NSFD's unfunded retirement liability looms

Published on: 6/12/2013

A recent study by the actuarial firm Milliman Incorporated calculates the North Shore Fire Department's 30-year retirement liability at approximately $44 million, about $30 million of which is unfunded.

Retirement liability, commonly referred to as Other Post Employment Benefits, comprises health insurance which bridges retirement age and Medicare eligibility, as well as sick leave payouts, among other things, depending on the benefits an organization provides. While OPEB liabilities have existed as long as employers have offered the benefits, the precise long-term ramifications of those liabilities haven't been clear until legislation has required governmental bodies to commission actuarial studies every three years, beginning in 2009.

"It's only the second time we've seen this," NSFD Finance Director Lynn Burton said.

As the cost of health care has increased over the years, so, too, has the department's OPEB liability. NSFD's unfunded liability was approximately $21 million when the first actuarial study was done in 2009, and has since increased to the present value of approximately $30.4 million.

The amount NSFD would need to sock away each year to fully fund OPEB, referred to by actuaries as the Annual Required Contribution is approximately $2.7 million. Fire Chief Robert Whitaker said that the department typically spends about $900,000 annually on retirement, between the current out of pocket costs of retirees claiming their OPEB benefits, and the $400,000 the department began putting away annually last year to help cover the benefits over the long term.

Higher costs

The actuarial study shows that NSFD's OPEB liability represents 371 percent of its $8.2 million payroll, a far cry from municipalities like the city of Brookfield at 45 percent or the village of Menonomee Falls at 42 percent. Whitaker said the West Allis Fire Department, at 340 percent, is a better comparison, since relative to cities, fire departments have a much higher percentage of employees classified as "protective" who qualify for OPEB benefits.

Following the passage of Act 10, school districts started making significant changes to their OPEB benefits to curtail their long-term liabilities. In 2012, for instance, the Whitefish Bay School District made big changes to their plan which reduced their ARC from $3 million to $1 million, a more palatable number for the administration and School Board.

Since Act 10 preserved collective bargaining for firefighters, Whitaker said, NSFD's options are limited when it comes to reducing the liability. For the most part, he said, the most immediate savings will come when NSFD shops around for health insurance and potentially negotiates lower rates.

Next contract in 2017

The most significant opportunity to reduce the liability will come in 2017, Whitaker said, when firefighters' contracts are again up for negotiation, though cutting benefits to reduce a down-the-road liability may be a tough sell.

"For us, to bargain that, would require a give and take, the quid pro quo," Whitaker said. "The best bet would probably be to put money (into OPEB) slowly and make small changes, because it would be almost unachievable to make big changes through bargaining."

A bill is currently working its way through the state Legislature which would require municipalities to fund OPEB benefits for new hires in a separate account. Whitaker calls it an unfunded mandate, since local governments have been and still are under levy freezes, and a provision of the now-in-consideration state biennial budget would have to reduce their levies by the amount of any new fees after 2013.

"It's the solution from a technical standpoint, but the problem is that the state says you can't raise your levies," Whitaker said. "(NSFD's member communities) can't raise the revenue to pay for it. You have to reduce something else."