Other Post-Employment Benefit Liabilities, 5th Edition

by Lee Schalk, Thomas Savidge, Nick Stark & Jonathan Williams

Introduction

Other post-employment benefits (OPEB), covers all the benefits a retired public employee is eligible to receive in retirement that do not count as a pension. If a retired public employee is eligible for a pension, he or she is most likely eligible for OPEB benefits as well.  These benefits include health insurance, life insurance, Medicare Supplement Insurance and other benefits. Unfunded state OPEB liabilities total $959 billion or $3,000 for every man, woman and child in the United States. Overall, OPEB benefits have worse funding ratios than pensions. OPEB plans have an average funding ratio of 11.94%, a critically low amount. Many OPEB plans have no prefunded assets, also known as “pay-as-you-go” plans, which allow liabilities to grow rapidly year over year. OPEB Reform, such as in Nebraska, South Dakota and Utah, are needed if states hope to keep OPEB promises.

This study uses a risk-free discount rate, expressed as a percent, to determine the value of liabilities that OPEB plans must pay in the future. The “risk-free” aspect of our discount rate calculation follows the reality that states cannot default on these promised benefits. This risk-free discount rate is based upon the yields of the 10-year and 20-year U.S. Treasury bonds, which means the rate changes each year. In addition, the risk-free discount rate creates a common scale to measure OPEB liabilities across the country, as well as compare OPEB liabilities to pension liabilities as reported in Unaccountable and Unaffordable.

To account for unexpected fluctuations in the risk-free discount rate, this report also measures liability values with a fixed discount rate of 4.5% to account for these changes in the risk-free discount rate.

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