Other Post-Employment Benefits (OPEB)

Other Post-Employment Benefits (OPEB) are benefits, other than pensions, that U.S. state and local governments provide to their retired employees. These benefits are crucial to public sector employees and include healthcare and various forms of insurance. The main focus of this discussion will be on understanding the nature of OPEB, the accounting and financial considerations involved, and the implications of OPEB liabilities on government fiscal health and public policy.

Understanding OPEB

Definition and Types of OPEB

OPEB typically encompasses the following benefits provided after retirement:

• Healthcare Insurance: The most common type of OPEB, this includes medical, dental, vision, and other health-related insurance benefits.
• Life Insurance: Policies that cover retired employees, continuing into their post-employment period.
• Disability Benefits: Financial support in case of long-term disability.
• Legal Services: Assistance with legal matters post-retirement.
• Other Benefits: This can include various other benefits such as tuition reimbursement for retirees’ children or healthcare for dependents.

Importance of OPEB

Providing OPEB plays a significant role in attracting and retaining skilled employees in the public sector. The promise of comprehensive post-employment benefits can be a decisive factor for employees when considering long-term employment with a government.

Accounting for OPEB

Governmental Accounting Standards Board (GASB) Statements

The GASB has issued several statements to guide the accounting and reporting of OPEB:

• GASB Statement No. 45: Prior to 2015, this statement required the measurement and disclosure of OPEB responsibilities but did not require the recognition of a full liability on the balance sheet.
• GASB Statement No. 75: Effective from mid-2017, this updated standard requires governments to recognize the full OPEB liability on their balance sheets. This ensures greater transparency and accountability regarding the promises made to employees.

OPEB Trusts

To manage and mitigate the financial impact of OPEB liabilities, many governments establish OPEB trusts. These are irrevocable funds set aside specifically to meet future OPEB obligations. Contributions to these trusts can help reduce the unfunded liability and provide a buffer against future cost increases.

Financial Considerations

Funding Status

The funding status of OPEB plans can significantly impact a government’s financial health. A fully funded OPEB plan signifies that sufficient assets have been set aside to meet future obligations, whereas an underfunded plan indicates a looming financial burden.

Actuarial Valuations

Regular actuarial valuations are essential for assessing the financial health of OPEB plans. These valuations consider various factors such as employee demographics, salary growth, healthcare cost trends, and investment returns.

Amortization of Unfunded Liabilities

Unfunded OPEB liabilities must be amortized over a period not exceeding the average remaining service lives of employees. This amortization affects the annual costs reported by the government and its overall fiscal planning.

Implications of OPEB Liabilities

Fiscal Health

Unfunded OPEB liabilities are a significant concern for many state and local governments. Large OPEB liabilities can affect a government’s credit rating, borrowing costs, and fiscal sustainability.

Budgetary Pressure

The annual cost of providing OPEB can place severe pressure on government budgets. As healthcare costs continue to rise, the financial burden of OPEB may necessitate reallocating resources from other critical areas, such as public safety and education.

Policy and Reform

Addressing OPEB liabilities often requires substantial policy changes. Governments may need to consider:

• Benefit Reductions: Scaling back the promised benefits or increasing cost-sharing with retirees.
• Prefunding: Increasing contributions to OPEB trusts to better match future liabilities.
• Plan Design Changes: Modifying the structure of OPEB plans to control future cost growth. For example, replacing traditional healthcare plans with high-deductible plans paired with Health Savings Accounts (HSAs).

Legal and Ethical Considerations

Governments must navigate legal constraints and ethical considerations when altering OPEB policies. Many states have constitutional or statutory protections for certain employee benefits, making it challenging to reduce promised benefits.

Case Studies and Examples

City of Chicago

The City of Chicago has faced significant OPEB challenges, with billions of dollars in unfunded liabilities. In recent years, Chicago has made efforts to address these issues through a combination of benefit restructuring, increased contributions, and seeking legislative changes to provide more flexibility in managing OPEB costs.

State of California

California’s CalPERS system administers OPEB benefits for many state employees. The state has implemented prefunding strategies, including establishing a dedicated trust fund and requiring higher employee contributions. These measures have helped to stabilize California’s OPEB liabilities but challenges remain due to rising healthcare costs.

Conclusion

Other Post-Employment Benefits (OPEB) are a critical component of public sector employee compensation in the United States. Proper accounting, funding, and management of OPEB obligations are essential to ensure the fiscal health of state and local governments. As healthcare costs continue to rise, addressing OPEB liabilities will remain a complex and ongoing challenge requiring thoughtful policy solutions and proactive fiscal management.