OPEB Made Easier

A new set of best practices for 'other post-employment benefits'
by | February 23, 2012

It has now been seven years since the Governmental Accounting Standards Board began to put "other post-employment benefits" (OPEB), such as retiree medical benefits plans, into the footnotes of state and municipal financial reports. Since that time, only a handful of governmental employers have taken the next logical step and begun to fund these liabilities like a pension plan. Most still "pay as they go" by budgeting only enough money each year to pay the immediate bill for the retirees. They fail to sock away money for the benefits earned this year by the current employees.

There are many reasons for this procrastination. The best excuse of course was the Great Recession of 2008 — which wiped out any revenue surpluses that might have been devoted to funding OPEB properly for the first time. Before that, budget money was actually available from the bubble-year economies in 2006 and 2007, but nobody took OPEB seriously and politicians preferred to start new programs, raise salaries and hire new employees, instead of making a down payment on past-due retirement medical benefits.

Labor statistics show that state and local payrolls actually expanded into mid 2008, even when the recession had already begun to shrink revenues. Obviously nobody was ever elected on a campaign to fund OPEB properly. Then there was the "national health care" smokescreen, as if anybody actually believed that the federal government would ever have enough money to pay for state and local government retirees' medical benefits. And now, after the Great Recession ended technically in the spring of 2009, the recovery has been so anemic that there haven't been surging revenues and surprise budget surpluses like we used to experience in the "V-bottoms" of prior business cycles. Many states and localities are still cutting their employment levels with job freezes and attrition, even though the U.S. is approaching the third anniversary of the end of the recession. There are many competing claims and priorities for any new money that might be used to fund OPEB plans properly. Will those be just more excuses?

It's time to face the music. As the U.S. economy slowly gets back on its feet, responsible leaders must look forward in time to the next recession, and realize that if OPEB funding is not initiated sometime soon — before the advocates of discretionary spending regain their moxey — the hole we're digging will only be deeper at this stage in the next cycle.

Since 2007 when national analysts at Credit Suisse first estimated the total unfunded OPEB liabilities of state and local governments at $1.5 trillion, those liabilities have grown by an estimated 7 or 8 percent annually. That growth is in line with medical cost inflation plus the aging of the workforce, so the total liabilities today probably exceed $2 trillion. Unless the employer has taken steps to mitigate benefits costs, the typical OPEB plan's liabilities have grown by 40 to 50 percent in the past 5 years. The hole is getting deeper every year and relatively few employers have stopped digging it deeper.

Some politicians have wishfully claimed that they could walk away from their promises, and simply renege on the OPEB obligations in one way or another. But as the California Supreme Court has now held, there is frequently an implied contract binding on employers who adopted these benefits by official actions such as ordinances and resolutions. That doesn't mean that the benefits can't be abridged in federal court upon showing of necessity under financial distress with a reasonable plan to share the burdens and provide a reasonable replacement benefit. But, it's highly unlikely that very many public employers will be able to walk away from their OPEB obligations once their budgets have stabilized.

The reality is that these liabilities are not going away. That leaves the last line of defense to the procrastinators: "It's too complicated and you have to set up a trust which could make the liabilities even harder to change." Again, it's another smokescreen to avoid biting the bullet.

Fortunately, the Government Finance Officers Association (GFOA) has stepped up to the plate with a new guidance document providing best practices to public employers seeking to establish an OPEB trust. This primer covers the basic questions that most public officials and managers will face, outlines the basic legal options and pitfalls, explains in simple terms the paths available and the pros and cons of each, and directs readers to literature in the field to help support sound decisionmaking. Any finance officer can start with this roadmap and easily chart a course to implement a trust within six months.

GFOA is unequivocal that once a clear and substantial liability is determined to exist, the wiser course of action is to establish an OPEB trust and begin pre-funding, just like a pension plan. Their guidance helps beginners understand the proper roles of custodians, investment advisors, administrators and other parties to an OPEB trust, and very importantly, why and how these differ from the traditional governance structure of a pension plan. For example, there may be no rationale for employee membership in an oversight body — especially when the employer makes all contributions. In fact, some OPEB trusts provide extensive outsourcing of most governance and investment functions, although GFOA takes note that employers should always establish an oversight capacity and accountability to monitor the results and operations.

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