Connecting state and local government leaders

Billions in Unfunded Retiree Health Care Liabilities Underscored by New Report


Connecting state and local government leaders

Costs for “other post employment benefits,” the report from Standard & Poor’s cautions, “could crowd out other investments or contribute to overall budgetary pressures.”

Confronted with other costs and sluggish revenues, many states continue to shortchange funding to cover future health care benefits for retired public employees, a practice analysts at a credit rating agency characterized as unsustainable in a report issued Wednesday.

The report looked at “other post employment benefits,” or OPEB, a category of expenditures that largely involves retiree health care. Analysts at Standard & Poor’s found that total liabilities for these benefits had increased $59.4 billion, or 12 percent, over a two year period after 2013. Although 17 of the 41 states they examined did report that liabilities had declined.

"Many states have favored underfunding OPEB actuarially required contributions as a trade-off to address more immediate rising costs amid a slow revenue growth environment, a practice that we do not view as sustainable," said credit analyst Carol Spain in a news release.

OPEB liabilities represent the cost of benefits that will come due in future years.

Unlike pensions, where money is set aside in advance to cover expenses owed when employees retire, OPEB costs are more commonly covered on a “pay-as-you-go” basis—meaning the expense of the benefits is paid when it comes due.

The Pew Charitable Trusts published a brief in May that noted states had paid $18.4 billion during 2013 for worker retirement benefits other than pensions with most of that total spent on healthcare. OPEB liabilities totaled $627 billion that year, according to the brief. All together, states had set aside enough assets to fund about 6 percent of that sum.

Saving for OPEB in advance, the Pew brief said, “can both make costs more predictable for taxpayers and make benefits more secure for retirees.”

Some critics of the benefits take a different view. The Manhattan Institute, a conservative think tank, issued a report in March that said state and local policymakers should not establish trust funds to prefund OPEB and should move to phase out the benefits entirely.

A number of states have enacted reforms in recent years to curb OPEB costs. The cost burden for the benefits, meanwhile, varies considerably state-to-state.

When considered relative to population, per capita liabilities range from over $5,000 per resident in five states to less than $100 per person in 16 states, the Standard & Poor’s report pointed out.

The authors of the report stressed that OPEB costs should be evaluated in the context of other pressing government expenditures, such as pensions, infrastructure, education, Medicaid and social services.

“To the extent that annual OPEB costs grow,” the credit analysts wrote, “they could crowd out other investments or contribute to overall budgetary pressures.”

Bill Lucia is a Reporter at Government Executive's Route Fifty and is based in Washington D.C.

NEXT STORY: Download Our New State and Local Law Enforcement Ebook