A recent actuarial report issued by New York City’s controller shows the city’s unfunded other post-employment benefits (OPEB) liability rose by $9.3 billion to $107.8 billion during the 2019 fiscal year.
Due to a recent federal tax change, this amount should be trimmed slightly before it appears on New York City’s Comprehensive Annual Financial Report next year but will likely remain well above $100 billion.
The city’s unfunded OPEB liability exceeds that of any other local government in the country, as well as that of most states. New York City’s large pool of OPEB red ink is attributable to several causes, including its large number of participating employees and retirees, its cost of benefits per retiree, and a lack of pre-funding.
The actuarial report shows a total plan membership of 583,645 individuals. Most of these members are either currently on the city’s payroll or retirees currently receiving benefits. A smaller number have left city employment, but are eligible for the plan and have yet to begin receiving benefits. The large membership base is reflective of the city’s relative size (far larger than every other city and all but one US county) and the centralized nature of the local government. In New York, a unified government executes all municipal and county functions and also has educational responsibilities, which are often handled by independent school districts in other cities.
Various categories of city employees vest in the OPEBs after five, 10 or 15 years of service. Benefit eligibility typically begins at retirement. Spouses and children up to the age of 26 are also covered, but dependent coverage normally terminates after a member’s death.
The city pays the full health insurance premium for beneficiaries who enroll in “basic coverage,” which includes hospital and physician networks but not prescription drugs. For younger retirees who are not yet eligible for Medicare, the city’s cost for basic coverage ranges up to $20,000 annually for individuals, and more when family members are also covered. Additionally, the city makes an annual contribution of about $1,800 to union-administered “welfare funds” that provide various forms of supplemental coverage including prescription drugs.
During the debate over Obamacare, policy experts advocated disincentives for high-cost plans such as the one offered by New York City. As a result, the Affordable Care Act included an excise tax on high-cost employer-sponsored health coverage, at a rate of 40 percent of per-member benefit costs above a certain threshold. This so-called “Cadillac tax” was originally slated to take effect in 2018 but Congress later postponed its imposition to 2022. New York City’s actuaries estimated the present value of future Cadillac tax payments at $1.8 billion, which is included in the city’s OPEB liability.
But the Cadillac tax was repealed in the most recent $1.4 trillion federal appropriations budget bill, HR 1865, signed by President Trump in December 2019. As a result, the city should be able to reduce its reported net OPEB liability by $1.8 billion, leaving its net OPEB liability at around $106 billion.
As of June 30, 2019, the city’s OPEB plan had a fiduciary net position of just $4.7 billion, which was little changed from previous years. Most of the assets are invested in short-term fixed-income instruments that are generating minimal interest.
With a funded ratio of just 4 percent and no plans to ramp up pre-funding, New York is obliged by Governmental Accounting Standards Board (GASB) regulations to use a low discount rate for its OPEB liabilities. In 2019, it used a rate of 2.82 percent down from 3.01 percent the previous year. This compares to a 7 percent discount rate applied to the city’s pensions, which—according to the latest valuation—are about 70 percent funded.
For these reasons, the city’s net OPEB liability is about double the amount of its net pension liability. Retiree medical costs are the largest contributor to New York’s negative net position. This OPEB liability is also putting negative pressure on the city’s bond ratings. While the federal repeal of the Cadillac tax will help the city’s financial position slightly, policy changes will be needed to make a major dent in unfunded OPEB liabilities.
Options the city might consider include pre-funding benefits, tightening eligibility requirements and increasing contributions that retirees are asked to pay towards the cost of their coverage.