States Narrow the Gap in Retiree Health-Care Funding

Health care and other non-pension benefits for retired public workers, collectively called “other post-employment benefits” (OPEB), remained severely underfunded in 2022, according to the latest data collected by The Pew Charitable Trusts.

The overall OPEB funding gap—the disparity between promised benefits and available assets—was $552 billion in 2022. And the share of plan liabilities that can be paid with available assets, known as the funded ratio, was just 14.6%. These figures amounted to improvements of $130 billion and 5.3%, respectively, compared with 2019.

The funding gap narrowed thanks to increased plan assets from positive investment returns and higher contributions; a decline in total liabilities because of shifts in workforce trends, demographics, and lowered projections for medical cost growth; and a range of state policy efforts to ensure sustainable benefits and long-term fiscal health.
In 2022, OPEB assets reached $95 billion—a $24 billion increase from 2019—because contributions to OPEB funds exceeded outgoing benefit payments by $11.8 billion and states reaped $12.7 billion in investment returns over that span. On the other side of the balance sheet, liabilities—the amount that a plan is short to meet its benefit obligations—declined by $106 billion, driven primarily by benefit adjustments, investment assumption modifications, and changes in demographics, workforce trends, and projected growth in health care costs.

Over the three-year period, 34 states fell short of their minimum adequate contribution benchmarks—the lowest possible combined payments from employers and employees sufficient to keep unfunded liabilities from growing in the long term. However, some of those states still saw improvements in their funded ratios as actuarial assumptions about future conditions became more favorable, decreasing these expected liabilities.

Improved Funding Ratios

Better fiscal discipline, along with other policy changes, helped improve funded ratios in 35 states as of 2022. (See Figure 1.) Eighteen states were at least 30% funded, up from only eight states in 2015. Five of those states—Alaska, Arizona, Ohio, Oregon, and Utah—were fully funded, with Ohio and Utah having newly attained full funding. Ohio and West Virginia showed the most improvement, increasing their funded ratios by 55% and 58%, respectively.

Increased But Still Insufficient Contributions

Although 23 states increased contributions over the three-year period, 32 still fell short of their minimum adequate contributions in 2022, based on their net amortization benchmarks—the total amount of money needed to both pay for new benefits earned by current employees in a given year and cover interest on a plan’s OPEB debt.

In 2020 and 2021, state OPEB plans collectively missed their net amortization benchmarks by $29.8 billion and $30.6 billion, respectively. The contribution gap improved slightly in 2022 but still fell short by $22 billion. However, since 2019, nearly half of states have improved their contributions, and by 2022, 17 states met or exceeded their minimum required contributions, nearly double the nine that did so in 2019. (See Figure 2.)

State Policy Efforts

In recent years, several states have made significant policy changes that meaningfully improved their OPEB funding in 2022—including pre-funding plans, increasing contributions, and changing benefit structures—but in some cases, those changes also led to a reduction in benefits for current or future retirees. The results of policy efforts in three of those states highlight the difficulty policymakers face in balancing fiscal sustainability and workers’ retirement security:

• In 2013, Hawaii passed Act 268, which required the state to pre-fund its OPEB commitments by paying the actuarially determined contribution each year. The goal of pre-funding is to achieve contribution levels that cover the cost of benefits in the year that employees earn them, rather than waiting to fund benefits years or decades after an employee retires.
  
  At the time that Act 268 was implemented, the state’s OPEB funding ratio was zero and the legislation’s goal was to get the state to full funding by 2045. As of 2022, Hawaii has both increased its funded ratio to over 30% and exceeded its net amortization benchmark. Once the state reaches full funding, its annual required contribution is projected to decrease, saving the state $800 million to $900 million annually.
• Ohio dramatically improved its OPEB funding ratio, from 63.5% funded in 2015 to 112% funded in 2022, through a mix of contribution and benefit changes. Employer contributions rose from $29.5 million to $135.8 million over that span. In addition, the state made changes to its retiree health care plan in January 2020 that cut its total OPEB liability in half, increasing the funded ratio from 57% in 2019 to 120% in 2020. In particular, the state closed its health plan for non-Medicare-eligible retirees and now gives qualifying retirees a subsidy toward the purchase of plans on the open market. Further, the age and years-of-service requirements for non-Medicare retirees to receive benefits increased, and the allowance available to Medicare-eligible retirees decreased.
• Although New Mexico’s OPEB remain underfunded, the state expects to close the gap over time under its current funding trajectory. As of 2022, New Mexico had exceeded its net amortization benchmark and increased its funding ratio to more than 33%, triple what it was in 2015, largely as the result of employee contribution increases. The state also reduced a credit for each year of service that employees earn toward their retiree health insurance premiums in 2021.

Although state OPEB plans remain significantly underfunded, with fewer than 20 cents on hand for every dollar needed for promised benefits, these policy efforts show the range of approaches states are taking to keep OPEB costs sustainable, while working to preserve retirees’ economic security and to avoid crowding out other important priorities.

Ora Halpern is a senior associate, Keith Sliwa is a principal associate, and David Draine is a principal officer with The Pew Charitable Trusts’ state fiscal policy project.

This story first appeared in Pew Charitable Trusts. Read the original here.