SNOW HILL – A retirement benefits trust projected to earn 7.5 percent in interest is earning less than 1 percent right now, but Treasurer Harold Higgins reassured county elected officials this week that the trust will perform as planned when completely set-up.
Three years ago, a state mandate called for substantial yearly contributions from Worcester County to create a county fund for Other Post-Employment Benefits (OPEB) for Worcester County government and Board of Education employees. Worcester County set aside $17 million each year, until that number dropped to $15.3 million this year.
“We were hoping it would be even less,” said Higgins.
The yearly contribution should go down when the OPEB trusts are put into long-term investments, he said, which will yield 7.5 percent in annual interest.
On Tuesday, Commissioner Virgil Shockley questioned where the 7.5 percent return is that was forecast.
The OPEB trusts are not fully set up and are currently in short-term investments, said Finance Officer Phil Thompson. The OPEB funds should earn that 7.5 percent once in long-term investments.
The county still needs to establish an investment policy, form an investment committee and pick an investment manager, Higgins said.
“A 7.5 percent goal over the long term is not yet unreasonable. It’s still obtainable,” said Higgins. “It was never a linear relationship. It was more of an exponential relationship.”
Shockley asked, “If you’re not getting 7.5 percent on that, why isn’t that $15 million number going up?”
Once the trust is set up, the county can pursue long-term investments to get that interest rate, and the cash flow from the county over the next five to seven years will create the ability to earn enough to keep the county’s annual contribution at that rate or lower.
“The key is the long term investment,” said county attorney Sonny Bloxom.
The commissioners cut $3 million off the top of the contribution in last year’s budget, expecting a 7.5-percent return, said Commissioner Bobby Cowger, and if the trust money isn’t getting kind of return, that means the county faces a $3 million shortfall, Cowger concluded.
The county already expects less revenue in the next budget cycle, making it more difficult to fund that amount, county administrator Gerry Mason said.
“You can’t get worried because of one year,” said Bloxom.
“We’re basing this on a study lasting 30 years,” said Thompson.
The $15 million is a solid number through fiscal year 2010, said Thompson. A new study will be performed in 2011.
One change facing the county is the need for $141 million, not $121 million, over 30 years to fund OPEB.
The 2006 study, when the benefits contributions began, had no history to work off of, unlike more recent analysis, Higgins pointed out.
“Your recommendations were foresighted enough to say you need to fund this now when times are good,” said Commissioner Judy Boggs. “Now $15 million off the top is painful.”
“Fifteen million dollars is painful whether times are good or bad in my book,” said County Commission President Louise Gulyas.
Healthcare costs continue to rise, and the demand for benefits goes up every time an older employee retirees and a younger employee with a family takes that open slot, doubling the costs, Higgins pointed out.
“We did the best we could do. Things have changed,” Higgins said. “That was the big change we just didn’t see coming.”
Higgins said he does not know how the new national healthcare laws will affect healthcare costs, which could change OPEB needs in the future. Furloughs or layoffs would also affect OPEB, as well as overall economic changes such as inflation. How well, and how fast, the economy recovers from the recession will also make a difference, Higgins said.
Real world changes are the reason that a new needs study is conducted every two years.
That $15.3 million contribution figure should not go up, according to Higgins, who said he is 80 percent confident the number will hold.