Category Archives: Budgets

I signed up for a webinar in two weeks on putting the town’s budget online.  This outfit would cost the town $7,000/year to do it.  Then everything is easily available  and everyone gets access.

OpenGov | 650.422.3642
Mountain View | Boulder
www.opengov.com @OpenGovInc
June 18, 2014 (3:50pm)

1.    Cost is based on size of town’s annual budget =
a.    Under $100m cost $7,000/year
b.    Below $50m is $4900/year

This was the email from OpenGov –

The Division of Local Services’ e-newsletter today has an excellent article on how Needham is dealing with its Other Post Employment Benefits (OPEB) liability.  OPEB is mainly future health insurance costs for town employees, in their retirement.  Medfield’s OPEB liability has been estimated by our actuaries at about $40 m.  The town started to fund the liability in the past two years, but still at a level way below the estimated $1.5 m. per year that Medfield’s OPEB liability grows each year, so we are continuing to fall behind and our OPEB liability continues to get larger.  The state has a study committee looking into solutions, but none that have been mentioned get around the need to pay what has already been incurred.

Best Practice: How is Needham Addressing OPEB?
Rick Kingsley – Municipal Data Management and Technical Assistance Bureau Chief

With many local officials struggling to understand and plan for looming liabilities related to Other Post-Employment Benefits (OPEB), we thought it would be beneficial to explore the approach that the Town of Needham has taken to address these future obligations. A community that fails to act on its OPEB liabilities runs the risk that future health insurance expenses will become so large that they eventually overwhelm other budget priorities and have a detrimental impact on municipal services.

Background

For those that may not be familiar with this topic, other post-employment benefits refer to benefits other than pensions that employees receive after they retire. By far, the most significant of these is health insurance, but may also include life insurance, dental or other benefits paid after an employee’s retirement. In 2004, the Governmental Accounting Standards Board (GASB) issued directives concerning how these liabilities must be presented in a municipality’s financial statements going forward (Pronouncements 43 and 45).

Similar to an employee’s pension benefits, OPEB are earned during the employee’s active working career, but are not actually paid until after the employee retires. GASB directed that these future costs no longer be accounted for on a pay-as-you-go basis, but rather these liabilities must be recognized as they are earned or accrued. In other words, employees earn the right to receive health insurance and other benefits upon retirement incrementally over their active working career. Therefore, on an accrual basis, the annual cost of an employee’s health insurance includes both the municipal share of the actual premium paid on the employe’s behalf plus a portion of the projected post-retirement benefit earned in the current accounting period.

These projections are done by actuaries who look at several variables to estimate these future costs. These variables include a projected rate of inflation for future medical costs, assumptions about employee turnover, age at retirement, Medicare eligibility, election rates for various plans at retirement, and mortality. Factored in as well are the respective cost sharing agreements for splitting benefit costs between the municipality and retirees. To attribute these future costs to current accounting periods, it is necessary to calculate a present value of these future benefits using a discount rate. As we will discuss later, the discount rate has a tremendous impact on the calculation of OPEB liabilities.

The important estimates that emerge from an actuarial analysis include the total present value of future OPEB benefits and the required contribution that must be appropriated annually to address this liability over multiple years. The projected cost of future benefits discounted to a present value is referred to as the Actuarial Accrued Liability (AAL). This amount is then attributed to the current and prior fiscal years based on when these benefits were earned. The amount of the AAL is reduced in cases where there are OPEB reserves set aside. The Annual Required Contribution (ARC) is the portion of projected benefits earned in or attributable to the current fiscal year (normal cost), plus an additional amount necessary to amortize the unfunded actuarial accrued liability for prior years. The amortization period cannot be more than 30 years.

Needham’s Experience

Well before the formal issuance of GASB’s OPEB pronouncements, Needham was among the first municipalities in the state to recognize the need to take action regarding OPEB liabilities. In January of 2002, the Legislature approved the Town’s special act to establish a post retirement insurance liability trust fund. The act was modeled after similar legislation that had been approved earlier for Bedford.

An initial appropriation of $380,000 was achieved through savings that arose in the contributory pension appropriation and a favorable actuarial analysis of the retirement system. An additional $380,000 was appropriated to the trust fund in each subsequent year from FY2002 through FY2007. In FY2005, when the town converted its health insurance coverage to the West Suburban Health Group, it saved more than $1 million. Half of the savings ($500,000) were also appropriated to the trust fund.

By 2007, with a modest amount set aside in the trust, the Town reviewed its pay-as -you-go retiree health insurance appropriation in relation to its Annual Required Contribution. It found that with the retiree health insurance appropriation, plus the annual set aside of $380,000, that the town was only about $120,000 away from appropriating its full ARC. The important message here is that retiree health costs can be paid as part of the annual appropriation of the ARC with the difference between the ARC and retiree health costs reserved in the trust for future liabilities.

Through a second special act approved by the Legislature in 2008, the Town amended the investment standard for assets in the trust from investments that are legal for savings banks to the more flexible prudent investor standard. This change opened the door to more lucrative investment opportunities and put the fund on equal footing with the investments allowed for a pension fund. It also made it far more likely that the town could achieve its targeted rate of return on these investments of eight percent.

As noted earlier, the discount rate used to calculate the present value of future OPEB costs plays a significant role in the size of the liability. For communities contributing their full ARC, GASB allows a discount rate of eight percent based on the estimated long-term yield on plan investments needed to pay future benefits. For plans that are pay-as-you-go and not funded at all, a discount rate of four percent or less is required, reflective of the much lower rate of return on general assets. For partially funded plans, a blended discount rate can be used.

To illustrate the importance of this discount/investment rate in these actuarial calculations, Needham’s unfunded actuarial accrued liability as of July 1, 2007 was $76.4 million using a four percent discount rate and it dropped to $43.6 million with the use of an eight percent discount rate.

Investing with PRIT

With the adoption of the prudent investor standard, Needham began analyzing its options for investments and investment advisory services. For many years, the Town’s pension assets had been invested with state pension assets in the Pension Reserves Investment Trust (PRIT). Through this long-standing relationship, Town officials were aware that the PRIT fund had an average annual rate of return of more than 9.6 percent since its inception in 1985.  At the time, however, there was no legal mechanism to combine the Town’s OPEB funds with its pension assets or otherwise invest these funds with PRIT, so the Town was forced to invest its OPEB trust on its own.

With the approval of Outside Sections 50 and 57 of the FY2012 state budget (Chapter 68 of the Acts of 2011), cities, towns, districts, counties and municipal lighting plants were authorized to invest their OPEB trusts with PRIT. To do so, entities must accept MGL c.32B, s.20 to establish a trust fund and seek approval from the Board of Trustees of the state’s Health Care Security Trust (HCST) to invest in the State Retiree Benefits Trust Fund (SRBTF, MGL c.32A, s.24). The SRBTF is invested in the PRIT Fund’s General Allocation Account (GAA), also known as the PRIT Core Fund. This fund contains about $58 billion in state and local pension assets, as well as the state’s OPEB assets. For communities like Needham with existing OPEB trusts authorized by special act, similar permission to invest in PRIT was contained in an amendment to MGL c.32A, s.24.

To receive approval from the HCST Board to invest in PRIT requires that a municipality submit several documents as part of the application process. This documentation includes evidence of adoption of MGL c.32B, s.20 or special legislation, acknowledgement of investment risk and an investment agreement and a designation of a custodian. The custodian can be either the municipal treasurer or the HCST. If the treasurer is to be the custodian, the SRBTF should be identified as an authorized investment vehicle for the treasurer. Lastly, the Board requires indication of the commitment to fund these liabilities. The Board has set a minimum initial investment requirement of $250,000 and a non-binding goal for qualified governmental entities to reach $1,000,000 over three years.

Earlier this fiscal year, Needham liquidated its OPEB investments and transferred the resulting cash balance to PRIT. The town now has about $15 million in assets invested with PRIT, or roughly 20 percent of the total municipal OPEB assets invested with PRIT.  Needham officials identified several factors that influenced their decision:

• The Town’s longstanding, successful relationship with PRIT to invest the Town’s pension assets provided a comfort level with moving OPEB funds to PRIT.
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• Investing with PRIT eliminated the need for Needham to procure investment management services through the MGL c.30B procurement process.
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• The PRIT fund is one of the best performing state pension funds in the country and serves as an excellent vehicle for attaining the town’s targeted rate of return on OPEB investments.
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• Professional investment management is provided at a lower cost due to economies of scale than the Town of Needham would have realized by going out on its own for the services.
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• A highly diversified portfolio that makes use of investment vehicles not available to smaller investors (e.g., private equity, direct hedge funds, timber, and private real estate).
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• PRIT understands the investments that are legal in MA where an outside investment advisor might not be aware of various prohibited investments.

Conclusion

Needham’s experience provides several important takeaways for other cities and towns that might not be as far along with OPEB. Although GASB has not mandated a funding requirement for OPEB liabilities, it is important for municipalities to start saving for these costs as soon as possible. Through the adoption of MGL c.32B, s.20, a community can establish an OPEB trust, use the prudent investor rule for trust assets and invest these funds with PRIT. Even if your community is not in the position to contribute the full ARC each year, modest and manageable contributions are better than nothing. Strategies to set aside one-time revenues, appropriation balances or other windfalls and appropriate them to the trust as available or identifying an appropriate recurring revenue stream can make a significant difference.

Once funding sources have been identified, it is important that these assets are invested with a long-term outlook similar to pension assets. A simple, low cost way to meet these long-term funding needs is to apply for authorization to invest these funds in the state?s PRIT fund. The tremendous diversification of investments, the annual performance of this fund over time for pension assets and the similarities between the long-term investment horizons for pension and OPEB liabilities make the PRIT fund an excellent vehicle for the investment of OPEB trusts. For additional information about PRIT, please contact Senior Client Services Officer Paul Todisco at 617-946-8423 or ptodesco@mapension.com.

Needham Town Manager Kate Fitzpatrick, Assistant Town Manager/Finance Director David Davison and Treasurer/Collector Evelyn Poness contributed to this article.

This chart shows how Medfield’s state aid figures have progressed over last year, and then with respect to first the Governor’s proposed budget, then the House budget, and now the Senate’s budget.  The Governor had us down $1,000 compared to last year, while the House has us up $34,000 and the Senate up $40,000.

The Massachusetts Municipal Association’s alert this afternoon focuses on the Senate’s version of the state budget.  A copy of that alert appears below –

Thursday May 15, 2014

SENATE WAYS AND MEANS BUDGET WOULD INCREASE KEY LOCAL AID ACCOUNTS IN FISCAL 2015

Yesterday, the Senate Ways and Means Committee released a $36.25 billion state budget recommendation that will be debated by the full Senate next week. The SW&M budget local aid highlights include:

• INCREASE OF $25M FOR UNRESTRICTED GENERAL GOVERNMENT AID (UGGA) – the same increase passed by the House, and $25M more than recommended by the Governor

• INCREASE OF $99.5M FOR CHAPTER 70 – the same level of funding passed by the House and recommended by the Governor

• INCREASE OF $18.7M FOR REGIONAL SCHOOL TRANSPORTATION REIMBURSEMENTS – an impressive 36% boost that would fund this key reimbursement account at 90% of full funding, which is $16.7M more than the House budget, and $18.7M more than in the Governor’s budget

• INCREASE OF $7.9M FOR THE SPECIAL EDUCATION CIRCUIT-BREAKER PROGRAM TO ENSURE FULL FUNDING – the SW&M recommendation is $7.9M more than in the Governor’s budget, and the House budget increases funding with a slightly different number that is also intended to fully fund the program

• INCREASE OF $5M TO CHARTER SCHOOL REIMBURSEMENTS – the same increase passed by the House, which is $5M more than recommended by the Governor, but still approximately $33M below full funding

• INCREASE OF $3.2M FOR MUNICIPAL LIBRARIES – this is $2.8M more than in the House budget, and $3M more than requested by the Governor

• INCREASE OF $1M FOR PAYMENTS-IN-LIEU-OF-TAXES (PILOT) – this is $1M more than in the House budget, and $1.5 million above the Governor’s recommendation

• LEVEL-FUNDING FOR MCKINNEY-VENTO REIMBURSEMENTS AT $7.35M – the same amount passed by the House and recommended by the Governor, and still $7.5 million below full funding

• INCLUDES $3M FOR TRANSPORTATION REIMBURSEMENTS FOR OUT-OF-DISTRICT VOCATIONAL STUDENTS – this program was funded at $1.5 million by the House, and was not included in the Governor’s recommendation

• SW&M BUDGET INCLUDES IMPORTANT REFORMS TO PROVIDE NET SCHOOL SPENDING EQUITY TO ALLOW ALL COMMUNITIES TO COUNT RETIREE HEALTH COSTS – this is a key provision that is also in the House budget

As expected, the Senate Ways and Means Committee yesterday released its version of the fiscal 2015 state budget (S. 4), a $36.25 billion budget plan with a bottom line that is lower than the Governor’s recommended budget, yet provides more funding for targeted municipal and school aid programs.

The Senate plan would spend less than the amount recommended by the Governor in January, avoid the tax increases proposed in the Governor’s budget (H. 2), draw less from the rainy day fund, and increase municipal and school aid accounts used to balance local budgets by $64.1 million above the amount recommended in H. 2.

Cities and towns are facing serious fiscal challenges, and the MMA will be working to build on the Senate Ways and Means budget when the full membership begins debate on Wednesday, May 21. In the meantime, Senate members will have until 3:00 p.m. on Friday, May 16 to file budget amendments.

Click here to link to the Senate Ways & Means Committee’s budget site and see the entire budget: http://malegislature.gov/Budget/FY2015/Senate

PLEASE CONTACT YOUR SENATORS AND TELL THEM HOW THIS BUDGET IMPACTS YOUR COMMUNITY

THE FOLLOWING IS AN INITIAL ANALYSIS OF THE KEY LOCAL AID AND POLICY ITEMS INCLUDED IN THE FISCAL 2015 STATE BUDGET PROPOSED BY THE SENATE WAYS AND MEANS COMMITTEE:

$25 MILLION INCREASE IN UNRESTRICTED GENERAL GOVERNMENT AID

The SW&M budget plan funds the $25.5 million increase in Unrestricted General Government Aid that was announced in the local aid resolution in March and passed by the House in April, increasing UGGA funding from $920.23 million to $945.75 million. The Governor’s budget would have level-funded this vital source of local aid. The Legislature’s commitment to increase this vital source of local aid is deeply appreciated.

CHAPTER 70 INCREASE REMAINS AT $99.5 MILLION

The Senate leadership’s proposed budget also reflects the $99.5 million increase in Chapter 70 funding proposed by the Governor, passed in the Legislature’s local aid resolution, and included in the House budget passed in April, to fund Chapter 70 aid at $4.4 billion. The plan would bring all cities and towns up to foundation levels, phase in the target share funding provisions, and provide all communities with a minimum increase of $25 per student. Most cities, towns and regional school districts are slated to only receive the minimum aid increase of $25 per student, an amount that is inadequate to maintain existing program levels. Although the MMA will continue to call on legislators to provide a higher minimum aid increase when the full budget is debated next month, legislative leaders are insisting that the debate on Chapter 70 funding took place during the adoption of the local aid resolution last month.

$18.7 MILLION MORE FOR REGIONAL SCHOOL TRANSPORTATION REIMBURSEMENTS

The Governor’s budget would have level-funded regional school transportation reimbursements at $51.5 million, and the House budget would add $2 million for fiscal 2015. Senator Brewer, the Chair of the Senate Ways and Means Committee, has been a strong supporter of increased funding for this key account for small and medium-sized communities, and has proposed a 36% increase of $18.7 million to bring funding up to $70.25 million. This would bring reimbursement funding up to 90%, the highest percentage in a generation.

$7.9 MILLION MORE FOR SPED CIRCUIT BREAKER TO FULLY FUND THE PROGRAM

The Senate Ways and Means budget would fund the Special Education Circuit Breaker program at $260.4 million, a $7.9 million increase intended to fully fund this essential reimbursement program. The Governor had proposed level-funding, which would have generated a shortfall due to rising costs. House members also intend to fully fund the program with a slightly lower $5 million increase. The good news is that Senate and House leaders are committed to full funding for this vital account.

CHARTER SCHOOL REIMBURSEMENTS RECEIVE $5M INCREASE, STILL UNDERFUNDED

Under state law, cities and towns that host or send students to charter schools are entitled to be reimbursed for a portion of their lost Chapter 70 aid. The state fully funded the reimbursement program in fiscal 2013, but so far is underfunding reimbursements by $27.6 million this year (the good news is that the House is acting on a supplemental budget to fully fund the program in fiscal 2014). The Governor’s fiscal 2015 budget would level-fund charter school reimbursements at $75 million, which would set the stage for a shortfall of $38 million in fiscal 2015. The SW&M budget would increase reimbursements by $5 million, to a total of $80 million, the same amount in the House-passed budget. This represents progress, but the program would still be underfunded by $33 million next year. Underfunding the charter school reimbursement program causes major fiscal distress in every community that has a significant charter school presence. Only a small fraction of the public school students attend charter schools. Underfunding this program would force cutbacks for the vast majority of students who remain in the traditional school setting.

INCREASE OF $3.2M FOR MUNICIPAL LIBRARIES

Aid to municipal libraries is funded at $6.8 million this year, and the Governor recommended a $200K increase for fiscal 2015. The House budget would increase the program to $7.2 million and the SW&M recommendation is to fund this account at $9.99 million, a $3.2 million increase over fiscal 2014.

$1 MILLION INCREASE FOR PAYMENTS-IN-LIEU-OF-TAXES (PILOT)

The Governor’s budget would have cut $500,000 from PILOT payments, reducing the program to $26.27 million. The House budget would restore this funding, and keep the account at the fiscal 2014 level of $26.77 million. The SW&M budget would increase funding by an additional $1 million, bringing the program up to $27.77 million in fiscal 2015.

McKINNEY-VENTO REIMBURSEMENTS UNDERFUNDED

The HW&M and Governor’s budgets would level-fund reimbursements for the transportation of homeless students at $7.4 million, which is at least $7 million below the full reimbursement called for under the state’s unfunded mandate law. Two years ago, the State Auditor ruled that the adoption of the federal McKinney-Vento law imposed an unfunded mandate on cities and towns. The program was funded at $11.3 million in fiscal 2013 and $7.4 million in fiscal 2014. Level-funding the program would continue to impose a significant burden on those cities and towns that are providing transportation services to homeless children who have been placed in their communities by the state.

$3M FOR VOCATIONAL EDUCATION REIMBURSEMENTS

Last year the Legislature established a $3 million program to reimburse cities, towns and school districts for the costs of transporting students to out-of-district vocational schools. The Governor did not include any funding for the program in fiscal 2015, and the House restored $1.5 million. The SW&M budget would fully restore funding to $3 million.

$6.5 MILLION FOR SHANNON ANTI-GANG GRANTS

The SW&M budget would fund Shannon Anti-Gang grants at $6.5 million in fiscal 2015. The House budget would provide $6 million, and the Governor recommended $8 million. Current funding is $7 million this year.

NET SCHOOL SPENDING EQUITY REFORMS INCLUDED IN SW&M BUDGET

The SW&M budget includes important law changes to establish equity in calculating net school spending under Chapter 70 to allow all communities to count health insurance costs for retired school employees in fiscal years 2016 and beyond, phased in over 4 years, and allow DESE to waive penalties in the meantime. This critically needed language was also adopted in the House budget.

THE SENATE WILL BEGIN DEBATE ON THE BUDGET ON WEDNESDAY, MAY 21.

PLEASE CALL YOUR SENATORS TODAY AND URGE THEM TO BUILD ON THE PROGRESS CONTAINED IN THE SENATE BUDGET COMMITTEE’S RECOMMENDATIONS

This email from John Nunnari this afternoon.  Looks like Medfield’s state revenue sharing total will be up about $110,000 over last year.  The Governor added $65,000 onto last year’s school funding (i.e. Chap. 70), and the House and Senate included that and added $45,000 more in local aid.  ==>

Senate released their budget this morning.

Assuming amendments (which are due by Friday) don’t change the numbers, the Senate agreed with the House numbers, which means they won’t be taken up during conference committee deliberations in June.

john