Boston’s Retiree Health Care Liability Increases

Gap between actuarially determined contribution and city payment is narrowing

The City of Boston’s (City and Public Health Commission) unfunded actuarial liability for retiree health and life insurance benefits (OPEB) grew to $2.365B, an increase of $102M or 4.5% in the most recent independent actuarial valuation report as of June 30, 2017. The previous unfunded actuarial liability as of June 30, 2015 totaled $2.263B.  This increase is due to lowering the expected investment return on assets from 7.0% to 6.75% for the City and increasing the investment return from 5.50% to 6.75% for the PHC.  Also, normal plan operations and other plan changes contributed to the increase. Retiree health insurance plans must be actuarially equivalent to those of active employees, but their premium share may be less. The number of retirees, beneficiaries and dependents receiving health and life insurance benefits is 15,114, whose average age is 72.6.

OPEB Liability

$ in Billions

FY15 $2.263
FY17 $2.365

OPEB Funding

The City funds its OPEB (Other Post Employment Benefits) obligations by funding the annual retiree health and life insurance costs on a pay-as-you-go basis. The City has also been appropriating funds annually to the irrevocable OPEB Trust for investment since FY08 and since FY13 at $40M a year. The OPEB Trust Fund has a balance of $547M as of December 31, 2017. The OPEB funded ratio as of June 30, 2017 is 16.6%.  The current plan for the City is to annually appropriate $40M to the Trust through 2025 and from 2026 on, appropriate $100M to the Trust.  The OPEB liability is expected to increase each year until 2025, and then annually decrease and reach full funding by 2043.  The $100M is a place-holder that the Research Bureau believes should be higher starting in 2026.

The City‘s first priority for its long-term unfunded liabilities is the pension liability of $1.5B which is expected to reach full funding by 2025 based on an aggressive annual pension appropriation. The pension funded ratio is 74.9%. Unlike the OPEB funding system, the pension liability is actuarially funded which means the City annually pays the cost of the liability incurred in the current year and the annual portion of the 40-year amortized liability which will be paid off in 2025.  The expected return on assets in the pension valuation is 7.75%, which should be lowered.

ADC and Appropriation Gap

$ in Millions

ADC City Appropriation Gap
FY12 $194.00 $153.7 $40.3
FY17 $178.40 $163.7 $14.7

The City has reduced the gap between the annual actuarially determined contribution (ADC) and its actual OPEB payment in FY17 to $14.7M.  The City should strive to fund annually the full ADC.

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