The amounts paid to the eligible retirees are defined by contract with the employees/Union/Bargaining Unit. The amount paid to each retiree is an obligation that the Town has committed to in the Contracts. This is what is termed a "Defined Benefit" program. The retirees are entitled to and the Town is obligated to pay the prescribed amounts each year. It is not based on the amount in the Pension Fund. If the Pension Fund were zero, the Town would be obligated to raise taxes high enough to pay the required annual distributions to the retirees.
The reason for the Pension Funds is to balance or spread the cost of the payments over time. The Pension Funds are set up for the benefit of the Tax payers. They provide a way to invest funds, earn a return on that investment and consequently pay less in over time. It is in the Taxpayers best long-term interest to fully fund the annual contribution.
The Town hires an Actuary to evaluate the Pension Program and recommend the annual contribution. In FY2010, the recommended amount is $1.57 Million. The annual contribution is typically calculated based on the Pension Fund balance on June 30th of the prior fiscal year. The June 30, 2008 balance was the starting point for this year's calculation. We had one very unusual occurrence that caused this year's calculation to be adjusted. There was an adjustment made to begin allowing for the money lost in the Madoff scandal. While the payment for FY2010 was adjusted, the impact is being "spread" over a number of years to minimize contributions increase in any one year.
Our Town has had the benefit of not contributing to these funds from our annual budget for the last ten years. We were fortunate that we had contributed enough in the past to have these funds exceed the Pension Liability estimate so the Town made a decision not to contribute and keep our taxes lower. Most, if not all, surrounding towns have been contributing each year to these funds. A Pension contribution made each year reflects the "benefit" earned by employees working today even though this "benefit" will be paid in the future when they retire.
This year it is recommended by our Actuary that we contribute $1.57 Million to the funds. The annual amount will increase next year because it will be calculated based on the June 30, 2009 balance in the funds which will be significantly lower than 2008. We are no longer funded at over 100% of our Pension Liability.
Some thoughts:
- We are not required to make an annual payment.
- If we don't make the annual recommended payment, we are hurting taxpayers in the future by putting a greater burden on them for paying for the employees who provided services today to current residents.
- It is past RTM's along with prior Town/BOE Administrations that agreed these were fair amounts to pay in deferred compensation. These contracts and the benefits included were fairly negotiated by all parties. The taxpayers in the future didn't have any input to these decisions.
- We didn't make payments for the last ten years because prior taxpayers fulfilled their obligation and we benefited.
- If we don't fully fund our annual obligation, we don't get the benefit of the earnings from that investment.
- The actuary would then recalculate next year and the annual recommendation would be even higher to make up the difference.
- It is in every taxpayer's best interest to fully fund the recommended amount each year.
In a real sense, we have to make the payment. Not making the payment is like deferred Maintenance. It looks good today but makes it more expensive next year and the year after, etc. The obligation to pay does not go away. The Town has a legal contractual obligation to make the payments. The least expensive way to fund this obligation is to make the annual payments in full every year.
If people want to reduce this obligation, there is only one course of action. Labor Contracts would have to be negotiated in the future to adjust this obligation by either changing the pay out amounts or adjusting the employee contribution. It should be understood that the benefit structure for people already retired cannot be adjusted without their approval. The contracts are approved by the Board of Selectmen and the RTM. In the appropriate cases, the Board of Ed would also give approval.
Since more information is generally a good thing, it might be in everyone's best interest to have a study done that shows how Fairfield compares to other towns in Pension Benefits.
Other Post Employment Benefits or OPEB:
These funds are set up to pay Town Employees Medical Benefits including Dental Coverage and Life Insurance upon retirement. There are guidelines defining how long one has to work to be eligible and exactly what benefits are due upon retirement.
The benefits provided eligible retirees are defined by contract with the employees/Union/Bargaining Unit. The benefits due every retiree are an obligation that the Town has committed to in the Contracts. This is what is termed a "Defined Benefit" program. The retirees are entitled to and the Town is obligated to provide these Medical Benefits. It is not based on the amount in the OPEB Fund. If the OPEB Fund were zero, the Town would be obligated to raise taxes high enough to pay the required annual distributions to the retirees.
The reason for the OPEB Trust Funds is to balance or spread the cost of the payments over time. The OPEB Funds are set up for the benefit of the Tax payers. They provide a way to invest funds, earn a return on that investment and consequently pay less in over time. It is in the Taxpayers best long-term interest to fully fund the annual contribution.
The Federal Government reporting standards changed recently. For the first time, each town is required to note on the Annual Audited Financial Statements the total amount of the OPEB Liability. For Fairfield, this Liability is approx $140 Million. While we have been paying for Retiree Medical Benefits on a yearly basis, we have not had plan in place to fund a reserve or Trust Account to meet this Liability.
Again, the Town has hired an Actuary to calculate the total obligation. The Actuary also calculated the ARC or Annual Recommended Contribution. The ARC is comprised of two components: the part needed to pay this years cost or benefits and the part to be invested to help offset future obligations. The total of these two components is approx. $11.5 Million. This amount includes the $4.0 to 4.4 Million needed to fund the current year Medical Benefits for current retirees.
The First Selectman in a letter to the Actuary on January 16, 2009 committed the Town to fully funding the ARC over the next four years. In the FY2010 budget, there is a $5.8 Million payment against the ARC. The balance of the ARC will not be funded this year. This will cause the ARC and our overall Liability to be higher in future years.
The $140 Million Liability was calculated as of June 30, 2006. It is two years behind. So it is reasonable to assume that since we didn't make the full ARC payments over the last two years that this Liability has grown. The $140 Million valuation assumes we are fully funding the ARC every year. Since we missed funding previously and will not fund it fully in FY 2010, the Total Liability will continue to grow.
Additional thoughts:
- We are not legally required to make an annual payment. However, since the First Selectman committed to our Actuary and Auditor in his January 16, 2009 letter, we appear to now be obligated to increase our annual contribution till we are fully funding the ARC of $11.5 Million in the next four years.
- If we don't make the full ARC, we are hurting taxpayers in the future by putting a greater burden on them for paying for the benefits earned by employees who provided services to today's residents.
- It is prior RTM's along with prior Town/BOE Administrations that agreed these were fair and reasonable Benefits to pay. These contracts with the benefits included were fairly negotiated by all parties. The taxpayers in the future do not have any input to these decisions. To be fair to prior RTM's, I don't remember ever being given a town by town comparison of total employee costs included in contracts. Total employee costs would include wages, benefits, pension, retiree medical benefits and work rules. And most often, there is very little time given the RTM to evaluate or analyze the economic impact of the contracts.
- The RTM might consider passing a resolution or ordinance that any labor contract be presented to the body at least 75 days in advance of a vote to be taken. Labor costs comprise 70 percent of our Town budget and appropriate time should be give to study and understand the impact of multi-year agreements.
- We didn't make any significant payments until this year. So part of what is driving this year's tax rate increase is a change in the rules.
- If we don't fully fund our annual obligation, we don't get the benefit of the earnings from that investment.
- The actuary would then recalculate next year and the annual recommendation would be even higher to make up the difference.
- It is in every taxpayer's best interest to fully fund the recommended amount each year.
OPEB is another example where not making the payment is like deferred Maintenance. It looks good today but makes it more expensive next year and the year after, etc. The obligation to pay does not go away. The Town has a legal contractual obligation to pay for the Benefits. The least expensive way to fund this obligation is to make the annual payments in full every year. And like the Pension Contributions above, the payment made in this year is a reflection of the "benefit" earned by current employees even though it will be paid out in the future. In other words, it is part of the compensation package agreed to for working today. A day worked today is paid for in wages, benefits along with Pension and Benefits to be paid in the future. This is the total cost of an employee working today.
If people want to reduce this obligation, there is only one course of action. Labor Contracts would have to be negotiated in the future to adjust this obligation by either changing the Benefits or adjusting the employee contribution. Again, for people already retired these benefits cannot be adjusted without their approval. It should be noted that BOE Retirees covered already contribute a significant amount towards the cost of this benefit. The contracts are approved by the Board of Selectmen and the RTM. In the appropriate cases, the Board of Ed would also give approval. The BOE Employees covered are the "non certified" employees/retirees or retirees who are not teachers.
For anyone interested, the Board of Finance commissioned a study this past year to compare various towns and their benefit packages paid to retirees. This study shows that our Medical Benefits covered under this program offer a top tier package. This top ranking is earned based on the benefits offered and the fact that it is offered without cost to Town Retirees - again, BOE Retirees due cover a significant portion of their costs. I believe this study is available from Mr. Hiller, our Town CFO.
Prepared by Mike Tetreau, Member Board of Finance
Special Thanks for editing and additional explanation to Bob Mayer, Member Board of Finance
