In addition to their unfunded pension obligations, state and local governments have $1.2 trillion of net liabilities for other post-employment benefits (OPEBs), primarily health care commitments for retired public sector workers. This study computed this total, which amounts to 6 percent of U.S. Gross Domestic Product (GDP), by conducting an extensive review of state and local government audited financial statements.
This study is the most extensive effort yet undertaken to assess OPEB burdens on a national scale, comprising a review of over 30,000 recent audited financial statements for states, municipalities, school districts, and other units of government across the United States, capturing the vast majority of other post-employment benefit liabilities.
OPEB debt is highly concentrated, with just 15 governmental entities accounting for half the national total of $1.2 trillion.
The debt is also geographically concentrated, with New York State having the highest debt burden by a considerable margin. New York State’s aggregate OPEB debt is driven by its largest public sector entities, including the City of New York, the Metropolitan Transportation Authority, and the State University of New York. But smaller entities across the state also have large volumes of OPEB debt relative to revenue. For example, this study identified seven New York school districts that have net OPEB liabilities amounting to over 350 percent of their annual total revenues.
By contrast, the state of South Dakota does not offer other post-employment benefits at all, while local government OPEB obligations across the state are limited.
Other large public sector employers that do not provide OPEBs include Fresno County in California and Sound Transit in Washington State.
Other governments offer retiree health care but fully prefund this benefit. Indeed, this study found several governments that had substantially “overfunded” OPEB plans with assets equaling more than 110 percent of liabilities. Oakland County, Michigan, achieved this threshold by issuing OPEB obligation bonds, but Walworth County, Wisconsin, was able to pay down its OPEB debt without borrowing. Both counties closed their employer-paid OPEB plans to new members.
The wide variance in OPEB liabilities reported across state and local governments is attributable to varying plan provisions, as well as differences in discount rate and health care cost trend rate assumptions.
Actions by the new Congress and presidential administration may impact OPEB liabilities. By expanding Medicare eligibility to individuals below 65, for example, the federal government would effectively take on a large portion of state and local OPEB obligations. But because these obligations are not evenly distributed across the country, federalizing OPEB debts could be seen as a transfer of wealth to New York State, New Jersey, Delaware, Connecticut, and the other states that have accumulated relatively large unfunded OPEB liabilities.
State and local governments can reduce their unfunded OPEB liabilities by making or exceeding actuarially determined OPEB contributions or by lowering future costs by, for example, increasing the number of years of service required to vest in retiree health benefits, phasing out benefits for higher-income retirees, and/or eliminating dependent coverage to provide health care for the retiree-only rather than his or her dependents as well.
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