SAN FRANCISCO — States face more than $450 billion in other post-employment benefits owed to their retired employees, but they should be able to manage the liabilities if they begin to address them now, according to a report from Standard & Poor’s.
The Government Accounting Standards Board in 2004 required governments that follow generally accepted accounting principles to report their OPEB liabilities in a similar way to their reporting of pension liabilities. Retiree health care is the biggest OPEB for almost all governments.
The current recession has hit state government revenues and investment funds hard, decreasing the prospects for wholesale resolution of OPEB liabilities anytime soon, but many governments are beginning to chip away at the newly reported liabilities, Standard & Poor’s said.
“While some states have developed strategies to begin to manage these long-term funding requirements, Standard & Poor’s believes that the current economic downturn could affect budget performance for years, which in turn could impede OPEB funding progress,” analyst Robin Prunty said in a report published Wednesday.
The new accounting rules have spurred governments to start acknowledging a massive looming cost, but the rules don’t require governments to pre-fund them. Standard & Poor’s said states have adopted many different strategies for dealing with the liabilities.
Prunty’s report summarizes the liabilities and approaches of each state. She found that the average state OPEB liability is over $9 billion, but the range of liabilities is wide, from $50.6 billion in New Jersey to nothing in Nebraska, which doesn’t fund retiree health benefits. The median states — Florida and Tenessee — owe $2.4 billion.
State responses also vary, but some are beginning to take action, the report found. At least 15 states have created task forces or commissions to review benefit levels, funding options and to develop long-term plans.
“The OPEB strategies for most states have not significantly altered the liability, but have focused on their ability to maintain current benefit levels or to begin incrementally increasing appropriations,” Prunty said.
Ohio is among the farthest along. It has accumulated $16.8 billion in trust funds to pay OPEB costs for retired teachers and state workers.
Other states have started chipping away at the obligations by reducing benefits for retirees or requiring workers to work longer before qualifying for benefits. Pennsylvania, for instance, increased workers’ contributions to their retiree health costs for individuals who retired after July 1, 2007. That reduced the state’s liability by almost 40%, according to Standard & Poor’s data.
“We believe that state governments will eventually come up with workable strategies over time to manage this liability without weakening their credit quality in the near term,” Prunty said.
But she said states don’t have an unlimited window of opportunity to address OPEB liabilities.
“While fiscal stress from OPEB in the next year or two is unlikely, there could be some credit pressures possibly as early as the next three to five years, due to the increasing costs that governments face for health care and from a growing retiree population,” Prunty said.
