LA County’s $25 Billion OPEB Debt

A recently completed actuarial report shows that Los Angeles County has over $25 billion in unfunded retiree healthcare liabilities — and this constitutes the greatest threat to the county’s long term fiscal sustainability. L.A. County’s Other Postemployment Benefit (OPEB) unfunded liability turns out to be greater than its unfunded pension liability. As of July 1, 2016, the county had $561 million in reserves against a total liability of $25.91 billion, leaving $25.35 billion unfunded—a funded ratio of only 2.2%. Thus, while the county’s pension fund is “only” poorly funded (with around $7.4 billion in unfunded retirement checks promised), the OPEB fund is essentially empty. As the number of L.A. County staff retirement claims rise in the coming years, it is just a matter of time before the existing assets are wiped out.

L.A. County’s OPEB costs and liabilities reflect the relative generosity of the County’s retiree health benefits, as compared to the typical benefits seen among other many public and private sector employers. For example, an employee retiring after 25 years of service receives full medical, dental vision coverage. Coverage is also provided to the spouses, domestic partners, children and stepchildren of retirees, and continues after the retiree’s death. Children can receive benefits until age 26.

In 2014, the County and labor unions agreed to ratchet back retiree healthcare benefits for new hires. Employees starting service after June 30, 2014 (Tier 2 members) will no longer be eligible for spousal and child coverage at retirement. Further, they are required to enroll in Medicare at age 65.  Although the County estimated an $840 million savings from this change, these savings are back-ended because they only apply to new hires. The reform lowered the system’s overall Accrued Actuarial Liability by only 0.2% in the 2016 valuation.

That said, the County’s reported measurement of total promised OPEBs (i.e. its OPEB liability) shrank from $28 billion in 2014 to $25 billion in the latest report. Most of that change is attributable to revised assumptions, rather than real changes. Compared to the previous actuarial valuation, actuaries now assume that healthcare costs will rise more slowly. For example, costs for those under 65 were previously assumed to rise 5.7% annually in the early 2020s; that rate was reduced to 5.3% in the new forecast.

Because of L.A. County’s high cost per beneficiary, its OPEB plan could become subject to Obamacare’s “Cadillac tax” starting in 2020. To help pay for the Affordable Care Act, lawmakers included an excise tax on high cost employer sponsored health plans. This tax was originally supposed to take effect in 2018, but Congress delayed implementation to 2020.  At that time, employer coverage costing more than $10,900 for an individual and $29,400 for a family would be subject to a 40% excise tax on amounts above these thresholds.

Actuaries calculate that the tax would add about $1.3 billion to the County’s unfunded liability, but exclude this cost from their final estimate. While it is true that the tax has come under sharp criticism, Congress’ recent inability to pass new health reforms suggest that there is considerable risk that the tax will go into effect. Thus, including the additional liability arising from this tax would be the more prudent approach.

Despite the reduction in the measured value of Los Angeles County’s unfunded OPEB liability, the County’s balance sheet is still expected to take an OPEB-related hit in 2017. This is due to a change in OPEB reporting mandated by the Government Accounting Standards Board (GASB). Starting in the 2017, the County’s OPEB reporting will be governed by GASB Statements 74 and 75, which require a government’s balance sheet to carry an OPEB liability approximating its unfunded liability. For the fiscal year ending June 30, 2016, the county included a “Net OPEB Obligation” of $13 billion on its Statement of Net Position; this amount will should roughly double in 2017.

While the California Rule limits L. A County’s ability to rein in its pension liabilities because it guarantees current benefit formulas to current employees, County Supervisors have much more control over the OPEB debt, since retiree health benefits are not constitutionally guaranteed. To bring its balance sheet back under control, County leaders will have to consider more aggressive measures to limit retiree health costs than it has taken thus far.