WASHINGTON — States’ unfunded liabilities for health care and other non-pension post-employment benefits totaled $545 billion in fiscal 2010, Standard & Poor’s said in a report issued Thursday.
And this amount is likely to grow because only about half the states have set aside any funds to pay for their future accrued actuarial costs, the rating agency warned. The report provides information about OPEB liabilities and funding progress on a state-by-state basis.
“I think the overall takeaway is that there is not much pre-funding of OPEB costs,” David Hitchcock, a senior director in the state and local government group, said about the report.
“At least half of the states are funding liabilities on a pay-as-you-go basis and even where costs are being pre-funded, it’s generally low, the states are not funding the true actuarial costs.”
In other words, many of the states pre-funding some costs are not funding the full retirement costs of current workers.
While the Government Accounting Standards Board has required states to disclose OPEB liabilities since 2008, there are no requirements for how states should fund their liabilities.
The rating agency, which has been working on the report for months, drew its data from official statements, comprehensive annual financial reports, and actuarial reports. It found wide variations in what states offer as OPEB benefits as well as how they fund their liabilities.
All but two states — Alaska and North Dakota — paid less than their full actuarial OPEB cost in fiscal 2010, the report found. Utah funded 96% of these costs. The rest of the states paid for smaller percentages and many continued to fund their liabilities on a pay-as-you-go basis, it said.
Meanwhile, OPEB costs are rising because large numbers of baby boomers are retiring and health costs are increasing.
“Given the generally strong credit profile of the state sector and the long-term nature of these liabilities, we do not believe that OPEB costs are currently jeopardizing state governments’ capacity to fund their debt service obligations, but we believe they can weaken a state’s relative credit profile,” the rating agency said in its report. “Over time, there could be credit pressure due to the increasing costs for health care and from a growing retiree population. If unmitigated, OPEB costs could strain some state budgets and balance sheets in the long term.”
Standard & Poor’s looks at a state’s debt and liability profile as one of five major factors in determining its rating and OPEB liabilities are included within that profile.
The report noted that some states are taking action to lower their unfunded liability such as increasing contribution rates, lowering benefit levels, having longer vesting periods, and revising age and service requirements.
“We believe that these actions could help contain cost over time,” the rating agency said. “The effectiveness of these reform initiatives will depend on how broadly and timely they are applied.”