Eliminating retiree health care liabilities in an orderly, predictable fashion can free up state and local budgets
NEW YORK, NY – Legacy retirement costs are contributing to debt crises across the country, constraining state and local governments’ ability to provide key public services. The root of the problem lies in back-loaded employee compensation, including retiree health care, also known as OPEB (Other Post-Employment Benefits), and governments that fail to set aside enough funds to pay for these growing costs. In a new Manhattan Institute report, senior fellow Daniel DiSalvo examines how North Carolina passed legislation to eliminate OPEB for future employees, positioning the state to tackle its debt and begin to realize savings.
North Carolina offers an instructive approach for other states looking to ease legacy costs and free up funds for other pressing needs. Larger states with big retiree health care liabilities but weak public-sector unions, like North Carolina, can especially learn from its experience. These include Alabama, Georgia, South Carolina, and Texas, whose OPEB liabilities are in the billions. In all four states, unions represent less than 10% of the public workforce, suggesting the possibility of reform.
According to DiSalvo, in lieu of traditional retiree medical benefits, state and local governments should consider encouraging the creation of Retiree Medical Trusts (RMTs). RMTs function like defined-contribution plans and are run by employees or their unions, not by employers. RMTs are a more flexible option for employees who want to maintain their retirement benefits and a more sustainable option for public employers who pay as they go—rather than build up large liabilities over time.