Many state and local governments have promised to provide healthcare benefits for their retirees. These benefits cover retirees before they reach the eligibility age for Medicare and those who are Medicare ineligible. The promises include additional Cadillac benefits to retirees who are eligible for Medicare and provided supplemental coverage. These promises are known by their accounting moniker, OPEBs (other post employment benefits).
Few governments have set aside funds to pay for these promises, leaving an enormous unfunded liability that will burden future municipal budgets. Every government is responsible to meet their promises. Moody’s analyst Marcia Van Wagner wrote about the size of the OPEB juggernaut:
States listed a total of more than $530 billion in unfunded OPEB liabilities in their fiscal 2012 financial reports, although the liabilities are highly variable and concentrated within a subset of states.
Moody’s says the unfunded liability is about equivalent to state tax-supported debt. Unlike bonded debt though, OPEBs are being reduced and in some cases have been eliminated by bankruptcy in cities like Stockton, California. Detroit replaced retiree healthcare coverage with a small monthly check. Moody’s writes about other, less onerous steps that governments have taken to rein in costs and benefits:
Surveys indicate that state and local governments have widely pursued initiatives to contain retiree health costs. About two-thirds of governments responding to surveys cited by the Center for State and Local Government Excellence indicated that they had made changes to retiree health care in recent years, with the most common changes being increases to retiree premium contributions, co-payments and deductibles.