Massachusetts could tap into tobacco settlement and rainy-day funds to help pay down a $13.3 billion other post-employment benefit liability, according to a report released last week on the commonwealth's unfunded health care costs.

Currently the state meets its annual OPEB costs for retired state employees on a pay-as-you-go basis, yet officials would like to increase the annual contribution as the state has done in the past with its pension allocations. Boosting its yearly OPEB payment beyond the current pay-as-you-go plan would decrease the $13.3 billion liability to $7.5 billion over the next 30 years, according to the report.

Possible funding streams for an annual OPEB contribution include annual tobacco settlement payments made under the 1998 Master Settlement Agreement, and surplus state revenues.

Massachusetts currently allocates roughly $400 million to the State Retiree Benefits Trust to meet its most pressing OPEB requirements, according to the report. Yet tapping into tobacco payment revenue, which currently flows into the general fund, and any potential surplus funds could boost the state's yearly allocation to more than $1.6 billion by fiscal 2026 and shore-up the fund by fiscal 2038.

Since the fall of 2007, a special committee has been meeting to devise possible strategies in paying down the $13.3 billion OPEB liability. That committee is co-chaired by Sen. Benjamin Downing, D-Berkshire, and Rep. Jay Kaufman, D-Middlesex, and includes legislative minority leaders; chairs of Senate and House Ways and Means Committees; state Comptroller Martin Benison; Secretary of Administration and Finance Leslie Kirwan; executive director of the pension reserves investment management board, or PRIM, Michael Travaglini; and a representative of state Treasurer Timothy Cahill.

In response to the committee's report, Cahill in a prepared statement supported pre-funding the state's OPEB liability beyond pay-as-you-go, yet called for an outside actuary to help the state determine an appropriate funding amount. Cahill also said he prefers a dedicated allocation from the general fund as opposed to committing tobacco settlement revenues directly.

"I strongly recommended that the commonwealth address its OPEB obligations directly by pre-funding this liability with annual appropriations to be determined by an independent actuary," Cahill wrote. "The report does not include a provision that would allow for this approach and seeks to use the revenue obtained from the state's tobacco settlement. Rather than limiting potential funding resources, the OPEB liability should receive a dedicated and transparent appropriation."

Last summer, Gov. Deval Patrick signed a fiscal 2008 budget that included language allowing the state to leverage tobacco settlement payments in order to help pay down the $13.3 billion OPEB liability. Selling tobacco bonds to help address Massachusetts' unfunded OPEB costs was not included in the report.

The proposal to use future tobacco settlement revenues involves phasing in settlement payments gradually, with the state allocating 25% of tobacco funds in the first year, 50% in the second year, 75% in the third year, and 90% each year thereafter. The state's tobacco settlement payment for fiscal 2009, which began July 1, is $288.5 million.

The committee also recommends allocating half of any additional revenues from the general fund to go towards the OPEB liability as opposed to the commonwealth's rainy-day fund, where current excess revenues go.

"The special commission recommends that 50% of any unanticipated surplus funds in a given budget surplus year be allocated to the [State Retiree Benefits Trust], instead of the stabilization fund," according to the report.

Along with its OPEB liability, Massachusetts has an unfunded pension liability of roughly an equal amount, $13.3 billion. The state paid a $1.46 billion contribution toward its pension program for the current fiscal year. That amount takes into account immediate pension requirements as well as future obligations.

The Bay State has $29 billion of outstanding debt. Moody's Investors Service rates the credit Aa2. Fitch Ratings and Standard & Poor's rate the commonwealth AA.

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