Key reforms could reduce the threat to core public services
NEW YORK, NY — Many states and municipalities are struggling to fund pension liabilities, but other post-employment benefits (OPEB), which typically include medical insurance, are a far riskier obligation. OPEB liabilities are typically less than pension liabilities and are therefore considered less of a concern. But they are politically difficult to reform and often far more difficult to estimate, making them riskier. A new Manhattan Institute report by Thurston Powers, a data analyst for the Mercatus Center at George Mason University, explores the unappreciated risks and complexities of OPEB, particularly in New York State, New York City, Connecticut, and New Jersey, and makes the case for reform.
OPEB liabilities are complex due to the many factors that go into quantifying their future cost. Health insurance in particular requires considering mortality, health-care cost increases, inflation, demographics, health-care regulations, payroll growth, and, in cases where the employer is prefunding, the investment rate of return. Highly complex financial risks like this threaten a state or municipal government’s ability to provide core services like public safety, hospitals, and education.
In the tri-state area in particular OPEB presents substantial risks to fiscal health. The report’s key findings include:
- New York City has a staggering net OPEB liability of $90 billion. Its liability had a net increase of $20.6 billion between 2013 and 2017.
- Between 2014 and 2018, New York State’s estimated required OPEB contributions grew from $2.3 to $4.3 billion, an 89% increase, signaling higher future operating costs.
- Thanks to 2017 reforms, Connecticut’s total OPEB liability decreased between 2013 and 2017. Medicare Advantage reform contributed to 95% of the decline.
- New Jersey’s net OPEB liability increased by nearly $18 billion from 2013-2017, reaching $69.3 billion.
The report also considers measures that governments can take to limit their OPEB risks. These measures range from providing a health care subsidy, indexed to inflation, to switching to an OPEB plan without either explicit or implicit subsidies. These changes mitigate risk to the employer and thus protect the ability of states and municipalities to provide employee benefits and core government services in the long run.