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Address Long-Term Liabilities

Long-term liabilities often escape attention during the budget process because their full impacts will only be felt many years later. If not addressed, long-term liabilities could be a powerful drag on recovery or cause a new fiscal crisis when the liability comes due.

Pension Reform
OPEB Reform
Develop a Maintenance Policy, Strategy, and Plan

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Pension Reform

Contributed by Girard Miller, senior strategist at the PFM Group

 

Pensions are a large and growing liability for many governments. The Great Recession has revealed flaws in the assumptions behind how many public pension plans are constructed and financed. Strategies for long-term financial health need to address how pension plans will be made financial sustainable, while still providing a reasonable benefit. Some strategies for making the biggest and fastest impact on pension liabilities include:
  • Reconsider employee contributions. If the employer contributes more than two times what employees contribute, there may be an imbalance.
  • Raise retirement ages and curb early-outs. People are living much longer than when retirement age was defined as somewhere in one’s mid-sixties. In fact, a male who reaches 65 is now expected to live until past 80. Hence, if a retirement plan allows retirement at 55 a person could be expected to spend almost as many years on retirement benefits as they spent earning then.
  • For new hires, (and unvested workers) install a new multiplier if it is too high now. The multiplier determines how much and how quickly pension benefits are earned. A multiplier greater than 2.5% is a symptom of an unsustainable plan. A much lower multiplier (like 1.7% for civilian workers) could be sufficient to provide a retirement income at 85% replacement of working income if pension income is supplemented with social security and a 457 plan.
See GFOA’s article “New Normal Retirement Plan Designs” for more in-depth discussion of pension reform. Best Resource:

OPEB Reform

Contributed by Girard Miller, senior strategist at the PFM Group

 

Other post-employment benefits (i.e., retiree health care) represent an important long-term liability for many governments. Rapidly escalating health care costs mean that this benefit may have a much bigger impact on the budget than thought when it was initially instituted. Some strategies for making the biggest and fastest impact on OPEB liabilities include:

  • CPI cap on OPEB. OPEB funding strategies simply can't keep up with double-digit annual increases in medical costs. Of course, this means that the retiree will need to pay the difference and/or that benefits will have to adjust.
  • Employee-only benefit for OPEB. Limit OPEB benefits to only the employee that earned them - exclude coverage for spouses, children, etc.
  • Limit OPEB to Medicare supplement. Leverage Medicare to reduce reliance on your OPEB benefit.

Best Resources:

Develop a Maintenance Policy, Strategy, and Plan

Aging infrastructure is a problem for many communities. Poor infrastructure maintenance makes the community less attractive to residents and commerce and may also require premature asset replacement or costly emergency repairs. Develop a multi-year plan that describes the standards infrastructure will be maintained to, projects to be undertaken, and financing sources. This plan is supplemental to the capital improvements plan and can include those items that singly are not high-cost items, but in quantity can have an extensive impact – for example, computers, laptops, printers, copiers, benches, and light fixtures. It is also helpful to inventory maintenance agreements and warranties. Below are the steps you can take to develop such a plan.
  • Conduct a standardized evaluation of capital assets. Departments propose standards for maintenance, complete easily understood but well-defined condition assessments, and prepare cost estimates for bringing substandard infrastructure up to par and maintaining that infrastructure over time. The objective is to quantify not only any annual capital maintenance gap but also the one-time cost for bringing all infrastructure up to standard.
  • Engage the public in condition standards. Meeting the proposed standards of maintenance may require either new funding or diverting existing funding from other priorities. Either has an impact on the pubic. Therefore it is important that the public has a role in setting maintenance standards. A citizen task force (of expert, informed citizens) could be convened to examine the evaluation of the assets and make meaningful adjustments to maintenance standards. The objective is for the task force to issue a report that sets realistic and fiscally prudent standards for asset condition.
  • Model financial impact. Once the standards are set, the next step is to determine one-time and ongoing financial impacts. For instance, GFOA’s MuniCast can be used to model annual infrastructure repair and acquisition needs, by category and project, over 20 years or more. With information on maintenance and new asset needs loaded into the model, various “what-if” funding options can be designed, such as: 1) pay-as-you-go, 2) potential non-recurring funding from other government or private entities, and 3) debt financing alternatives, adjusted by variable debt ceiling assumptions and a range of future incremental operating income available to service new debt service. 
  • Engage the governing board. When the citizen task force and staff complete their work and as the model is completed, the board can be engaged to review findings and recommendations. The objective is to confirm the direction of the work done so far.
  • Staff strategizes financing tactics. A team of staff can examine and recommend tactics to close any infrastructure funding gap. This might include, for example, ideas for reallocating existing revenues, achieving cost efficiencies, using one-time revenues, or divesting of assets where appropriate. The objective is to identify: 1) ideas that can be implemented easily and quickly at a staff level; and 2) ideas that are more far-reaching, and which will require more than just staff involvement.
  • Engage public in developing capital financing policies and strategies.  A second infrastructure task force can be formed that is made up of community business and civic leaders. Its objective is to create a capital funding policy for civic infrastructure that provides a long-term framework for maintaining and improving the civic assets on a sustainable basis while providing capacity and means for new infrastructure to meet the future community needs.
  • Develop capital financing plan. With the capital policies in place, a capital financing plan can be developed that recommends a set of proposals to provide adequate capital funding.


The City and County of Denver received a GFOA Award for Excellence for their approach to developing an asset maintenance and funding plan. Their ideas will be useful for governments of all sizes. You can read about their experience in “Public Stewardship: Building a Long-Term Funding Policy For Infrastructure Maintenance” by Marilyn Miller and Margaret Brown.

 

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