(FORT BEND COUNTY) - Followers of Fort Bend County Commissioners Court have seen a repeated pattern at recent meetings. At least once, sometimes more, Precinct 3 Commissioner Andy Meyers will bring up an unfunded $500 million healthcare liability that threatens the county’s bond rating and could affect the future of retirement healthcare for county employees and their spouses.
Meyers’ comments have even prompted jokes from County Judge K.P. George, who made reference to Meyers “pocket speech,” insinuating he has the same spiel written on a piece of paper kept in his coat. Yet time and time again, Meyers brings it up and no discussion is had.
So what is the $500 million liability and how did the county get in this position?
According to County Auditor Robert “Ed” Sturdivant, the issue first arose in 2008. In 2008, governing boards began requiring counties to document the annual expense of funding their liability of healthcare provided to retired county employees who qualified.
In 2008, Commissioners Court was informed that the county currently had $200 million in unfunded liability. At the time, the current out of pocket cost for retiree healthcare was $1.2 million per year. But to cover the projected costs affected by the estimated number of future retirees, increased lifespan and other factors, Sturdivant suggested to Commissioners Court that the county put $15 million per year in a fund to “hold the line on the growth of this liability.”
“What was difficult was making the commissioners believe this was real,” said Sturdivant.
By 2012, counties would be required to add those numbers to the books, including current retirees, upcoming retirees and all employees working towards retirement. The goal would be to move from a “pay as you go” system and have a fund available to cover the cost should something happen.
“So if something happened, say our assets went way down, the benefit plan would be funded,” said Sturdivant. “That’s the whole purpose of having to account for that and strive to fund it.”
By 2017, the county was north of $430.1 million in unfunded liability.
“Liability is an obligation on your balance that you do not have the resources for,” said Sturdivant.
Changes were made by Commissioners Court – the amount of time with the county to qualify for retirement healthcare benefits was raised from eight years with the county to 16 in 2010.
“They were monitoring and waiting for me to come to them and say, ‘great news, the changes have resulted in restraining the growth of liability or erased it,’” said Sturdivant. But people were living longer, there were more and more retirees and there was minimal impact to the liability.
In 2019, years of service to qualify for retiree healthcare was changed from 16 to 20 years, and also now required no breaks in service.
“It wasn’t moving the bar either, “said Sturdivant. “That’s when I started pressing the court to start to fund the liability at some level.”
The goal is to have a healthcare fund that generates enough interest to pay the yearly liability, stabilizing the increasing unfunded liability, which is now growing by $30 to $40 million per year.
In 2015 Commissioners Court allocated $5 million to a fund for healthcare, and in 2019 dedicated a half cent of the maintenance and operations tax rate to the fund, increasing that to one cent the next year.
By 2019, bond rating agencies began taking notice of the liability. Bond rating agencies gauge the financial health of a governmental body issuing bonds. Financially “healthy” governments are given high ratings, which lower the interest rate of bonds issued and are considered less risky by investors. For counties that issue many millions in bonds every year, a lower bond rating would be very costly in terms of interest charges and could make the bonds harder to sell.
“We started to amass these funds and I was able to explain to rating agencies and underwriters initially that we were making the effort, everyone was happy, great news,” said Sturdivant.
Then in 2020, new laws prohibited counties from generating more than a 3.5 percent tax revenue increase per year. As property valuations increase, the same tax rate will generate more revenue, so it isn’t just a matter of not raising taxes, it could mean lowering taxes to avoid going over the 3.5 percent limit.
The money continued to accrue to cover the healthcare liability, and by 2022 was up to $23 million. Then, in fiscal year 2022, commissioners realized they had a budget shortfall and had priorities they would not be able to meet. Commissioners Court took $17 million of the healthcare fund’s $23 million to fund the general operating budget, leaving the fund with the original $5 million. The money set aside had yet to be placed in a trust, which would have rendered it untouchable for anything other than healthcare.
“It put me back to square one,” said Sturdivant. “Hence we are at $500 million in total liability, we have funded $5 million of that number and I need to have a more aggressive response to our rating agencies and to our underwriting syndicate.”
What Can Be Done?
The current cost per year for retiree healthcare in Fort Bend County is $15 million, with the county using a pay-as-you-go system. The current unfunded liability is $500 million, which increases $30 to $40 million per year if nothing is done.
The goal is to have a healthcare fund that generates enough interest to pay the yearly liability, stabilizing the increasing unfunded liability. If nothing is done, the county could see a drop in their credit rating, which would raise interest rates. It could also affect healthcare benefits for retired Fort Bend County employees, now and in the future.
There are options available, two which would require the state legislature to amend statutes.
Fort Bend County is currently asking Texas legislators to allow the county to issue Pension Obligation Bonds, which include retiree healthcare. Currently only municipalities can issue those bonds. The county is stipulating that it would not use property tax revenue to pay for those bonds. Sturdivant says there are several revenue streams that could be used, such as prisoner housing revenue, permitting fees or court fees. The caveat to that is those funds are already allocated in the yearly operating budget.
“All of that revenue is being used in our general budget process already,” said Sturdivant. “So if they were to use these revenues to fund this, they would have to increase taxes to fund whatever they were already funding.”
Budget cuts are also an option.
The second request, one Sturdivant says is less likely to pass, is allowing county governments to issue Working Capital Notes that mature in five years rather than one. That would make it possible to issue a larger amount of bonds which could then be put in front of the voters for approval. If they are approved by the voters, the tax code would allow the use of property taxes to fund them.
“But that’s a gamble,” said Sturdivant. “What if the voters don’t approve them? Then the county would be left with how to pay that.”
Pending possible legislative changes, Sturdivant has a proposal he hopes to have on the Commissioners Court agenda by the end of April.
Sturdivant says the county currently has a $30 million surplus in debt service. That money can only be used to pay debts. His proposal involves issuing Revenue Anticipation Notes, which mature in one year or less. These funds can be used to fund the county’s operating budget, such as payroll. With the bond proceeds added to the operating budget, it would free up $29 million, with $1 million accounting for interest on the bonds, which could then be put in the trust for healthcare costs. The $30 million debt service surplus could then be used to pay off the bonds when they mature in a year or less.
“I think what is going to have to happen is I am going to have to prove to them the value of prefunding this liability,” said Sturdivant. “What I will need to do is make sure we have our financial advisor and bond council there just so they can say, ‘yes we can do this and it’s a good option,’ so it’s not just me saying the words.”