Government Officials Scramble to Fund $500B in OPEB

September 10, 2009 ( - State and local governments trying to find a way to prefund for their Other Post Employment Benefits (OPEB), including retiree health care, have been utilizing a variety of mechanisms, a new survey found.

However, the study of how U.S. public employers are responding to the OPEB public benefit disclosure requirements of GASB No. 45 said there is still much work left to be done since researchers estimate the totally cumulative unfunded liability for OPEB is $558 billion. GASB 45 requires public employers to produce actuarial valuations for their OPEB, follow­ing GAAP principles, and to report these liabilities in their financial reports.

The biggest problem, according to researchers at the Center for State and Local Government Excellence, which published the OPEB study, “Prefunding Other Post Employment Benefits (OPEB) in State and Local Governments,” is that most public employers are still essentially ignoring the long-term problem by dealing with the bill on a pay-as-you-go basis.

“… most indicate no plans to adopt prefunding mechanisms in the near future,” the report said. “However, as time passes, the amount of fund­ing required to fund ever-increasing OPEB costs will likely-absent radical changes to the structure of retiree health plans-render pay-as-you-go an unattractive and unsustainable option.”

class=”Pa16″> The report said government agencies had several primary mechanisms to deal with the funding issue: a governmental trust (Section 115); medical subaccount [401(h) ]; and voluntary employee benefit association (VEBA).

Among the funding plans focused on in the report were:

  • West Virginia created the West Virginia Retiree Benefits Trust. The stateeliminated retiree health care subsidies for all employees hired after July 1, 2010.
  • Montgomery County, Maryland, has set up a Section 115 trust, the Retiree Health Benefits Trust, to prefund benefits for retirees and their dependents under the county's health plan. A board was appointed by the county government to manage the trust and create policies governing the trust's philosophy on the balance between capital preservation and growth. Investment decisions for the trust are made by an investment manager appointed by the board.
  • The state of Ohio established its 401(h) subaccount. Contributions are subordinate to pension fund contributions, meaning that no more than 25% of the employers' total annual contribution to the defined benefit pension plan can be allocated to the health benefit subaccount. The subaccount is separate from the pension fund for accounting purposes, but the assets from both can be commingled for investing purposes.
  • General Motors recently bargained with the United Autoworkers Union to set up VEBA trusts with a planned large one-time payment from the company (Bernstein 2008).

As a way to raise funds to deposit into OPEB trusts, the report said governments can do a public issue of OPEB bonds.

The report is available here .