Governments Likely to Focus on Reducing OPEB Costs

State and local governments, overall, face significant costs for post-retirement benefits.

In 2014, 61% of state and local government human resource executives responding to a national workforce survey answered that they had made changes to retiree health benefits over the past year, up from 45% in 2011, according to a report from the Center for State and Local Government Excellence.

Fourteen percent of respondents shifted health care costs from the employer to retirees, 8% set funds aside to cover future retiree health costs, and 1% eliminated retiree health care benefits altogether.

For fiscal year 2013, state other postemployment benefits (OPEB) unfunded actuarial accrued liabilities (UAAL) were nearly $498 billion. The Center notes that the size of a state’s unfunded OPEB liability is a function of its funding strategy, the generosity of the benefit, and demographics.

The median average state OPEB UAAL is $2 billion, and the mean average is $10 billion. However, the aggregate state OPEB UAAL is nearly half of one-trillion dollars, and more than 75% of the total is carried by the top ten states.

The Center found disparity in the funding discipline for state OPEB benefits, as measured by the annual required contribution (ARC). The average percentage of the OPEB ARC contributed by states for the fiscal year 2013 period was 55%. However, the weighted average amount contributed was lower, at approximately 46%. The states with larger UAALs and ARC requirements were among the lowest contributors.

Prior published reviews of state OPEB finances have identified a growing number of states who have elected to set aside assets to prefund retiree health benefits, the Center noted. For fiscal years 2009 through 2011, 18 states reported holding OPEB assets; for the 2012 fiscal year, the number of states grew to 25. For 2013, 33 states held approximately $33 billion in OPEB assets.

However, the Center says that, given the size of the unfunded OPEB liability in some states, it is likely that state governments will continue to address these issues by reforming benefits or taking other actions. The Center’s report notes that legal protections for OPEB benefits are lower than protections for pension benefits, although this is not the case in every state. The Center pointed out that in July, the Illinois Supreme Court ruled that the state constitution prevents the reduction of health care benefits for retired employees.

States may have other means of cutting OPEB costs outside of the legislative process, the Center suggests—public health insurance exchanges. While this practice has yet to be adopted by any state governments, some local governments, including Detroit, as of March 1, 2014, and Chicago, as part of a phased approach which will conclude by 2016, are taking advantage of the exchanges as an alternative means of providing health care to their pre-Medicare eligible retirees.

The Center’s report is here.