S&P: OPEB Liabilities Shrink, But More Work Needed

WASHINGTON — States continue to have large unfunded health care and other post-employment benefits despite reducing them since 2011, but more action is needed to protect their credit, according to a new report from Standard and Poor’s.

State OPEB liabilities declined by $16 billion, or 3%, to $528.8 billion from 2011, the rating agency’s report concluded. OPEBs primarily represent retiree health care benefits, but can also include other non-pension benefits extended to retired government employees, such as life insurance.

The decline in the unfunded liability was more a function of a decreased liability rather than more funding, Standard and Poor’s analysts wrote. Increases in future costs without additional pre-funding could eventually weaken states’ credit ratings, the report warns.

The report notes that unfunded OPEB liabilities vary widely among the states, and that direct comparisons between them can be difficult to draw because each state has its own actuarial assumptions. The unfunded OPEB liability per capita ranged from $1 in Oklahoma to $8,408 in Hawaii, the report shows. The median state unfunded OPEB in the survey was $1,219 per capita.

By dollar amount, New York had the highest liability at $66.5 billion, surpassing California, which took the top spot in the agency’s 2011 OPEB report. Oklahoma, which offers limited benefits to retired state workers, clocked in at the lowest total unfunded liability with just $4 million.

“The relative stability of current OPEB liabilities results from the actions states have taken to address projected post-retirement health care costs,” said Standard & Poor’s credit analyst David Hitchcock.

The reduced amount of liability “generally reflects benefit adjustments, changes in actuarial assumptions, or a combination of both,” a Standard and Poor’s summary of the report states. “One additional reason for the small decrease in unfunded liabilities is that slightly more than half of the states (30) are pre-funding OPEB by setting aside money in an irrevocable OPEB trust fund. Advance funding of future liabilities can yield large cuts in unfunded OPEB due to the assumed growth of trust assets at actuarially assumed rates of return, until benefits are paid.”

OPEB liabilities represent a moderate chunk of state obligations, ranking ahead of bond debt but behind pensions, the report shows. Data for 2013 cited earlier this year by Standard and Poor’s shows that OPEB liabilities account for 29% of long-term state obligations, while bonds account for 26% and pensions 45%.

Standard and Poor’s analysts said pension reform efforts have opened the door for OPEB reform in some cases, and that if OPEB underfunding is not addressed it could impair bond repayment ability.

“OPEB liabilities, despite the recent decline, remain large and must be managed,” the report reads. “Although we do not believe OPEB obligations currently impair repayment of debt obligations, we think that potential increases in annual OPEB payments in states with large OPEBs could weaken capacity to pay debt in the future. Unfunded OPEB could rise due to pay-as-you-go funding, increasing health care costs, and a growing retiree population, absent changes in benefits.”

It remains unclear how implementation of the federal Affordable Health Care Act, commonly called Obamacare, will impact OBEP liabilities, Standard and Poor’s said.

For reprint and licensing requests for this article, click here.
Healthcare industry
MORE FROM BOND BUYER