Retiree Health Care Costs Loom Large Over Governments

Governments face sizable shortfalls in funding retiree health insurance liabilities.

The financial services firm Standard & Poor’s recently released a report detailing state government long-term liabilities for OPEB (“other post-employment benefits” defined to exclude pensions). Their conclusions:

Overview

  • While overall unfunded state OPEB liabilities have increased, many states have taken action to mitigate rising costs.
  • Liabilities measured on a per capita basis remain low for most states, with several notable exceptions.
  • OPEB expenditures make up a small share of overall general spending, but a significant share of liabilities, and these costs could pressure state budgets if fully funded.
  • Analysis of OPEB pressure requires a variety of measures.
  • Despite many states’ ability to change OPEB benefits, thus reducing liabilities, OPEB ratios still matter to credit quality.

An article on Route Fifty puts the S&P analysis into broader context:

OPEB liabilities represent the cost of benefits that will come due in future years.

Unlike pensions, where money is set aside in advance to cover expenses owed when employees retire, OPEB costs are more commonly covered on a “pay-as-you-go” basis—meaning the expense of the benefits is paid when it comes due.

The Pew Charitable Trusts published a brief in May that noted states had paid $18.4 billion during 2013 for worker retirement benefits other than pensions with most of that total spent on healthcare. OPEB liabilities totaled $627 billion that year, according to the brief. All together, states had set aside enough assets to fund about 6 percent of that sum.

Saving for OPEB in advance, the Pew brief said, “can both make costs more predictable for taxpayers and make benefits more secure for retirees.”

Recognizing the need for ready-to-use investment options for Maryland local governments, MACo recently launched the MACo OPEB Investment Trust — a stand-alone entity offering investment and related financial service for jurisdictions making advance contributions toward these long term liabilities. The Trust setup enables investment in longer-term instruments, that are not suitable under state law for true “public funds” available for short term use.

Read more about MACo’s OPEB Investment Trust.

Resources:
S&P Report – September 2016
Pew Brief – May 2016
MACo OPEB Investment Trust

Michael Sanderson

Executive Director Maryland Association of Counties
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