States have prefunded just 9% of promised healthcare and other non-pension benefits (OPEBs)—far below what actuaries recommend, but a slight improvement over past funding levels, according to a new report from Pew Charitable Trusts, a think tank that studies public policy issues.
Still, in 2019, the most recent year for which comprehensive data is available, “states collectively reported $749 billion in OPEB liabilities but only about $69 billion in assets to pay for these benefits, resulting in a funded ratio—the share of benefits already earned that have been pre-funded—of just 9.2%," the report said.
States vary widely in the progress they’ve made toward prefunding: Eleven states reported they have zero assets set aside for retiree healthcare benefits, while Alaska, Arizona and Oregon said retiree healthcare and other benefits were fully funded.
Several states, including Hawaii and Vermont, which have long had no assets set aside for these benefits, have recently started the protracted process toward adequately funding these benefits, researchers said.
In addition to a range of funding levels, “states also show a significant disparity in the value of OPEB benefits they offered to public employees and retirees. The 27 states that provide retirees with a subsidy that covers a fixed percentage of health insurance premiums account for over 90% of the liabilities, with five states accounting for over 57% of the country’s total OPEB debt,” researchers said.
The other half of states offer public employees and retirees “much smaller benefits that typically have an immaterial impact on their state’s budget. Identifying policies to effectively manage the cost of these benefits can be a challenging task for the states with the largest liabilities,” they added.
In contrast to the average healthcare and other benefit liability funding rate of 9%, the total funded ratio for state retirement systems was 71%, researchers said.
To arrive at their findings, Pew researchers used new government accounting standards to develop a “net amortization benchmark” to measure whether a state’s contributions are sufficient to keep the gap between other post-employment benefits or OPEBs like healthcare and liabilities from growing on an annual basis, assuming plan assumptions are met.
The new data, which shows state-by-state OPEB liabilities, allows users to see for the first time how each state’s liabilities for retiree healthcare and other benefits change annually and what would be required to keep them from growing, the report said.
While most state plans are significantly underfunded, “they vary significantly in how policymakers have managed these liabilities, as well as the generosity of the benefits and scale of the liabilities in contrast with the overall fiscal picture,” Pew researchers said.
The 26 states with the most modest benefits report having less than 10% of the total liability need to fund benefits other than pensions, while the 11 states with the most significant benefits, when measured against state own-source revenue, reported they have more than half of the total liability.
“Policy makers can look to where their state stands on this measure to assess the fiscal significance of unmanaged OPEB liabilities and the potential need for corrective action, whether increasing funding or adjusting benefits,” Pew researchers said.
The new disclosure standards will allow policymakers, beneficiaries, researchers, and the public “to better understand what drives the changes in funding levels and to see how contribution policies, actuarial forecasts, and, in some cases, volatility in investment markets can end up affecting the fiscal position of a state’s OPEB plans,” researchers added.
Historically, according to Pew, healthcare and other nonpension retirement benefits “have been more poorly funded than pensions for retired public workers. The new data and Pew benchmark now provides “a more complete picture of the long-term price tag of these benefits…and allows users to see for the first time how each state’s liabilities for OPEBs change annually and what would be required to keep them from growing.”
The data also helps policymakers understand which states face the biggest long-term fiscal challenges from underfunded OPEB plans, Pew said.
“Pre-funding retirement benefits is a way to pay for the compensation of public employees while they are providing service rather than pushing costs for work done today years or decades into the future,” researchers said.