The Town of Andover has taken significant steps to decrease its future financial obligations. Like other towns across the Commonwealth, Andover faces a number of financial pressures, including the impact of municipal employee retirement obligations. Unlike many towns, Andover has made the tough decisions necessary to reduce the amount it will pay for retiree healthcare. Specifically, Andover has moved to increase retirees’ contributions towards their healthcare premiums.
What has Andover Done?
In Massachusetts, once an employee has worked for local government for 10 years, they qualify for certain retirement benefits, including pensions and retiree health insurance. Healthcare makes up the bulk of what has come to be known as Other Post-Employment Benefits (OPEB). Because OPEB represents a promise to pay for retiree health insurance when employees retire, the related liability grows based on a number of assumptions. Due to rapidly increasing healthcare costs and the growing number of retirees and employees, these liabilities are increasingly significantly. Liabilities are actuarially determined based on age of employees; financial projections, including future healthcare cost; employee and retiree healthcare premium contribution; and the discount rate or the anticipated investment returns from plan assets.
Rather than having the financial discipline to set adequate funds aside as benefits are earned by current employees, towns have historically funded OPEB benefits on a pay-go basis. The pay-as-you-go approach has resulted in staggering unfunded liabilities, putting further financial pressures on local governments. Commonwealth-wide, unfunded OPEB liabilities were estimated at $46 billion in 2016.
In 2016, Andover took steps to address its unfunded OPEB liability by increasing retirees’ share of health premiums. This decision by the town’s Board of Selectmen was hotly contested. In an effort led by Selectman Bob Landry, three board members approved the rate increases put forward by the Town Manager and in line with the recommendations of an advisory committee. All premium savings from this reform plan will be put toward Andover’s unfunded OPEB liability, which currently stands at $188 million. By adopting this proposal, Andover will reduce its unfunded OPEB liability to zero in 37 years. Without it, the unfunded liability would have ballooned to $650 million.
Andover’s unfunded OPEB liability amounts are similar to a number of other Massachusetts municipalities. Pioneer’s MassAnalysis tool allows for OPEB spending comparisons between peer communities. Towns that have similar socioeconomic profiles to Andover also have liabilities that are above $100 million.
Following Andover’s decision to increase retiree contributions, the town faced a lawsuit to block the decision by retirees and union leaders, who argued that state law prevented Andover from increasing the share of healthcare premiums that retirees pay. The Municipal Healthcare Reform Law says that:
The first time a public authority implements plan design changes under this section (22) or section 23, the public authority shall not increase before July 1, 2014, the percentage contributed by retirees, surviving spouses and their dependents to their health insurance premiums from the percentages that was approved by the public authority prior to and in effect on July 1, 2011.
This law effectively put in place a moratorium on retiree healthcare premium increases until 2014. The legislature has since extended the moratorium twice: first from 2014 until 2016, and then from 2016 until 2018. Note that the moratorium applies only to the “first time” Section 22 is implemented. The Town of Andover implemented plan design changes under Section 22 for the first time in 2012. When the town took the vote in 2016, it fully expected that the moratorium would not apply, since it was the second time the town had implemented plan design changes under Section 22.
However, retirees advanced a different interpretation of the law in their lawsuit, arguing that the intent of the legislature was to prevent contribution increases and because of this intent the law should be interpreted as preventing Andover from implementing the agreement. The town countered that the text of the statute has an obvious plain meaning that only applies the law to the first time a town tries to implement plan design changes under Section 22. The court agreed with the town and held in Andover’s favor.
The ruling was handed down in December 2017, but it could have large implications for other towns facing large unfunded OPEB liabilities. However, it is not yet certain how the case will play out; the plaintiffs have appealed, promising another round of legal battles. If Andover ultimately prevails, other towns may also elect to raise retiree contributions.
As it stands, it is uncertain if the legislature will hold to their pattern of extending the moratorium for two more years. If the last-minute extensions continue, towns will be robbed of the ability to plan for their fiscal futures.