In my April message I described the process whereby the city's budget is formed and adopted. Four factors that threaten the revenue side of the budget were explained in that message.
There is another factor which wasn't included in my previous message: the Governmental Accounting Standards Board (GASB) pronouncement number 45. In 2004 this Accounting Board released two Standards numbered 43 and 45. The one that directly affects the financial position of the City of Berkley and all municipalities across the United States is GASB 45. The City Council has spent considerable time learning about GASB 45, and the following is a brief summary of its impact on our city's fiscal planning.
Beginning in fiscal year 2008-09 the City of Berkley and all similar municipalities will be required to record a new liability on their books for all Other Post Employment Benefits (OPEB) promised to current and future retirees. OPEB includes: life insurance, health, dental and vision care benefits for the municipalities' retirees. These benefits have been contained in employee contracts for the city's retirees over many years.
It has been standard practice in the past for the City of Berkley and all other municipalities across the nation to include in their annual operating budgets only the current year's cost for these OPEB for their retirees and for the annual fringe benefit costs of health and life insurance for active employees. This practice is commonly known as pay-as-you-go.
In accordance with this new GASB 45, the City will have to annually record an additional liability on the books to report the pre-funding cost of OPEB for active employees. This is done in the same manner that the liability of pension costs is recorded.
Let's look at the numbers. The City Actuary has estimated that the City will appropriate and pay approximately $1.179 million dollars in the 2008-09 fiscal year operating budget for health care, dental, vision and life insurance for active employees and current retirees.
The City will also be required under GASB 45 to record the additional liability of $905,102 annually over the next 30 years to represent those dollars required today, to pay for retiree OPEB benefits in the future for current active employees. The actuary's 6/30/06 report states that the total unfunded actuarial liability for this City's current active employees OPEB over the next 30 years amounts to almost $22,000,000 if fully funded annually.
At this point I must explain that we are not required by State law to fund this additional $905,102 per year. Yet, we must record the liability on the City's books. However, if the City wants to maintain its excellent credit rating, which keeps taxes down, be competitive in the employment market, and fund the OPEB promises made to active employees and retirees – then the City must establish fiscal policies that do not bankrupt the City and are still responsive to the City's fiscal needs.
I will not kid you; the City does not have an annual $905,102 on hand to fund this liability. However, the City would be in a weaker financial position if the City did not at least partially fund this liability. Currently, we have set aside approximately $200,000 for this liability in the 2007-08 operating budget. This is a small amount, yet it is a start.
Other actions taken include wage and fringe benefit packages at retirement that are now being bargained with our three bargaining groups, in hopes of either driving down our future OPEB liability or coming up with some future funds to defray the cost of this liability. We are also eliminating some OPEB packages for new hires of the City to cap current OPEB liability amounts.
With careful planning, exacting work and all around sacrifice this financial dilemma can be solved.
I would like to thank our City Manager Jane Bais-DiSessa and Finance Director David Sabuda and the entire City staff for their leadership in articulating this most complex issue, and for proactively taking the necessary steps to start the City on a path that will help the City manage this GASB 45 OPEB liability.
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