CHICAGO - How local governments begin to manage - and eventually fund - the accrued liability of their other post-employment benefits will prove increasingly important to overall creditworthiness over the next several years, said rating analysts and other market participants attending The Bond Buyer's OPEB conference here.

"To the extent that cost pressures weaken financial position or flexibility, credit quality may suffer," said Standard & Poor's analyst Peter Block. "Essentially it's going to crowd out other services and crowd out capital spending."

Among state governments, OPEB liabilities range widely, according to a November report by Standard & Poor's. South Dakota, for example, has reported a $52 million OPEB liability, while New Jersey faces a $58.1 billion liability - though the average state OPEB liability is somewhere around $9.1 billion. About 15 states have taken some steps towards addressing the liability, including establishing a trust, implementing benefit changes, or approving resources to begin to fund the liability.

"We have a lot of issuers saying, 'We're going to do pay-as-you-go until we can't afford it anymore,' " said Block, naming one of the most expensive - and passive - options available to governments. "Well, at that point you already have a credit problem. We want to see your planning for the future."

When it comes to local municipalities, the more quickly the liability is tackled the better, said panelists.

Finance managers from Oakland County, Mich. - one of the only counties in the U.S. to have fully funded its OPEB liability - said they began examining the problem in 1985.

"It took us two decades to get here," said Laurie Van Pelt, the county's director of management and budget. The county ordered its first OPEB liability actuarial report in 1985, and it took two years for that report to be completed and for the county to properly assess its costs.

"It's a lengthy process just to get your actuarial report," said Van Pelt. Whether a government has ordered its report "will be one of the rating agency's first questions," she added.

At that point Oakland's pre-1986 total accrued liability was roughly $829.7 million and about 37% funded. In 2006, the county moved to fully fund the remaining $526 million liability through the issuance of debt.

After selling $557 million in certificates of participation, the county saved $150 million over a 30-year period, officials estimated. Debt service totals $48.5 million annually over a 20-year period, while payments into an annual required contribution - or ARC - account were estimated to come to $60.2 million annually over a 30-year period.

"Who wouldn't take that deal?" said Oakland County executive L. Brooks Patterson.

Issuing debt to fund the liability may not be the best move for all issuers, warned Van Pelt. "The market needs to be favorable, and you have to have a source of funds to pay the debt service," she said.

And Oakland County faced several obstacles in putting together the borrowing plan, said county bond counsel John R. Axe of Axe & Ecklund PC.

Axe said he spent a year lobbying the state legislature to pass legislation that would allow local municipalities to issue debt to cover their OPEB liability - only to have the governor veto it at the last minute. So the county moved to set up a trust and issued taxable certificates of participation.

"It's a much more cumbersome process, believe me," said Axe of issuing COPs. For example, selling taxable COPs means marketing to a whole different group of investors than traditional tax-exempt debt buyers. It also means entering into a contract that guarantees payments will be made to the trust.

Axe said the county also decided to make the COPs callable every seven years in order to preserve flexibility in case the federal government decides to take over the liability in the future.

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