Board seeks balance on post retirement benefits

For members of the Medford Area Public School District the $500,000 question is whether to pay now or potentially pay more later when it comes to employee post retirement benefits.

In order to attract and retain teachers and staff, the Medford school district, like many others around the state set up plans that give a payout to retirees who reach established longevity thresholds. The money is used by the employee to pay to stay on the district’s health insurance after retirement. The payout benefit varies by how long a staff member has worked for the district and whether they are a teacher, administrator or support staff employee.

When setting up the program many years ago, the district put money into a trust account and contributes to it each year. Other districts, such as Colby, pay for the benefit as a regular budget expense.

The major challenge Medford is facing is that despite having more than $2.9 million in its trust account, the actual potential liability over the next 30 years is about $5.2 million, leaving the district at 56% funded.

At Monday’s school district finance committee, members spent more than an hour reviewing the draft accounting liabilities report prepared by Key Benefit Concepts for the period running through June 30, 2020. It is this report, which is required every two years, that is showing the lower funding rate. Current year changes will be reflected in future studies.

What being at 56% funded actually means in terms of long term district operations depends on how much risk individual school board members are comfortable with. For board treasurer Brian Hallgren, who chairs the district’s finance committee, having the district at only 56% is a significant issue as he notes that it has been part of a downward trend going from being at 96% several years ago and dropping.

“It comes down to comfort levels, some would like it 95 to 98% and others 50 to 60%,” Hallgren said, noting that the intent of it was to look out for future boards down the line so that they are not faced with having to make cuts in order to fulfill district obligations to retired staff. “We went sideways really really quick,” Hallgren said of the drop in funding level. At the end of 2017, the district was at 99.41% funded, but dropped to 69.7% funded in 2018 and 63.36% funded in 2019.

However, Linda Mont, a senior benefit consultant at Key Benefit Concepts, had a more measured approach noting that levels above 50% are considered well funded in the financial industry.

“You are very well funded,” Mont said. She explained that some of the factors resulting in the drop was the growth in the pool of eligible employees due to plan changes and an increase in personnel with the biggest single factor being the “discount rate.” This is the number based on the interest generated used to determine the value of the trust. Due to market conditions in the past year the discount rate dropped significantly adding more than $250,000 to the district’s potential liability. In 2019 the trust fund generated $137,400 in interest compared to just $87,193 in interest last year. Mont noted that in 2016, the discount rate was at 5.5.% which if it carried through now would substantially impact the district’s percentage level for funding.

Board president Dave Fleegel said he was not optimistic of interest rates climbing anytime soon. “I am trying to find a happy medium,” Fleegel said.

Hallgren called for the district to make a larger commitment in each year’s budget as a contribution to the trust fund. The current budget calls for $210,000 to be put into the trust. However, the actual amount will depend on the end of fiscal year numbers which won’t be known until July. According to the actuarial study, the district would need to contribute $427,045 each year to cover the obligations over the next 30 years assuming no changes occur to eligible staff, interest rates or plan language. Changes to any of these would impact the district’s liability.

Hallgren said that rather than going “into the weeds” on what to contribute to it each year, he would like to see the district commit a set amount in the budget each year. “We have to toe the line,” he said, expressing caution about the board being put in the situation of having it as a pay-as-you go option with the risk of high payouts depending on the year.

While putting additional district funds toward the post retirement trust account would help that account’s bottom line, there may be other reasons that the district chooses to put it elsewhere in the budget such as into the district’s fund balance or toward longterm maintenance needs. Money placed into the trust is essentially locked up and cannot be spent elsewhere in the budget. Placing the same amount into fund balance would improve the district’s cash position reducing the need for the district to use short-term borrowing to meet payroll expenses between tax settlements and state aid payments.

This will become more of a factor in the coming year with the district having used existing cash reserves to make early repayment on some prior referendum debt.

Finance director Audra Brooks explained that the district will likely need to do short term borrowing in September or October as they await state aid payments which are paid to the school in November. The impact of this will be the need to move the annual meeting from the planned date at the end of October to be held at the same time as the August school board meeting.

The annual meeting is a time for district residents to review and formally approve the budget and give authority to the board to do different tasks under state law.

Brooks said the meeting change will be needed because state law prohibits short term borrowing between the start of the budget year and the annual meeting.

While historically annual meetings were held in the summer, in the past several years Medford has held its meeting in late October in order to get the most accurate state aid numbers for use in setting the levy. These numbers are not released until mid-October. The school district’s budget year begins July 1, meaning that the district typically has been one-third of the way through its budget year before the budget was formally approved.

During the regular school board meeting which followed the finance meeting, Fleegel expressed concern about the need for the district to short-term borrow so early in the year. Fleegel said he would rather the district look at what could be paid later rather than going into borrowing.

Board member Steve Deml said it is the same process used in town and other governments to cover expenses until revenues come in. “The money is coming,” he said of the state aid payments.

“A way around that is to load your fund balance,” Brooks said. Board members approved setting the annual meeting on August 23.

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