Nick Kotsopoulos Telegram & Gazette Staff @NCKotsopoulos

WORCESTER - An independent research group is sounding an alarm about the city's long-term liability for retiree health insurance, saying its current funding system is "unsustainable."

In a report on Other Post-Employment Benefits, known as OPEB, the Worcester Regional Research Bureau stated that unless the city changes the funding system to cover future retiree costs, the problem will only grow, and could ultimately force reductions in municipal staffing and services, and increases in taxes to cover those annual costs.

According to the research bureau, the city's unfunded long-term liability for retiree health insurance is $860.8 million for this fiscal year.

It is $133 million more than what it was two years ago, and $205 million more than four years ago.

"Worcester faces an OPEB liability significantly larger than the city's entire annual budget ($611 million)," the research bureau report stated. It is unsustainable. Local government, like all governments, must adopt a system whereby costs are paid as they are incurred and not deferred to future generations.

"A defined contribution post-employment system rather than a defined benefit system is needed," the report said. "The OPEB liability will be a difficult challenge for Greater Worcester communities for decades to come. It requires intentional and strategic action today, or it will one day prove insurmountable."

The research bureau's report, which goes before the City Council Tuesday night, comes out as City Manager Edward M. Augustus Jr. is in the midst of putting together his fiscal 2018 budget proposal.

The report urges the city to take steps to reduce its current OPEB liability, such as expanding cost-sharing requirements so retirees would have higher contributions rates, and reducing the future number of eligible individuals by outsourcing or privatizing certain municipal functions.

It said the number of OPEB eligible employees could also be reduced by extending the period before an employee vests or increasing the number of weekly hours worked for eligibility (currently 20 hours, excluding teachers).

In addition, the research bureau suggested that communities work with the state to develop a comprehensive plan to eliminate OPEB, though it acknowledged that this and the one to extend the vesting period for employees would likely require state approval.

"Worcester and its neighboring communities should look at creative ways to transition from an employer-sponsored retiree health care system," the report said. "Admittedly, it is likely a long-term approach. Eliminating OPEB for new employees is a start, but it could require six or more decades to phase out current employees."

Under state law, the city is required to provide health insurance benefits for retired employees.

A city or public school employee is considered 100 percent vested after 10 years of credible service, according to state law. That means the city is then responsible for contributing to the employees and the employee's spouse's healthcare costs upon retirement for the rest of their lives.

The research bureau said the projected $860.8 million OPEB liability is generated by the city's 4,146 active employees potentially eligible for future benefits, and the 5,083 retired employees or their survivors currently receiving benefits.

Worcesters unfunded OPEB liability is equal to 6.5 percent of its total assessed property valuation for fiscal 2016.

No community in the Worcester area has fully funded its OPEB liability. In fact, the highest level of funding among local communities is less than 7 percent of the total obligation, according to the research bureau.

Unlike the city's pension system, state law does not require municipalities to address OPEB liabilities. Municipalities are required, however, to calculate and report current OPEB liability, and determine an annual payment for fully funding OPEB over 30 years.

For many years, no funding source was in place to finance the city's future post-employment health benefits. As a result, the city simply paid as it went, but as health insurance costs continued to escalate, they took up a bigger share of the overall city budget each year.

When the city adopted its Five Point Financial Plan a few years ago, it established a policy that commits 30 percent of free cash surplus funds from the previous fiscal year for deposit into an OPEB trust fund account.

In addition, Mr. Augustus took an unprecedented step in this fiscal year by setting aside $500,000 in the citys operating budget that serves as an additional OPEB contribution for the year.

The manager has acknowledged that the city's OPEB liability is a significant, long-term financial risk to the city. He said efforts have been taken each year to pre-fund the liability and, in turn, help mitigate the citys long-term-risk.

In addition, the city has taken several actions in recent years to lower its health insurance costs, which in turn have prevented the OPEB liability from increasing even more significantly.

But the research bureau pointed out that while the citys OPEB trust fund had nearly $8.9 million in assets as of June 30, it represents only 1 percent of the total liability.

As a result of its failure to systematically address OPEB, the city of Worcester is currently $281.2 million in arrears on a 30-yar program to retire its OPEB liability, the research bureau report said. With no new efforts to reduce OPEB obligations, the citys liability will reach more than $2.5 billion in 30 years.

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Worcester's retiree health costs 'unsustainable' - telegram.com - Worcester Telegram