Hearing Set on Bill to Require Pre-Funding of Post-Retirement Health Benefits by School Boards

A pair of companion bills, Assembly Bill 269/Senate Bill 213,  authored by State Rep. Jeremy Thiesfeldt (R-Fond du Lac) and State Sen. Leah Vukmir (R-Wauwatosa) would require school boards to pre-fund post-retirement health benefits (also known as other post employment benefits or “OPEB”) offered to new employees.  (WASB opposes these bills in their present form)

Specifically, these bills prohibit a local government (including a school district) from providing health care benefits to any employee hired on or after January 1, 2016, for use upon the employee’s retirement, including compensated absences but excluding the implicit rate subsidy, unless the cost of the benefit is fully funded in a segregated account, based on an actuarial study conducted at least once every four years or other method that complies with generally accepted accounting principles.

While the WASB agrees with the policy objective of assuring that such benefits are funded, the WASB opposes the restrictive nature of these bills and believes local districts should have greater flexibility and discretion to fashion funding mechanisms.

(Note: The recognized authority in this area, the Government Accounting Standards Board (GASB), does not require that the OPEB liability of a local government unit be fully funded. However, GASB has advised that if an employer decides to fund its OPEB liabilities, in order to be considered funded in accordance with GASB, the employer must transfer assets to a qualifying trust or equivalent arrangement in which OPEB assets are held in trust for the exclusive benefit of plan members and their beneficiaries in accordance with the terms of the OPEB plan. These OPEB plan assets must be legally protected from creditors of the employer.)

The “one-size-fits-all” approach mandated by these bills would require districts to pre-fund and segregate the entire cost of the post-retirement health benefits offered to new employees, thus prohibiting use of any sort of  “pay as you go” funding approach.  Pre-funding these benefits would impose additional up-front costs and/or create cash-flow problems for districts.

Since districts statewide are facing tight budgets, the likely impact of these bills would be to curtail the offering of such benefits, which are often a useful tool to help districts attract and retain quality employees, particularly in shortage areas.  The pre-funding mandate would discourage even defined contribution benefits where the board was aware of the cost at the time of retirement.

In addition, these bills would require a separate actuarial study of OPEB benefits for any employees hired after Jan. 1, 2016  at least every four years, which would impose additional costs on districts and further deter the use of such benefits.

These bills further provide that, if a local government dissolves a segregated account established for the purpose of providing such health care benefits, the local government must provide for the equitable distribution of the proceeds among the beneficiaries.  The WASB has strong concerns that these provisions, as drafted, could actually have the unintended consequence of creating an inequitable distribution, and could create potential income tax and discrimination issues for districts and their employees.