By: Mark Glennon*
It’s an overlooked add-on to our pension crisis, and it’s huge. Like pensions themselves, the problem won’t be solved until we size it correctly and understand it fully. But with OPEBs, that’s more easily said than done.
OPEBs — Other post-retirement employee benefits — are primarily healthcare benefits granted to pension system members. Once promised to state and local workers in Illinois, they are constitutionally guaranteed along with pension benefits themselves, thanks to the 2014 Kanerva decision by the Illinois Supreme Court. Healthcare obligations extend for the lifetime of the pensioner and are mostly unfunded. That is, unlike the pension itself, nothing is set aside or invested to cover the future liability.
A working paper published this month by the Center for Retirement Research attempts to identify which governments have the biggest OPEB problem. They looked at OPEBs as part of the bigger picture of pensions and debt service. They added annual OPEB obligations with pension requirements and bond payments, and then compared the total to revenue for the sponsoring unit of government. The good news, they concluded, is things appear to be under control in many jurisdictions. “However, for a handful of states, counties, and cities, those costs are an extraordinarily high percentage of own-source revenue. These jurisdictions have only unpalatable options.”
You can probably guess which jurisdictions those are. Illinois is worst among the states — the only state in which that total exceeds 40% of revenue. Chicago is worst among major cities — the only city in which that total exceeds 60% of revenue. Cook is the sixth worst of all major counties in the country — one of only eight counties in which the total exceeds 40% of revenue.
That working paper may be useful as a way to make an apples-to-apples comparison of different governments, but its numbers are too optimistic. For starters, the authors discounted future healthcare obligations by 6%. What’s the rationale for that, especially when those obligations are almost entirely unfunded? None that I can see.
Worse, the whole topic of estimating future healthcare costs is little more than guesswork. Does anybody really know what healthcare costs will be decades from now? How long will people live, especially younger workers now constitutionally protected who may be only thirty now?
Hiding the issue, eventually, won’t be as easy as it has been. For fiscal years beginning after 2017, new accounting standards will require state and city governments to include retiree healthcare liabilities on public balance sheets instead of burying them in confusing footnotes, as most have done.
And the accounting and actuarial work on OPEBs makes pensions look downright simple and transparent. We’ll be digging into some of that in coming months, with help from a few honest actuaries to cut through the obfuscation. But for now, make no mistake: That obfuscation is thick and the liabilities are astronomical. Just at the state level for Illinois, adding healthcare increased the officially reported pension debt by over 50% — over $50 billion.
*Mark Glennon is founder of WirePoints. Opinions expressed are his own.
Updated 10/11/16 to correct the effective date of new reporting requirements on OPEBs to fiscal years after 2017.