Complexities related to other post-employment benefit liabilities pose risks to core public service in the New York City tri-state area, according to a
The city alone has a “staggering” net OPEB liability of $90 billion, said the report by Thurston Powers, a data analyst for the Mercatus Center at George Mason University. Both Manhattan Institute and Mercatus Center are free-market oriented.
Between 2014 and 2018, New York State’s estimated required OPEB contributions rose from $2.3 billion to $4.3 billion, an 89% increase, signaling higher future operating costs.
New York State uses a slightly lower discount rate while New York City assumes a slightly higher rate of health-care price increases.
Thanks to changes it enacted in 2017, Connecticut’s total OPEB liability dropped between 2013 and 2017. Medicare Advantage overhaul contributed to 95% of the decline.
New Jersey’s net OPEB liability, meanwhile, rose by nearly $18 billion from 2013-2017, to $69.3 billion.
“Many states and municipalities are struggling to fund pension liabilities, but [OPEB], which typically include medical insurance, are a far riskier obligation,” the study said. “State and local governments may inadvertently overpromise OPEB benefits to current employees, leading to a future budget crisis.”
“OPEB liabilities are typically less than pension liabilities and are therefore considered less of a concern. But they are politically difficult to reform and often far more difficult to estimate, making them riskier.”
Key changes, Powers said, could ease the threat to core public service. These measures range from providing a health-care subsidy, indexed to inflation, to switching to an OPEB plan without either explicit or implicit subsidies.
These adjustments, according to Powers, mitigate risk to the employer and thus protect the ability of states and municipalities to provide employee benefits and core government services in the long run.
OPEB, often an afterthought in pension liability debates, has begun to emerge over the last 10 years, according to James Spiotto, a managing director at Chapman Strategic Advisors LLC in Chicago.
“People have really begun to focus on OPEB,” he said.
Despite a growing economy, municipal finance managers are still looking at the OPEB costs rising faster than inflation, said David Fiorenza, a finance professor at Villanova School of Business.
“Municipalities can set up an irrevocable OPEB trust and place assets that are restricted for use solely to pay OPEB benefits,” he said. “This would be a separate pool of funds from the municipal funds and legally protected from creditors.”
Pennsylvania's situation is similar to its surrounding states with pension obligations. By law, its municipalities must submit their minimum municipal obligations to the state and in public meeting. “The MMO is just one facet of the unfunded liabilities,” Fiorenza said.
OPEB liabilities are complex due to variables in quantifying, Powers said. Health insurance in particular requires considering mortality, health-care cost increases, inflation, demographics, health-care regulations, payroll growth and, in cases where the employer is prefunding, the investment rate of return.
“Highly complex financial risks like this threaten a state or municipal government’s ability to provide core services like public safety, hospitals, and education,” Powers said.
Spiotto said the 2020 national elections could sharply change the health-benefits dynamic.
On average, pension, OPEB and debt service exceed 25% of governmental expenditures for 15 largest cities, said Bank of America Merrill Lynch.
Primary fixed costs for pensions, debt service and OPEB ranged from 14% of governmental expenditures in Philadelphia in fiscal 2018 to 45% of governmental expenditures in Chicago.
Philadelphia's percentage, along with those of seven other cities, improved year-over-year.
