Retiree medical costs were phased out in an orderly and predictable fashion
It’s often reported that underfunded public employee pension systems create barriers to state and local governments’ ability to provide ample public services like education, parks, and libraries. Too often overlooked, however, is another looming fiscal challenge: the rising costs of paying for health insurance for America’s retired public employees.
The Federal Reserve estimates that the long-term liability for providing medical coverage (technically called Other Post-Employment Benefits, or OPEB) for retired public workers is over $1 trillion. These retirement benefits vary widely across the country but can cover early retirees who are ineligible for Medicare as well as older retirees on Medicare. The costs of this coverage constrain what governments can do to address pressing problems and have even contributed to a few cities filing for bankruptcy.
The good news is that a few states have tackled the OPEB problem—and they provide lessons for others. Consider North Carolina. The state had run up a staggering OPEB liability of $34.4 billion—or $3,200 per resident. In 2017, the State Treasurer’s office found that pensions and retiree health care were approaching 20% of the state’s general fund budget—effectively “crowding out” other critical services. Since the General Accounting Standards Board (GASB) now requires state and local governments to report these liabilities in their annual financial reports, officials were worried about the impression this gave about the state’s fiscal health.
Daniel DiSalvo is a senior fellow at the Manhattan Institute and a professor of political science at the City College Of New York (CUNY). This piece is based on his new report, North Carolina's OPEB Experiment: Defusing the State Debt Bomb. Follow him on Twitter here.
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