PHOENIX - Sacramento, Calif.'s creation of a long-term plan to fund its retiree healthcare benefits has put the city on a more sustainable trajectory, Moody's Investors Service said Friday.
The rating agency said the Sacramento City Council made a positive move for the city's Aa2-rated credit when it adopted on Feb. 16 a policy to fully fund its other post-employment benefits, or OPEB, in 30 years and make its full annual OPEB cost payment in 10 years. Sacramento's unfunded OPEB liability, at $433.7 million or 168% of payroll is very high when compared with that of similarly-sized California cities.
Unfunded OPEB liabilities, along with unfunded pension burdens, have become a topic of increased concern for analysts, regulators, and others concerned with the health of the muni market because the interests of pension and OPEB beneficiaries can clash with those of bondholders when an issuer becomes fiscally distressed.
Under Sacramento's new policy, the city manager is to readjust city spending in order to fund the OPEB plan. These adjustments, Moody's said, could include increased deposits by Sacramento into the city's irrevocable OPEB trust, increased employee contributions, and any legally possible changes to existing benefits.
"Because post-employment benefits are defined by labor agreements and resolutions approved by the City Council, the city manager will work to achieve its OPEB objectives through negotiations with bargaining units and plan adjustment proposals to the City Council," Moody's said.
Sacramento is like most California cities, Moody's said, in that it funds its OPEB on a pay-as-you-go basis and contributes less each year than the OPEB actually costs. In fiscal 2015, for example, the city contributed $14.5 million to OPEB spending vs. an OPEB cost of $41.3 million. If the city had paid that in full, it would have amounted to almost 11% of its revenues. More uniquely, the rating agency pointed out, Sacramento has stopped offering OPEB benefits to most new hires other than firefighters. Therefore, its OPEB liability as a percentage of its payroll should decline over the next 30 years.
The city is also one of several that established an irrevocable OPEB trust with the California Public Employees' Retirement System, or CalPERS. While its current assets of $13.5 million are small compared to Sacramento's OPEB liability, continuing deposits "place the city on a positive trajectory," Moody's said.
Growth of these assets will help to offset the city's OPEB liability in the long term, which will help the city achieve its policy of making full OPEB cost payments in 10 years," said Moody's.
