State Comptroller Thomas P. DiNapoli today announced legislation to create an optional investment pool to help the state and local governments fund retiree health insurance and other post employment benefits (OPEB). DiNapoli estimates the unfunded OPEB liability of New York state to be $68.2 billion and an additional $68.3 billion for local governments outside of New York City that have reported data.
When a public employee retires, the individual is often eligible for benefits including a pension and health insurance. While pension costs are pre-funded and invested to help pay for these future benefits, most governments, including New York state, do not set aside funds for retiree health insurance and instead fund it on a “pay-as-you-go” basis or out of pocket. The funding mechanism DiNapoli is proposing would give public employers another option to help fund these benefits for present day employees.
“New York is behind the eight ball on this issue. More than thirty states have already put rules in place that allow public employers to set aside money today to pay for these benefits,” DiNapoli said. “The numbers are daunting, but there is a real cost to doing nothing and leaving the bill for future generations of taxpayers to cover. The legislation would establish the legal structure for creating trusts that the state and local governments could use to start saving the funds needed to pay for these benefits. The responsible, good government thing to do is to start preparing for the future and plugging the hole before we reach a crisis moment.”
In state fiscal year (SFY) 2013-14, the state’s total unfunded OPEB liability is estimated at $54.3 billion for state agencies and $13.9 billion for the State University of New York (SUNY). Together, New York state and SUNY paid $1.5 billion for retiree health insurance in SFY 2013-14, which is half of what is needed to fully fund the OPEB liability. Costs for retiree health insurance are expected to grow as the workforce ages, people live longer and health care costs continue to increase. Current estimates project at least 6 percent annual increases for health insurance premiums – which means OPEB costs will double within 12 years.
If the state were to begin making regular annual contributions to a trust and earn a return on investments, it would potentially save billions of dollars in future OPEB cash payments.
The unfunded OPEB liability for the 837 of 2,293 local governments that reported it to DiNapoli’s office totaled $68.3 billion.
Moody’s Investors Service estimates the total national unfunded liability at $530 billion for states alone. New York is second to California in highest total OPEB liability, but it lags other states in starting to address this problem. Thirty-three states already have funding mechanisms to set aside funds to pay for OPEB costs.
DiNapoli’s proposal (A.5525/Abbate) would:
- Authorize the creation of irrevocable OPEB trusts, not part of the New York State Common Retirement Fund, so that New York state and its local governments can, at their option, help fund their OPEB liabilities;
- Establish an OPEB investment fund in the sole custody of the State Comptroller for the investment of OPEB assets of the state and participating eligible local governments;
- Designate the president of the Civil Service Commission as the trustee of the state’s OPEB trust and the governing boards as trustee for local governments; and
- Allow school districts to transfer certain excess reserve balances to an OPEB trust once it is established.
Under DiNapoli’s proposal, there is no limit on how much or how little a government can deposit into the trust.
New York City, which has already begun funding its $89.5 billion in OPEB liabilities, would be grandfathered in under its own statute. In 2006, the city established the Retiree Health Benefits Trust (RHBT), which currently has a balance of $2.4 billion. New York City Councilman Daniel Garodnick has proposed a City Charter amendment that would require the city to put at least 5 percent of its annual retiree health insurance expenses into a reserve fund under certain circumstances.
Since 2004, the Governmental Accounting Standards Board (GASB) has required state and some local governments to report their OPEB liabilities on their financial statements as obligations accrued during an employee’s entire period of service.
In 2015, GASB is finalizing additional accounting and financial reporting requirements, which will standardize how local governments report their OPEB liabilities.
DiNapoli notes that governments with no plan to deal with their large OPEB liabilities could see their bond ratings suffer and borrowing costs increase down the road.
See OPEB legislation.