Retirement shortfalls may lead to service cuts

January 11, 2019

Bloomfield Township residents will be questioned this month about potential cuts to services as officials look at how best to deal with an annual structural budget shortfall tied to unfunded retirement benefits.

 

The township announced in December that changes to state accounting laws that have gone into effect require municipalities to fund at least 40 percent of their unfunded liabilities, including other post-employment benefits (OPEB), which includes benefits such as medical, dental, vision and life insurance for retirees and their spouses. The changes mean the township will no longer be able to pay for those expenses as employees retire and accrue actual costs, or pay-as-you-go, a practice used by many municipalities.

 

In total, about 6.7 percent of about $164 million of OPEB liabilities are funded, according to a 2017 township OPEB report. The new law requires municipalities to fund OPEB liabilities at no less than 40 percent, a shortfall of about $65 million for Bloomfield Township. To address the changes and bring the funded ratio up, the township is considering multiple cuts to public services, some increased fees, as well as potentially issuing bonds to fund OPEB liabilities.

 

Bloomfield Township Supervisor Leo Savoie said in December that the township board of trustees directed him to have a survey of residents conducted so they could get feedback from residents. He said recently the township has hired Richard Czuba of Glegariff Group to conduct and analyze the survey. Township Clerk Jan Roncelli and trustee Dani Walsh are working with Czuba to manage the resident survey.

 

Measures to be considered and estimated budget impacts include: eliminating the township's animal welfare division ($170,000 to $200,000); outsourcing police and fire dispatch services ($375,000 to $700,000); reducing police patrols in the township ($1.33 to $1.6 million); ceasing fire services at the township's Fire Station 4 ($800,000 to $900,000); instituting tax administration fees ($1.5 million); contracting out property assessing services ($140,000 to $400,000); cutting general fund support for the township's road division ($1.4 million); eliminating township programs, such as gypsy moth control and hazardous waste disposal ($300,000 to $340,000); and other reductions in services and/or increased fees for services ($400,000 to $500,000).

 

The township also is considering issuing bonds to bring funded liabilities related to OPEB to 40 percent. The township in 2013 rejected seeking a bond issue for OPEB, instead opting to issue $80,780,000 in pension obligation bonds to address unfunded pension liabilities related to the township's previous defined benefit pension plan. That plan was closed to new employees hired after May 1, 2011, instead offering new hires a defined contribution plan.

 

"Without this option, the township would have seen its annual required contribution double," township auditors said in the latest budget audit. "The significant increases to pension costs experienced in the past years were mostly the result of extremely low interest rates of fixed investment vehicles coupled with actuarial assumption changes reflecting longer life expectancies of participants. With the sale of the bonds, the township stabilized a significant budget item that had historically fluctuated year-to-year. The bonds were to be paid off over 20 years, and there are 15 years remaining."

 

A 2013 funding study rejected bonding for OPEB liabilities.

 

"With the health care delivery system currently in a state of flux with the new federal regulations, the township feels it would be best at this time to be patient and wait for more certainty as to what its future required obligations might be," the paper concluded. "There is a much better chance that this liability could reduce in the future than the possibility of reducing the defined pension plan liability. Therefore, at this time, the township isn't seeking a bond issue related to its other post-employment benefits liability."

 

However, in light of new accounting rules, the township is considering bonding between $65 and $160 million in bonds to fund 40 percent or more of OPEB liabilities. The township estimates homeowners would pay between $3,858 and $9,497 over the course of the bond. However, that amount does not include interest expense on the debt.

 

Meanwhile, bonds issued in 2013 intended to fully fund liabilities related to defined benefit pension plans have failed to provide a full return on investment, leaving pensions funded at about 93.2 percent, according to a 2017 pension report.

 

Savoie said in December that pensions are funded at about 95 to 98 percent, with an additional $3.8 million needed to get the fund to 100 percent actuarial funded. He said shortfalls in investments are mainly related to its fixed equity account managed by Prudential Retirement Insurance and Annuity Company.

 

"The fixed account hasn't generated returns since 2008," Savoie said. "It's an archaic plan and we are trying to get out of it."

 

Savoie said the township board will likely hold a special meeting in February, following a survey of township residents, to discuss options. The township's fiscal year ends on March 31, 2018.

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