Unfunded OPEB Obligation Going Over $3B in 2018?

Between now and the end of June, the Metro Council will approve our budget for the 2018 fiscal year. Before we get too deep into that process, it is worth remembering where Metro stands on its financial obligations to Metro retirees.

The financial obligations to retirees have two components – pension obligations and what is called “Other Post-Employment Benefits” or “OPEB.” The OPEB component is the health insurance coverage that Metro retirees have.

Metro has never set aside any money for the OPEB obligation. Instead, each year, Metro pays for the post-retirement healthcare obligations out of operating funds for that year. At the end of FY16, actuaries calculated Metro’s total unfunded OPEB obligation at $2.79 billion. There are several points to make about the unfunded OPEB obligation.

First, it is an enormous number. In fact, it was 1.4 times the entire Metro budget for 2016.

Second, this number has been growing rapidly. Back in FY12, the unfunded OPEB obligation was $2.23 billion. This means that, during Nashville’s historic growth from 2012 to 2016, the unfunded OPEB obligation grew by just over a half billion dollars ($560 million).

Third, there has been predictability in these numbers for the last 5 years. In both FY12 and FY16, the unfunded OPEB obligation was 1.4 times the Metro budget. The main takeaway is that, for every $100 Nashville has been able to grow its revenue/budget over the last 5 years, our unfunded OPEB obligation has grown $140. This is probably Metro’s worst financial statistic.

Here is a chart that shows Metro’s budget, unfunded OPEB obligation, and the OPEB obligation as a percent of the budget for 2012 to 2016.

I did the same analysis for the pension obligation. Here’s the chart for that. For the pension, there is money set aside already, although not enough to cover all future obligations. For the pension, the accountants calculate the “net pension obligation.” To do this, they look at how much money is set aside and then make some assumptions about inflation and how much money Metro will earn on the invested funds. Based on this data and assumptions, they calculate how much the shortfall will be over the long run. And that “net pension obligation” is how much Metro should anticipate having to pay for all current and former employees in addition to what is already set aside.

The good news is that the net pension obligation numbers are much smaller. For FY16, the net pension obligation was $401 million (or 20% of the FY16 Metro budget). That’s a big number, but manageable compared to the $2.79 billion unfunded OPEB obligation.

On the chart, you’ll see that it looks like the net pension liability quadrupled from FY13 to 14. But there was a complex accounting rules changes that went into effect that year, which forced the net pension obligation to be calculated differently. Since the rules change, the net pension obligation has ranged from 14 to 20% of the Metro budget.  So for every $100 that Nashville has grown its revenue/budget over the last 3 years, the net pension obligation increased by just under $20.

It is hard to put just the right context on numbers this large — especially the $2.79 billion unfunded OPEB obligation. I mean, panic isn’t the right response. But, Metro does need a serious plan for addressing the trend lines. The Mayor just proposed a $2.21 billion budget for FY18. If that 1.4 multiple holds true, the unfunded OPEB obligation will go over $3 billion in 2018.

Bob Mendes

Bob Mendes represents all of Nashville as a Council-At-Large member of Nashville’s Metro Council. He is Chair of the Council’s Charter Revision Committee, a member of the Metropolitan Audit Committee, and a member of the Council’s Budget & Finance Committee, Rules & Confirmations Committee, and Ad Hoc Affordable Housing Committee. Bob also practices business law at Waypoint Law PLLC. Bob’s complete bio is here. You can follow Bob @mendesbob.