The latest on Franklin's OPEB

• What is OPEB?

OPEB is "Other Post Employment Benefits"

• What is Franklin's outstanding unfunded liability?

Per the latest actuarial report (shown below), the unfunded liability is 92.5 million dollars.

• Is this an issue?

Yes, it is akin to a homeowner's mortgage, you need to have a plan to pay for it. Franklin has a plan to save for this liability and plans to increase their contribution to it as circumstances allow.

• How is Franklin doing compared to other MA communities?

Franklin is doing better than most according to the actuarial update provided at the Town Council meeting on Nov 18th
http://www.franklinmatters.org/2015/11/live-reporting-opeb.html


Here is the cover letter from Sherman Actuarial Services, LLC (SAS):

"The Town of Franklin has engaged Sherman Actuarial Services, LLC (SAS) to prepare an actuarial valuation of their post-retirement benefits program as of June 30, 2015. This valuation was performed using employee census data, enrollment data, claims, premiums, participant contributions and plan provision information provided by personnel of the Town of Franklin. SAS did not audit these data, although they were reviewed for reasonability. The results of the valuation are dependent on the accuracy of the data. 

The purposes of the valuation are to analyze the current funded position of the Town's post­ retirement benefits program, determine the level of contributions necessary to assure sound funding and provide reporting and disclosure information for financial statements, governmental agencies and other interested parties. This valuation report contains information required by the Governmental Accounting Standards Board's Statements Nos. 43 and 45, respectively entitled "Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans" and "Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions." 

According to GASB principles, if the benefits are not prefunded, the rate earned by the General Asset Account must be used to select the discount rat used to measure the plan. To measure on that basis we have used a discount rate of 4.0%. The Town is currently partially prefunding the obligation with additional contributions of $400,000. Based on this policy, we have determined that a discount rate of 4.5% is appropriate for financial reporting purposes. If the Town were to commence fully prefunding the Annual Required Contribution instead of paying benefits when due plus $400,000, the measurement would likely be based on an 8.0% discount rate. 

Section II provides a summary of the principal valuation results. Section VII provides a projection of funding amounts. 

While the actuary believes that the assumptions are reasonable for financial reporting purposes, it should be understood that there is a range of assumptions that could be deemed reasonable that would yield different results. Moreover, while the actuary considers the assumption set to be reasonable based on prior plan experience, it should be understood that future plan experience may differ considerably from what has been assumed. 

The report was prepared under the supervision of Daniel Sherman, an Associate of the Society of Actuaries and a Member of the American Academy of Actuaries, who takes responsibility for the overall appropriateness of the analysis, assumptions and results. Daniel Sherman is deemed to meet the General Qualification Standard and the basic education and experience requirement in the pension area. Based on over twenty years of performing FAS 106 valuations of similar complexity, Mr. Sherman is qualified by experience ·in retiree medical valuation. Daniel Sherman has met the Qualification Standards of the American Academy of Actuaries to render the actuarial opinion contained herein. 

The costs and actuarial exhibits presented in this report have been prepared in accordance with Generally Accepted Accounting Practices and the requirements of GASB 45. I am available to answer questions about this report. "

Respectfully Submitted,

SHERMAN ACTUARIAL SERVICES, LLC

DelCarte in autumn color 2015

The full report from Sherman Actuarial Services, LLC (SAS) can be read here:



Or use this link
https://drive.google.com/open?id=0B0wjbnXDBhczZFhRbjVXWjBPNTQ




Page 3 and page 10 were the two handouts for the Town Council meeting on Nov 18th




or use this link
https://drive.google.com/open?id=0B0wjbnXDBhczTkxYNkVCTVdGOTg


The Needham story
http://www.franklinmatters.org/2014/06/best-practice-how-is-needham-addressing.html

In the News: 'Tis the season, public records, OPEB liability explained

From the Milford Daily News, articles of interest for Franklin

"The Franklin Performing Arts Company will host a special performance of the original holiday musical “’Tis the Season!” for community youth, family and social services organizations at 3 p.m. Dec. 19 at the Franklin High School auditorium, 118 Oak St. 

FPAC will distribute complimentary tickets for the performance through community organizations including the Hockomock Area YMCA, local Best Buddies chapters and the Franklin Food Pantry."

Read the full article online here (subscription may be required)
http://www.milforddailynews.com/article/20151118/NEWS/151115487/1994/NEWS

"Ahead of the unanimous passage of what they said was the first public records overhaul in more than four decades on Wednesday, a key House lawmaker said the measure would increase transparency without adding an unfunded mandate on cities and towns. 

"As a former local official and someone who pays a lot of attention to municipal government, I don't view anything in this bill as an unfunded mandate," House Ways and Means Committee Vice Chairman Stephen Kulik said. He said, "Any public agency, including cities and towns, have responsibilities inherent to provide public access to the documents of what they do."

Read the full article online here (subscription may be required)
http://www.milforddailynews.com/article/20151118/NEWS/151115463/1994/NEWS

"The Town Council was told at its meeting Wednesday that Franklin is in relatively good shape in terms of other post-employment benefits (OPEB), but should continue to ramp up its contributions. 

Consultant Dan Sherman gave a presentation to the council on the concept."

Read the full article online here (subscription may be required)
http://www.milforddailynews.com/article/20151118/NEWS/151115448/1994/NEWS

Live reporting: OPEB

G. HEARINGS
none

H. LICENSE TRANSACTIONS
none


I. PRESENTATIONS/DISCUSSIONS
OPEB, Dan Sherman

also made presentation to FinCom this evening (meeting at 6:00PM)

had been 'pay as you go' costs for retirement
government accounting standards required changes in how this was handled
the amount of the outstanding promise was required to be specified, hence - "unfunded"

what is the time value of the money invested?

400,000 plus 10% of free cash is currently being planned for as part of the budget for the annual contribution. However, the requirement is about $2M so we are 'underfunded'

total unfunded liability = $92,5M
or 1.5% funded

the fact that we are setting money aside in the trust is good in the eyes of the rating agencies

the liability is 161% is low compared to peers, a 'wonderful place to be'

the annual cost of a home is all the ongoing costs, heating, electric, etc.
you also have a mortgage which is your liability

ARC = Annual Required Contribution, the amount that will be the line item eventually added to the budget

most communities are like us, setting something aside but not completely funding the liability

Like Needham, put some aside, gradually up the amount and eventually close the gap

Shrewsbury 2020 or bust, attempting to fully fund

some communities are not doing anything which the rating agencies won't like

Dan is currently a member of the FinCom for Wakefield, putting money aside to get fully funded eventually

pre-funding brings a bunch of advantages

OPEB is the one thing that for an employee is not paid up front, is paid after the employee retires

Q - to clarify on the unfunded and partial pre-funding

Q - can we change the plans we offer?
A - yes, we change the health plans frequently working with the unions

68/32 ratio

probably about 20 of the 350 communities are fully pre-funding

new employees don't get the same benefit as older employees
law change is being looked at for a change in the formula

Padula - recommend a motion to ask for legislative help
Kelly to be added to a future agenda

full copies to be posted to Town webpage in a couple of days

Dacey's Market liquor sales restricted by Town Council

The Town Council had a busy meeting on Wednesday. They approved the sewer extension for a single family home on Crocker Ave and penalized Dacey's Market for liquor sales to an underage person. They sent a zoning bylaw change to the Planning Board for the area around the current Thompson Printing facility. They also authorized the funding of the trust fund to help resolve the OPEB issue.

Sewer Extension

The single family home owner will pay for the sewer extension and repaving the road where the sewer line is laid. The land is mostly ledge and won't support a septic system per Franklin's Health Dept inspector. The vote was 8-0 for this item at the second reading. Members of the Council had objected to the absence of the home owner for the first reading of the bylaw change. The home owner was present on Wednesday.

Dacey's Market

Dacey's Market was handed a 7 day penalty, 4 days to be served beginning July 16th and 3 days held in abeyance for 2 years. This is the second instance for underage liquor sales. The first took place in 2011. 

The underage sale was discovered when an off duty sargent was making a personal purchase and observed the individual making his purchase. A vehicle license check confirmed the underage status. An officer on duty happened to be in the area, he was contacted. Confirmed the underage status and made a vehicle stop to confirm the liquor purchase. He confiscated a CT license. The individual claimed to not have used it as the store employees regularly did not check for licenses.

The owner of Dacey's Market was present. He had purchased the license validation machine after the 2011 incident to prevent underage sales. If the machine says the license is good, he makes the sale. The license itself may be good but it may still not match the individual. Dacay's has 5 days to appeal the Council decision by going directly to the ABCC, otherwise the penalty will take effect as agreed to.

Zoning Bylaw

A zoning bylaw change was referred to the Planning Board to begin the process of changing the last industrial zone in downtown to residential. This was an outcome of a prior zoning workshop the Council, Planning Board and other Town official held March 25, 2015. (My meeting notes can be found here)

The area around the location of the current Thompson Building is the target for the change. It already abuts another similarly zoned parcel. The proposed change is hoped to provide additional residential space near the downtown area. The Planning Board will do their public hearing process and bring the bylaw back to the Council where there will be a public hearing and two readings before a vote. 

Franklin Municipal Building

OPEB Trust Fund

Other Post Employment Benefits (OPEB) account is underfunded by the Town of Franklin to the tune of about $80M. An actuarial study currently underway will confirm the current requirement. Franklin had established a trust fund to help manage the money being put aside. The primary purpose for such would be to increase the rate of return on the funds invested. Current regulations impose a more conservative return opportunity for the money in 'stabilization' funds but allow for more aggressive funding opportunities in a managed trust fund.

The trust fund was established previously. The management committee had been meeting to discuss investment options and finally reached their decision. The Council's action was to approve the transfer of $1,875,334.64 (plus accrued interest) to the Trust Fund.  


The complete set of notes recorded live during the meeting can be found here

• Live reporting: Closing
• Live reporting: Legislation for action
• Live reporting: Dacey's Market
• Live reporting: Sewer Extension
• Live reporting: Franklin Advisory Committee
• Live reporting: Town Council - July 8, 2015

Good steps on funding and voting for the Chair doesn't really matter

The Town Council meeting on Wednesday was dominated by the presentation on the Franklin TV cable operations. The new studio is almost complete and they are broadcasting from the facility now. The residents of Franklin have already seen an increase in locally produced programs and can expect to see more. The presentation document can be found here
http://www.franklinmatters.org/2014/12/live-reporting-franklin-tv.html

Tucked away in the 'normal' business was the approval of a new manager for the liquor license at Joe's American Bar and Grill on King St.  Of more importance were a couple of resolutions that will positively affect the local fees and taxes Franklin residents pay.

Franklin TV studio on Hutchenson St

The first is that there is a restructuring of the solid waste disposal contract which includes a reduction in the tipping fees. This reduction which is in keeping with current market conditions is expected to allow the trash rates not to increase for a couple of years. The tipping fee is the amount the town is required to pay to dump the trash picked up.

The second is the creation of a trust fund to help manage the funds being put aside to cover the OPEB liability. OPEB is Other Post Employment Benefits and the current outstanding unfunded liability for Franklin is estimated to be about $89 million. 

We are not alone in this issue. There are perhaps one or two communities across the state that have fully funded their liability, Earlier this year, we shared here what Needham is doing to help fund their liability.  The article gets into more details and is a good background of the problem and potential solution.  http://www.franklinmatters.org/2014/06/best-practice-how-is-needham-addressing.html

The creation of the trust will allow for the investment of the fund being put aside to bring a greater return which will then help us more. We'll see this on a future agenda as there will be a call for interest in two citizens to be named to the trust fund. We'll also see the transaction to move the money from the current fund stabilization account to the trust fund.

One minor matter that occurred with the approval of the prior meeting minutes is the the Council has not bothered to correct the problem of not officially voting for its chairperson. As reported from the Nov 19th meeting, the Council accepted nominations for the Chair and voted to close the nominations. It got interrupted by another nomination and when putting that aside, turned to accept nominations for the Vice Chair. It never actually voted on the Chair position nomination itself. 

I had listened to my recording to confirm this. This was also confirmed by the minutes of the meeting that Council approved without amendment on Wednesday. So while some folks think the Council Chair matters, apparently getting officially voted in for it, doesn't matter.

The full set of notes recorded during the meeting can be found here:

• Live reporting: Legislation and closing

• Live reporting: Franklin TV

• Live reporting: Town Council - Dec 3, 2014

• 
  

From the minutes of the Nov 19th meeting:

ELECTION OF OFFICERS: MOTION by Pfeffer to nominate Bob Vallee to serve as Chairman of the Council. SECOND by Kelly. Close nominations. Vote Unanimous. MOTION by Bissanti to nominate Matt Kelly to serve as Vice Chairman of the Council. Close nominations. Vote for Vice Chair. Unanimous. MOTION by Padula to nominate Judy Pond Pfeffer to serve as Clerk of the Town Council. SECOND By Kelly all those who seek to close the nomination say Aye. AYE – Unanimous. MOTION to approve Judy Pfeffer as Clerk. Unanimous

The should be two votes on each nomination. One close the nominations and then one on the nomination itself. There are two recorded for the Vice Chair and Clerk, only one for the Chair.

In the News: Holiday Stroll, funding OPEB

A Holiday Stroll will kick off Thursday evening at Dean College with carolers providing the festive background music for a tree-lighting ceremony. 

The ceremony starts at 4 p.m. on the Dean College campus, 99 Main St., with the historic Dean Hall serving as the backdrop. The stroll then moves into the downtown, where more than 30 local businesses will provide entertainment, food and shopping until 7 p.m. for the hundreds of revelers expected to attend the Franklin Downtown Partnership annual event. 

“The Holiday Stroll is a unique event that we feel really showcases our businesses," said organizer Gregg Chalk. "Our merchants stay open late and invite everyone inside. It’s a great opportunity to discover new businesses and have one-on-one conversations with business owners."

Continue reading the article in the Milford Daily News here (subscription maybe required)
http://www.milforddailynews.com/article/20141204/NEWS/141208603/1994/NEWS

In recent years, Franklin and towns throughout the state have made it a mandate to put away more money for other post-employment benefits, also known as OPEB, which consists mostly of retiree health insurance. 

Franklin has an $89 million unfunded liability that is continuing to grow. To date, town officials have saved about $1.2 million in a stabilization account, but the creation of a trust would give them more options to invest the money in hopes of shrinking the liability. 

"If you establish a trust, you are allowed by law to invest in a much broader way, including equities," said Town Administrator Jeffrey Nutting. "This is happening across the commonwealth." 

The trust will be made up of five members, including Nutting and two residents appointed by the council.

Continue reading the article in the Milford Daily News here (subscription maybe required)
http://www.milforddailynews.com/article/20141204/NEWS/141208523/1994/NEWS

Best Practice: How is Needham Addressing OPEB?

Franklin's Other Post-Employment Benefits (OPEB) obligation is currently estimated at $89 million. We have started addressing this by setting aside some amount each year in a stabilization fund. We currently have about $822,000 so we have a long way to go.

Massachusetts Department of Revenue's Division of Local Services (DLS) publishes a newsletter "Cities and Towns" and the most recent issue has a long and detailed write up on how Needham is addressing their OPEB obligation.

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.

• Investing with PRIT eliminated the need for Needham to procure investment management services through the MGL c.30B procurement process. 

• 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 

• 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. 

• 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). 

• 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.

MA DOR Division of Local Services webpage