$2.8 Million in School and City Budget Adjustments Approved: Authorizes New Fund to Address Post-employment Benefit Costs

December 4, 2013
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The Common Council, in two separate votes on Monday night, authorized budget transfers and reductions to balance the city’s budget accounting for state aid reductions in the FY 2014 budget process.

According to City Auditor Richard Viscay the moves were necessary, because the city had built its budget for FY 2014, based on Governor Patrick’s proposed 2014 state budget, which included additional Chapter 70 funding for the Everett schools. However, when the state legislature approved the final budget later in the budget season, there was an adjustment to the Chapter 70 spending that effectively created a $2.8 million deficit between what was authorized for school spending and what had been appropriated.

To close that gap, the city had to come up with an additional $1.1 million in new funding for the schools and the school department had to identify $1.6 million in spending cuts.

The additional funding was found in the city’s Stabilization Fund, with the Council voting Monday to take $1,111,377 from the Stabilization Fund, to reduce the tax levy. If the Council had not voted to authorize the transfer, the city would’ve been forced to raise 2014 property taxes by that $1,111,377 in order to ensure sufficient funding for all appropriations in the current budget.

The second vote of the Council was to authorize a change in the School Department’s budget for Special Education funding, effectively reducing the SPED Tuition Collaborative Account by $1,671,837.

According to Viscay, the School Department has been able to identify savings in its special education programs, due to the opening of the new Special Education facility in Everett, which in turn has reduced the district’s reliance on expensive out-of-district placements for special education students.

Both orders were passed on 12-0 roll call votes.

OPEB Liability Trust Fund

The Council also voted 12-0 to establish a new Other Post-Employment Benefits Liability Trust Fund, to help the city better plan for an anticipated funding liability of some $159 million in costs that are associated with providing “Other Post Employment Benefits” (OPEB) – such as dental or life insurance for retirees and other post-employment costs that are typically borne by the city.

Auditor Viscay explained to the council that currently the city handles the costs of such benefits on a year to year basis, based on the number of retires in the system and is not yet required to plan for the anticipated liability associated with those costs for current employees.

However, given that bond rating agencies are now asking city’s to plan for their anticipated liabilities and given that the city is required to plan for its pension and health insurance liabilities for retirees, it is now considered sound financial practice to establish these types of accounts and begin to fund them in annual budgets.

“Right now we have $159 million liability with no assets associated with that liability,” said Viscay. “The Mayor’s goal is to establish these accounts and begin putting some funds into the account each year, so that we at least have some funds put away to handle the liability.”

Though it is not likely that the fund would be fully funded over the next few years, the act of starting the fund and establishing a process to put a pre-determined amount of money into the account each year would help the city keep its high bond rating and serve as an insurance policy for the potential future requirement to fund these of liabilities.

Viscay said the city is proposing that beginning with the FY 2015 fiscal year, up to 15-percent of each year’s free cash certification would be placed into the new fund, which would then only be available to be used for costs associated with OPEB costs in future years.