St Paul Public Schools: an Education in OPEB

Saw this article yesterday about the problems the with St. Paul public schools:

Clearly, Saint Paul Public Schools has a significant problem with other post-employment benefits (OPEB) obligations promised to its retirees.   As the disclosure below from the 2010 annual report indicates, the District has only been able to pay for the pay-as-you-go amount for OPEB liabilities.  While current benefits are being paid, no amounts are being set aside to fund previously accrued liabilities – which continue to compound at the rate of retiree health inflation.  This is pretty typical of most municipal entities around the USA.
The presentations made to the Board of Education
all emphasize funding in an effort to address the question; “How are we going to fund this large and growing liability?”
In Wisconsin, municipalities were, for a time, allowed to float OPEB bonds to fund the liability.  While intuitively this seems like a good idea, it is predicated on investment returns being generated to reduce (or completely offset) the bite of health care inflation.  This is great in theory, but what happens if your fund manager underperforms the market?  Or what happens if there is another period like 2008 when the market drops by double digits?   Funding is NOT a panacea.  Unless you can fund and cap the liability, you are still exposed.

What seems to be completely missing for the discussion in Saint Paul’s is how to manage  the cost trend of providing retiree benefits. Cost in Saint Paul are assumed to go up by 8.5% per year.   This is the true driver of the growth in OPEB.  If the School district controls the cost trend so that the trend is below that modeled, the OPEB liability will be reduced, as will the amount taxpayers have to pay to fund this liability.

How can SPPS reduce its cost trend?   There are many strategies for achieving this in the Medicare environment.  Most plan sponsors currently receive suboptimal subsidies from the federal government – in the form of the Retiree Drug Subsidy or RDS.  This program reimburses for a portion of prescription drug costs for Medicare eligible retirees.   While this sounds like a great idea, the alternative subsidy available through the Employer Group Waiver Plan (EGWP) generally saves plan sponsors up to 20% of drug cost over the RDS, while substantially enhancing risk management. To view a short presentation of the benefits of the  Employer Group Waiver Plan over the RDS follow this link: