Taxpayers have long understood government pension liabilities and the impact on local budgets, but government obligations for other post-employment benefits provided to employees (OPEB), namely retiree health insurance, have only recently started to receive similar attention. New reporting requirements force governments to disclose their OPEB liabilities, and the numbers show that retiree health benefits are no longer the marginal annual budget items they were when initially offered to employees. Instead, the rapid acceleration of health care costs combined with overly generous benefits have created staggering OPEB liabilities which exceed unfunded pension liabilities in almost all Massachusetts communities. Without action, these OPEB liabilities will continue to escalate with enormous consequences for cities and towns.
While a handful of Massachusetts communities have begun to fund their OPEB liabilities with modest contributions, the aggregate liability is more than 99 percent unfunded. Enormous OPEB liabilities, combined with existing pension obligations, threaten the long-term stability of local government finances and are already crippling municipalities’ ability to provide basic services, including public education.
What is OPEB?
The term OPEB refers to all benefits, other than pensions, that retirees receive. For public employees in Massachusetts, OPEB largely consists of retiree health insurance but also includes life insurance. As with pension benefits, employees are entitled to these benefits after meeting certain eligibility requirements, such as a vesting period and minimum retirement age.
The increased focus on government OPEB obligations comes partly as a result of requirements issued by the Governmental Accounting and Standards Board (GASB) in June 2004. Referred to as GASB 45, these standards require all government entities to report their annual OPEB obligations, unfunded liabilities, and various assumptions in annual financial statements. GASB 45 brought governments in line with private sector reporting requirements that have existed for 20 years.
Under GASB 45, governments must disclose the present value of their incurred OPEB costs for both current retirees and active employees already eligible for benefits. The liability defines how much the governments need to set aside today in order to continue to provide these benefits over time, based on a variety of assumptions. Such reporting also helps to gauge the true cost of employee compensation by forcing governments to quantify the present value of a future retirement benefit, even though an employee may not receive that benefit for many years.
Like the earlier pension statements issued by GASB, Statement 45 outlines technical and reporting requirements but does not set policies for governments to address liabilities. As a technical rulemaking board, this is typical for GASB. Although there is no requirement to pre-fund these liabilities, those governments that choose pay-as-you-go over pre-funding place a heavier burden on future taxpayers.
GASB 45 included a three-year phase-in of reporting requirements, with the largest governments being the first to implement the policy. Fiscal year 2009 was the first in which all 351 Massachusetts communities were required to disclose OPEB liabilities.
Massachusetts Taxpayers Foundation 1
There will be a line item for pension costs at town meeting, come with your prepared questions.