Retiree healthcare costs burdening some large US local governmentsCategories: National Developments,OPEB/GASB 45/75
Moody’s Investor Service Press Release, March 5, 2015
Annual budget contributions and liabilities associated with retiree healthcare, also known as other post-employment benefits (OPEBs), vary widely and burden some local governments more significantly than others, Moody’s Investor Service says in a new report, “Retiree Healthcare Contributions Typically Low for Largest US Local Governments; Potential Wildcard for Outliers in Bankruptcy.”
Typical non-pension OPEBs consist of retiree healthcare and life insurance. They are usually not pre-funded, and instead are paid on a pay-as-you-go basis.
“The pay-as-you-go method of funding OPEB benefits is less expensive in the near term for most of the 50 largest local governments,” says lead author of the report and Moody’s Associate Analyst David Gutierrez. “As such, OPEBs are not currently an outsized budgetary burden for most of the issuers.”
Moody’s views OPEBs differently than pensions or debt. “OPEBs are not a dollar-certain future liability as with debt or defined-benefit pensions. As such, we analyze OPEBs primarily as a budgetary expense, although the long-term obligation of unfunded liabilities is also important to our analysis,” according to Gutierrez.
Usually these benefits are a small budgetary cost for issuers and are about a third the size of the median pension contribution or one-tenth the size of debt service cost across the top 50 issuers (ranked by debt outstanding). In the short term, median costs for OPEBs for local governments are not likely to significantly exceed the 1.5% of operating revenue last reported in fiscal 2013, Moody’s says, but OPEB outlays will rise in the future due to healthcare inflation and growing retiree populations, and as more governments move from pay-as-you-go funding to a prefunding approach.