Public Plans Underfunded for Retiree Health Benefits Too

Not only are state and local governments struggling with unfunded pension liabilities but other liabilities as well.

An Issue Brief from the Center for State and Local Government Excellence finds governments’ aggregate unfunded other post-employment benefit (OPEB) liabilities are an estimated $862 billion—nearly two-thirds of which is held at the local level.

These unfunded liabilities are equivalent to 28% of the unfunded liabilities of pensions when pension liabilities are calculated with an interest rate comparable to OPEBs. The researchers note that new guidelines from the Governmental Accounting Standards Board (GASB) will require governments to account for their unfunded OPEB costs much like they book unfunded liabilities for pensions.

The researchers conclude that although the unfunded liabilities associated with retiree health insurance are much larger than generally perceived, several factors should make them less worrisome than those associated with pensions. These include manual levers, such as greater flexibility in adjusting benefits and increasing retirement ages, as well as market factors such as the recent decline in health care cost inflation. 

In addition, the notion that sponsors should be amortizing existing unfunded liabilities could use some additional thought. 

The Issue Brief is here.