When municipal analysts think of states with severely underfunded public employee retirement obligations, Illinois, New Jersey, and Kentucky typically come to mind. New York State, with its relatively healthy state employee and teacher retirement systems is rarely seen as a problem child.
But if we broaden the scope from considering just statewide public pension plans to also include the costs of state and local retiree health insurance benefits promised to workers and retirees, it becomes apparent that New York should be on the list of most troubled states.
A new Reason Foundation review of more than 30,000 state and local Comprehensive Annual Financial Reports (CAFRs), primarily from fiscal 2019, finds that New York State’s public sector entities have more than $300 billion of unfunded other post-employment benefit liabilities, which accounts for a quarter of the nation’s total of $1.2 trillion of other post-employment benefit debt.
In all, New York’s $300 billion of other post-employment benefit (OPEB) debt from state and local governments exceeds $16,000 per resident, dwarfing all other states on a per-capita basis.
New Jersey ranked second with more than $11,000 of OPEB debt per resident, our Reason Foundation study found. Delaware and Hawaii came in third and fourth respectively, with each having more than $8,000 of per capita unfunded OPEB liabilities.
Most of New York’s OPEB obligations belong to just four governmental entities: the state, New York City, the Metropolitan Transportation Authority, and the State University of New York. But many counties, cities, and school districts also contribute to the total.
Suburban and upstate cities that reported OPEB liabilities greater than $1 billion included Buffalo, Rochester, Syracuse, and Yonkers. Also exceeding this threshold were Erie County, Suffolk County, the Buffalo Board of Education, and the Yonkers City School District.
Smaller school districts had smaller absolute liabilities but much heavier OPEB debt burdens. We found seven school districts around the state with unfunded OPEB debt equal to 350% or more of their annual revenues. The Reason Foundation study did not find any school district outside of New York state with such a high OPEB debt/revenue ratio.
New York public sector employers might be hoping to get some relief from their other post-employment benefit debt burdens if the federal government decides to nationalize the problem. President Joe Biden advocated reducing the Medicare eligibility age to 60 during the campaign. In Congress, many members have suggested even more aggressive reforms, such as lower the Medicare age to 55 or even 50, while others have pushed for Medicare for All. Since Medicare-eligible OPEB beneficiaries typically receive relatively inexpensive Medicare-supplement coverage, state and local governments would realize substantial savings on retiree health care costs for each retired member added to the Medicare rolls.
However, state and local governments shouldn’t be planning on or expecting changes to Medicare. The Biden administration has prioritized its $1.9 trillion COVID relief plan. After that Biden’s infrastructure plan and immigration reforms would seem to be higher political priorities for Democrats. So rather than hope and wait for major changes to Medicare, government employers with large OPEB debt burdens should consider making their own reforms, including reducing or eliminating benefits for retirees who receive relatively large pensions, those with fewer years of credited service, and dependents.
In a short-term move that might shift costs to employees and federal taxpayers, state and local employers might consider encouraging or requiring some or all retirees to obtain their own healthcare on the Affordable Care Act exchange, thereby benefiting from federal subsidies in some cases.
Finally, employers should begin the practice of prefunding other-post employment benefits—as they do with pensions—to ensure long-term fiscal sustainability.
With state and local tax revenues taking a smaller hit during the pandemic than expected, many governments are likely to get more financial help than they need from the federal COVID-19 relief package now making its way through Congress.
Rather than spend those taxpayer funds on new programs or expanding current ones, public sector entities should devote some of their budget surpluses to making actuarially determined employer contributions to their OPEB plans, or, better yet, to making large, one-time catch-up contributions to reduce their debt.
A version of this column was previously published at Bond Buyer.
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