Historically, health care and other nonpension retirement benefits have been more poorly funded than pensions for retired public workers. Now new data resulting from updated government accounting requirements offers a more complete picture of the long-term price tag of these benefits, known as other post-employment benefits (OPEBs). This data allows users to see for the first time how each state’s liabilities for OPEBs change annually and what would be required to keep them from growing.
Using data from the new reporting requirements, The Pew Charitable Trusts has developed a metric—known as the net amortization benchmark—to measure whether a state’s contributions are sufficient to keep the gap between OPEB assets and OPEB liabilities from growing on an annual basis, assuming plan assumptions are met. Pew’s assessment shows that states collectively fell short of the benchmark by $30 billion in 2019, with just 10 states meeting the benchmark. If states continue to fund below this threshold, they will face growing debt for OPEB benefits. This information can help state policymakers better track the accumulated liability (the estimated amount that a state would need to have set aside today to pay for promised benefits that have already been earned) for OPEBs and identify whether the debt for unfunded retiree health care and similar benefits will grow or shrink on their state’s balance sheet. The data also helps policymakers understand which states face the biggest long-term fiscal challenges from underfunded OPEB plans.
This brief serves as a data update to Pew’s 2018 evaluation of OPEB benefits and explores the way this new, more comprehensive information can help government officials identify the challenges their states face and develop plans to ensure that retiree health benefits can be funded sustainably.
In 2019, the most recent year for which comprehensive data is available, states collectively reported $749 billion in OPEB liabilities but only about $69 billion in assets to pay for these benefits, resulting in a funded ratio—the share of benefits already earned that have been pre-funded—of just 9.2%. In contrast, that same year the total funded ratio for state retirement systems was 71%. Pre-funding retirement benefits is a way to pay for the compensation of public employees while they are providing service rather than pushing costs for work done today years or decades into the future. States vary widely in the progress they’ve made toward pre-funding: Eleven states reported no assets set aside while Alaska’s, Arizona’s, and Oregon’s OPEBs were fully funded. Several states that had long had no assets set aside for these benefits, such as Hawaii and Vermont, have recently started the protracted process toward adequately funding these benefits.
In addition to a range of funding levels, states also show a significant disparity in the value of OPEB benefits they offered to public employees and retirees. The 27 states that provide retirees with a subsidy that covers a fixed percentage of health insurance premiums account for over 90% of the liabilities, with five states accounting for over 57% of the country’s total OPEB debt. The other half of states offer public employees and retirees much smaller benefits that typically have an immaterial impact on their state’s budget. Identifying policies to effectively manage the cost of these benefits can be a challenging task for the states with the largest liabilities.
New data shows increased funding for OPEB benefits but still a big shortfall
In 2019, states had just $69 billion in assets set aside to fund OPEB liabilities of $749 billion, leaving a funding gap for retiree health benefits and other nonpension retirement benefits of $680 billion. Although this means that just 9% of these liabilities were funded based on the calculations by plan actuaries, the figure was actually an improvement compared to the 8% funded ratio reported for these benefits in 2018, as well as to the 3% funding level states reported in 2006.
States vary significantly in their progress in pre-funding OPEB benefits, and when they fall short, that means the bill for benefits that have already been earned by public workers gets pushed years or decades into the future. Of the 48 states that reported OPEB liabilities in 2019—Nebraska and South Dakota do not include them in their financial reports—15 have either not put aside any funds to pay for promised benefits or their available funds are negligible; 12 have a funded ratio between 1% and 10%; seven have a funded ratio of 10%-29%; and only 14 have a funded ratio of 30% or above. (See Figure 1.)
The 2018 and 2019 figures presented in this analysis use numbers reported by states under new accounting standards. The most recent comprehensive numbers using the prior reporting requirements were as of fiscal year 2016 because in 2017 states varied in which standard was being applied and, as a result, a consistent set of 50-state data is not available for that reporting period.
In 2016, states reported $696 billion in liabilities and $46 billion in assets, with a funding gap of $650 billion. By 2018, liabilities had risen to $748 billion and assets to $62 billion, with a funding gap of $686 billion. Unfortunately, due to the combination of inconsistent reporting standards, limited data disclosed under the older reporting requirements, and a gap for 2017, it is difficult to pinpoint what drove these increases in OPEB liabilities and assets, particularly since policymakers were making changes to benefit provisions, actuarial assumptions, and contribution policies over this period.
One advantage of the new standard is that, going forward, understanding year-over-year changes in the data will be much easier. Thanks to this new information, which includes details in the changes in liabilities year by year as well as changes in reported assets, Pew can report that the $7.5 billion increase in assets between 2018 and 2019 was due to the combination of contributions exceeding benefit payments by $2.7 billion, plus investment returns delivering $5 billion. On the other side of the balance sheet, liabilities largely stayed the same thanks to lowerthan-expected health costs and updates to actuarial assumptions that shape the liability calculations. These two factors drove a substantial downward revision in total liabilities, which would have otherwise grown by $36 billion if 2018 assumptions were maintained in 2019.
In the future, state policymakers can use this more comprehensive data to see the impact of changes to benefit provisions, track gains and losses from actuarial estimates missing the mark, and see how their contribution policy would increase or decrease OPEB funding gaps over time.
States vary in the type and cost of OPEB benefits
Twenty-seven states provide retirees from public-sector jobs with a health care benefit that covers a fixed percentage (in some cases 100%) of health insurance premiums and health care costs.1 Twelve other states provide a fixed subsidy for those premiums that is not guaranteed to keep pace with health care cost growth. Finally, nine states offer no direct subsidy, but allow retirees to buy into the state’s health insurance benefit at the same rate as active employees. Nebraska does not provide OPEB benefits to retirees. South Dakota restructured its OPEB retiree health premiums to eliminate implicit subsidies, thus discontinuing the need for reporting under Government Accounting Standards Board (GASB) rules.2 Moreover, some states offer their retirees additional benefits, such as life insurance.3
Differences in the scope of the benefits offered are reflected in estimated costs, with plans that provide a fixed percentage of coverage resulting in the highest costs. Fixed subsidy plans are typically, though not always, less costly. States that offer no direct subsidies report minimal OPEB liabilities. To provide a sense of scale, Figure 2 shows the OPEB liabilities for each state as a percentage of own-source revenue, which serves as a proxy for the financial resources that state has available and is defined as total revenues minus any revenues from intergovernmental transfers, utilities, liquor stores, and insurance trusts. Each state is also categorized by the type of health care benefit it offers. The states with the highest ratio of liabilities to state revenue are almost entirely those that provide a fixed percentage of premiums, while the states with indirect subsidies at a fixed cost largely report OPEB liabilities that are very small compared to state resources.
Some states with low liabilities will be unlikely to face significant financial pressure from OPEB obligations. But the states with the highest liabilities need to have a credible and sustainable funding plan to avoid situations in which policymakers would have to decide whether to reduce benefits. A number of states—including Hawaii, Kentucky, Michigan, South Carolina, and Vermont—have relatively high OPEB liabilities but have also taken steps to pre-fund these promises to beneficiaries. Illinois, Louisiana, New Jersey, and New York all had among the highest reported liabilities as a share of state revenue in 2019 yet had not set aside anything to pre-fund OPEB benefits.