(Editor's Note: This is Part 1 of a series examining Woburn's OPEB obligations and Mayor Scott Galvin's proposal to offset that liability by increasing to 25 percent the share future retirees' must contribute towards their health care premiums).
WOBURN - The City Council recently challenged Mayor Scott Galvin's proposal to begin chipping away a $218 million debt by immediately restructuring future retirees' health care benefits and obligating them to foot an additional 15 percent of insurance premiums.
During a recent council meeting in City Hall, Mayor Scott Galvin outlined his plans to unilaterally hike to 25 percent the total contribution future city pensioners must pay for their medical coverage on July 1.
According to Galvin, who first notified Woburn Retirement Board Administrator Maureen Marcucci of his intentions in 2014, the 15 percent increase will bring the city/retiree split of premium costs in line with the respective 75/25 percent rates that were negotiated with active employees during the last round of contract talks.
The mayor insists the action must be taken before the bill for Woburn's massive Other Post Employment Benefit (OPEB) liability, estimated at $218 million and growing by the year, cripples the financial stability of the community.
"This requirement has and will continue to have an adverse effect on our city balance sheet when the OPEB liability is not fully funded on an annual basis," Galvin recently wrote in a memo to the council. "In addition, bond rating agencies are becoming more and more concerned about the challenges in funding OPEB liabilities, when assigning ratings."
The City Council, which is being asked by the mayor to adopt a local-option statute to address an existing gap in the city's pension benefit funding mechanisms, recently referred that matter to its Liaison Committee for additional scrutiny.
Generally, the council agrees the city must act as soon as possible to address the OPEB liability before the debt obligations strangle the community. However, the aldermen universally oppose the mayor's July 1 deadline for restructuring future retiree benefits.
In their opinion, active employees, many of whom have carefully and methodically planned their retirements, should at a minimum be given a year's notice before such a drastic change in their benefits are enacted.
"I don't think it's fair during a three-week period to change a benefit that people have potentially been planning for their whole careers," said Ward 7 Alderman Lindsay Higgins.
Technically, the City Council isn't being asked to sign off on the mayor's planned benefit restructuring, as he insists he retains the sole authority to make the change and is under no obligation to solicit feedback.
Instead, Galvin has asked the aldermen to correct a decades-long oversight, in which the city is funding more than half of retiree health care premiums without the authority to do so.
Discovering the legal issue a few months ago, when the mayor was readying to alter future retirees' benefits, City Solicitor Ellen Callahan Doucette has opined the city must adopt M.G.L. 32B Section 9E, which authorizes communities to pay more than 50 percent of retiree's up front health plan costs.
"Before I made the change, I wanted to make absolutely sure the executive branch had that authority [to unilaterally change benefits]. So I had the city solicitor do some research, and she found out I didn't have the authority to make any changes, because the city never adopted 9E."
Despite claims to the contrary, the aldermen contend they have leverage over the mayor's planned health care alterations, as without their acceptance of the requested local-option statute, Galvin is unable to implement that change.
OPEB and benefit funding authority
Not to be confused with the community's unfunded pension obligations, OPEB deals strictly with state and local retirement systems' inability to cover financial obligations for retiree benefits, including the provision of promised medical, dental, disability, and life insurance coverage.
Back in 2001, the Government Accountability Standards Board (GASB) directed all cities and towns to begin the process of calculating the size of their OPEB funding gaps, as virtually no community had any reasonable grasp on those figures.
As the result of subsequent GASB statements, initial estimates of each community's OPEB debts, for both active and retired workers, were released in 2014. However, with workers continually flowing in and out of the system - and returns investment income resulting in further changes - the size of the debt is in constant flux.
According to Galvin, the size of Woburn's OPEB obligations is estimated at $218 million.
As of 2016, the Mass. Public Employee Retirement Administration Commission (PERAC) pegged the state retirement system's liability at $16.7 billion, while municipal retirement systems like Woburn's reportedly owed a combined $30 billion.
So far, cities and towns are under no obligation to begin making payments towards their OPEB liabilities. However, many local officials have in recent years established and begun making deposits into an OPEB Trust Fund.
Presently, Woburn has just $4 million sitting in that account.
Addressing the council about the major debt earlier this month, Galvin has insisted the city can no longer afford to ignore the issue, as delaying action will only hurt Woburn's bond rating.
The mayor also warns OPEB payments, once mandated by GASB, could so stress city finances that the community has no choice but to consider drastic measures like layoffs or service cutbacks to cover the obligation.
"Kicking the can down the road is not an option. We can send [this request] to committee, but we have enough information," he said. "OPEB is the 800 pound gorilla in the room. We don't want to end up like Detroit or some other city like that."
Pension payment liabilities
In contrast to the OPEB debt, Woburn's annual budget already includes an annual contribution towards outstanding pension system obligations, which involve the community's promises in regards to pensioners' day-to-day living allowances.
With the line-item increasing by about $800,000, the city's FY'19 budget includes about $8.2 million to cover those outstanding pension obligations.
Generally, a fully-vested worker is eligible for annual pension payments equivalent to 80 percent of the average of their five highest consecutive years of annual compensation, though employees hired before the state's 2012 Pension Reform Act calculate their retirement income off of a three-year average.
All communities are required by state law to fully fund their pension systems by 2040.
Unlike some of its neighbors, Woburn is on track to meet that obligation about five-years in advance of the deadline.
Prior to the 2007 subprime mortgage crisis, the Woburn Retirement Board had agreed the city must fully fund its pension system by 2028.
However, the worldwide recession brought about by the housing market collapse decimated local retirement system investments - their value plummeted by 26 percent in 2008 alone - and in order to spare city officials from having to make up for those losses through its annual pension system contribution, the local Retirement Board voted to push out the funding schedule to 2035.