Virginia Faring Well With Lowest OPEB Liabilities in the Southeast

WASHINGTON — As states scramble to meet new standards established by the Governmental Accounting Standards Board for reporting other post-employment benefits, Virginia finds itself enjoying the lowest OPEB liabilities in the Southeast. In June 2004, GASB unveiled its new rules that required state and local governments to report for the first time their unfunded actuarial accrued liabilities for health care and other non-pension post-employment benefits, in addition to their annual OPEB costs. The requirements were a departure from the way states previously handled OPEBs, in which they typically accounted for the costs on a pay-as-you-go basis, accounting for and reporting just the cost of the benefits for that particular year.In addition to establishing new requirements, GASB set a rolling deadline to meet those standards, beginning after Dec. 15, 2006. By the end of 2009, all states and localities are expected to meet the new standards.Other than Louisiana and Mississippi, all Southeastern states have established their expected OPEB liabilities, according to data compiled by Standard & Poor’s. Virginia appears to assume the smallest burden when providing benefits to state employees following retirement or other departure of service.The commonwealth reported that its actuarial evaluation anticipated $2.3 billion of OPEB liability. In addition, it found that its actuarial required contribution, which constitutes the annual payment needed to keep net OPEB obligations from accumulating, came in at $324.4 million.As a point of comparison, Virginia’s neighbor to the south, North Carolina, reported 10 times Virginia’s total in OPEB liabilities, at $23.9 billion, with an actuarial required contribution of $2.4 billion, equal to the total amount Virginia reported.In a report issued earlier this month on state OPEB liabilities, Standard & Poor’s said that due to the variety of actuarial methods and widely varying inflation assumptions, state-by-state comparisons are difficult. In addition, the rating agency said that any unfunded OPEB liabilities, due to their volatility and variability, will not appear on debt ratios used in reports unless pension obligation bonds or OPEB obligation bonds will be used for financing.Virginia is sitting favorably when it comes to OPEB thanks to its conservative employee benefit offerings, according to state Comptroller David Von Moll.Triple-A rated Virginia currently assumes five different types of benefits besides pensions for former public workers. They consist of a long-term disability program, a group life insurance program for retirees, a health insurance credit program that allows employees to set aside funds to offset health costs when they retire, a line-of-duty program that provides benefits to public safety officers and their families in case of their disability or death, and pre-Medicare retiree health care for state employees.The final program, Von Moll says, is “the big one.” And he said that Virginia’s advantageous OPEB position is largely due to its approach to the program, wherein the state offers a reduced health care premium for retirees, but stops short of providing fully funded care.“Virginia has the advantage of only having the implicit subsidy. We don’t directly pay for health care benefits for pre-Medicare retirees, but we let them participate with the active employees,” the comptroller said. “[Retirees] get a reduced premium, essentially because we group them with the active employees.”North Carolina law requires that health care benefits for retirees be consistent with the benefits of its full-time employees, according to the Standard & Poor’s report.While GASB only requires states to report their OPEB liabilities, not provide plans for funding them, many states, Virginia included, are taking the proactive approach and determining funding plans.Von Moll said that prior to the GASB initiative, Virginia had already budgeted for three of its OPEB liabilities, and is currently in the process of establishing a funding plan for the remaining two. “Long-term disability and pre-Medicare retiree benefits were the only ones that weren’t fully funded at the actuarial level,” he said.A five-year phase-in funding plan has been established for the remaining two programs, at which point the budgetary gap should be closed, he added.Other states are considering a variety of funding techniques to address OPEB needs, with several establishing task forces or commissions to review benefits and establish a long-term plan. Georgia, Kentucky, and South Carolina have taken this approach.Other techniques include establishing trust funds to finance future needs or adjust benefit plans to maintain similar levels of liability in the future.Illinois and New Jersey have issued pension obligation bonds to raise money for unfunded liabilities and other states are considering the same tactic.Despite Virginia’s current healthy OPEB position, Von Moll mentioned that the commonwealth needs to remain vigilant, as OPEB evaluations can change year to year. “Pretty much every year we’re having actuarial variations, and they change,” he said. “You have to deal with it budgetarily every year.”