Will the OPEB ostriches ever run out of excuses?


Flashback to 2004 when the government accounting community began to seriously address balance sheet and cost accounting liabilities for “other post-employment benefits” such as retiree healthcare in particular, but also certain life insurance and certain deferred compensation arrangements – benefits provided in addition to pension distributions and known by CFOs as OPEB.

This was a time when pension accounting moved to the business model of expensing benefits as they vested and recording liabilities on employers’ balance sheets, and the practice of actuarial funding through reserve funds pensions was well established. Although most systems had unfunded pension liabilities, they had at least some assets on their books. Even the Commonwealth of Massachusetts, once known for its “pay-as-you-go” kicks, had migrated to the pre-funded pension model in the 1980s.

But there and elsewhere, OPEB benefits were largely unfunded in practice, with many public employers relying on future taxpayers to cover the costs. This is a classic violation of the concept of intergenerational equity.

Over the next few years, heated debates focused on how best to deal with unfunded OPEB liabilities that appeared in state and local government financial statements. Rough estimates of a trillion dollars or more in unfunded liabilities for OPEB alone have caught the attention of fiscal conservatives and hawkish taxpayer advocates. But despite all that attention, OPEB’s number of deficits has only grown since then, as baby-boomer civil servants retired with post-employment benefits completely unfunded. in many jurisdictions – while their replacement workforce is also promised the same benefits by using IOU.

After looking OPEB costs in the face, many public bodies have reduced their OPEB plans, revised their vesting and age eligibility requirements, capped annual allowances or converted to defined contribution arrangements to mitigate liabilities at long term. But while many public employers began following professional best practices and funding their OPEB benefits actuarially with a trust reserve fund like that of a retirement program, that could not be said for others. So today, in at least 15 states and major municipalities that account for about half of the public sector’s unfunded OPEB liabilities, little has been done to address the massive accrued liabilities. As things stand, elementary school students and newborns will have to foot the bill when today’s workers retire.

What happened? How and why have public officials in these jurisdictions stuck their heads in the sand, like OPEB ostriches, while others have taken responsible action to address an obvious fiscal problem?

Roots in the Great Recession

As Tolstoy wrote, “every unhappy family is unhappy in its own way”, so it is impossible to generalize too much. But there are common cousins ​​in many of these jurisdictions. The first cousins ​​are all “victims” of the financial crisis and the Great Recession of 2007-2008, which caused public budgets to plummet across the country.

With the layoffs back then, even the most diligent public budgeters faced nearly impossible headwinds trying to raise new dollars to fund an OPEB trust fund for the first time, from so that progress towards installing actuarial funding was frozen in time until 2010 in many jurisdictions. At best, some employers may have used their financial crises as a predicate to cut benefits and mitigate the cost side of imbalanced actuarial projections.

Coming out of the Great Recession, earnings returned but rehiring took priority, and at that time, deteriorating actuarial ratios for public pension funds took precedence over OPEBs. The common thought was that pensions were a “hard liability” like municipal bonds, while OPEBs were a “soft liability” and therefore less urgent.

In addition to this, several of the now abandoned state constitutions protected the rights of public employees to pensions as a property right. As pension hawks swirled over their heads in state capitals, pension reform had become a political battleground and public service unions considered protecting pension rights and benefit levels as their first line of defense. OPEB could wait as unions and their supporters sought to shore up pension systems and preserve those payouts as best they could. Newspapers might occasionally run a story about OPEB’s deficits, but those stories were only an accessory to the battles for pension reform. Municipal bankruptcy courts took a similar view, treating the OPEB as an expendable promise when things happened; the Stockton, California decision was a good example.

By 2012, the economy had recovered enough to allow most public employers to grant modest wage increases and normalize their staff and payrolls, but pension costs continued to rise each year as the multi-year process of asset smoothing, aimed at reducing the impact of short-term market volatility and tighter and more realistic actuarial assumptions took hold and continued to push employer contribution rates higher and higher. The two charts below, taken from the National Association of State Retirement Administrators Annual Survey Report, depict the truly dramatic increase in retirement costs as an average percentage of payroll that most states and localities have experienced. over the past decade.

As a loyal finance officer once told me, “Our pension funds have basically absorbed all the new revenue we hoped to set aside to properly fund OPEB.” These and other priorities for spending every extra revenue dollar have continued to crowd out the possibility of instituting consistent actuarial funding for AOPE benefits; the path of least resistance for policymakers who lack foresight and a sense of fiscal responsibility has been to keep kicking the pot.

Thus, between 2015 and 2019, the state and local sector was clearly divided into three classes of employers: (1) those who had trimmed or modified their OPEB commitments and liabilities to sustainable levels, (2) those who had started financing an OPEB trust fund, and (3) those who do nothing and leave the problem to their successors and future taxpayers.

No more excuses for ostriches

Then, in 2019, the national political spotlight shifted to the Democratic presidential primaries, creating an atmosphere that supported the most cunning of can-kickers by providing their next excuse to continue doing nothing about OPEB: “Medicare for All” has become a rallying cry. in blue states, and this campaign theme has become the next big excuse for doing nothing about retiring health care funding for public employees.

After all, what would be the point of locally pre-funding retiree medical benefits if Uncle Sam inevitably had to foot the bill? Why not let federal taxpayers foot the bill? It doesn’t matter that current Medicare trust funds will be exhausted by 2026 under current benefit formulas.

Then came the COVID-19 pandemic, the latest in this litany of ostrich excuses. Even though states and localities have come through the fiscal gauntlet for the past two years in relatively good fiscal shape, the last thing on most politicians’ and voters’ minds now is funding health care for retired employees. That’s about as low on the list of political candies and priorities as one can imagine. Additionally, the 2021 U.S. bailout, which provides bipartisan federal tax assistance to states and municipalities, explicitly prohibited the use of these funds for public pensions. It’s not entirely clear if the law prohibited OPEB funding, but so far, at least, I haven’t been able to locate a single public employer who has attempted to circumvent the language of the Pension Haters Congress to use that money to fund a contribution to OPEB. Just look at the myriad uses of federal COVID-19 relief funds that have been allocated – with barely a penny for OPEB.

As the economy emerges from the uncertainties of the current pandemic into a phase of reliable growth, it’s time for states, municipalities and public agencies that have shorted their young workers to hollow OPEB promises to pay finally the kitty. Medicare can be reformed, but it will never be free for the foreseeable future. Maybe we’ll someday see a public option that provides access to Medicare for early retirees and their former employers at cost (which is now around $1,000 a month before age 65), but that’s not not the free lunch that the OPEB ostriches fantasize about. Public employees aged 40 and under should demand that promised benefits be funded when they are earned, or go to work somewhere where leaders don’t pretend to believe in miracles and an alternate fiscal reality.

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