N.Y. City’s rising OPEB obligations raise red flags

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New York City has amassed more than $95 billion in other post-employment obligations without any credible plan to pay it off, according to a report by the watchdog Citizens Budget Commission.

The debt, which continues to rise by roughly $5 billion annually, equals about $30,000 for each city household, said the report, titled “The Price of Promises Made.”

"The city's increasing OPEB debt threatens the affordability of city services," said CBC president Carol Kellermann. "It's time the city embraces more sound fiscal practices on OPEB before it's too late."

OPEB benefits largely consist of retiree health insurance plans, which unlike the city's pension plans are not prefunded and are paid using a pay-as-you-go arrangement annually. However, said CBC, since the health insurance benefits promised to today's workers are not paid until they reach retirement age, the next generation of city taxpayers must foot the bill.

The city’s OPEB liability traces largely to its relatively costly benefit package, said the report. While other cities have been actively seeking to reduce costs, said CBC, city retiree health benefits remain generous.

CBC’s comparison of city retiree health benefits with those of the federal government, New York State, Chicago, Los Angeles, San Francisco, Boston, Phoenix and Houston showed that none of the other jurisdictions match New York City's policy of covering 100% of the premium for both individual and family coverage and reimbursing the full cost of Medicare Part B premiums for retirees and spouses.

While calling the city’s pension fund strategy widely accepted, financing health insurance for retirees is less sound, according to CBC.

“Instead, it followed the model used for health insurance for current employees,” said CBC. “The city paid the annual premium for current employees and current retirees in the year it was due in order to cover those currently eligible for insurance. The costs of promised benefits for future retirees were not provided for or taken into account.”

The total state and local government unfunded OPEB liability exceeded $862 billion, the Center for Retirement Research at Boston College estimated in 2016.

To avoid Detroit-style fiscal crises, CBC recommended New York City reduce the benefit package cost by half and adopt “more substantial and systematic prefunding policies” such as making regular deposits into a dedicated fund resulting in the accumulation of funds for investments from which earnings can reduce future required taxpayer contributions.

In Detroit, current and future retirees absorbed cuts of more than 90% of expected benefits when a federal bankruptcy judge in 2014 approved the city's plan for adjustment.

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Public pensions Pension reform City of New York, NY New York