Albany’s OPEB iceberg gets bigger

by E.J. McMahon |  | NY Torch

New York’s unfunded liability for state government retiree health coverage has reached $90.5 billion—an increase of $3 billion over last year’s estimate, and nearly $13 billion in just two years, according to the just-released First Quarterly Update to the state’s FY 2019 Financial Plan.

The liability for other post-employment benefits, or OPEB, reflects the net present value of continuing state health insurance coverage available to all employees who retire directly from a state government payroll after at least 10 years of service.

The increase in the OPEB liability is attributed entirely to an updated actuarial estimate for employees of the State University of New York (SUNY), whose OPEB benefits are valued at $17.7 billion, up from $14.4 billion in 2016. The state government itself (legislative, executive and judicial branches) accounts for $72.83 billion of the total OPEB cost, based on an unchanged fiscal 2016 actuarial estimate that will soon be updated as well.

What this basically means is that the state has a $91 billion debt in addition to its bonded state-related debt of $55 billion. And as the number of retirees and cost of health insurance grows, the OPEB debt will keep growing—unless something is done to reform or rein in these benefits.

Background

Government retirees at almost every level in New York are entitled to continuing health care coverage at a heavily discounted rate, or even for free—a benefit that has virtually disappeared from the private sector.

The state government’s collective OPEB obligations are enormous because, in contrast to pension benefits, retiree health care is not prefunded with deposits into large investments pools but covered on a “pay as you go” basis. In other words, current taxpayers must lay out cash to cover the cost of a health benefit earned in the past—sometimes the distant past—by current retirees.

It’s a classic cost shift from one generation to another, and it’s fundamentally inequitable and inefficient.

The annual charge for retiree health coverage—which, excluding SUNY, came to about $1.6 billion in fiscal 2018—is just the tip of a very big iceberg. Counting all public agencies in New York, including localities and authorities, the Empire Center estimated in 2012 that the total unfunded OPEB liability came to $250 billion—a figure that now probably is closer to $280 billion, if not higher.

Why the growth?

Like previous reports, the latest Financial Plan Update from Governor Cuomo’s Division of the Budget says “a significant portion” of the growth in the OPEB liability has been driven by a reduction in the discount rate used to calculate the projected retiree health benefit obligation (see page 47). The rate is based on the 20-year average return from the state’s Short Term Investment Pool, or STIP, which dropped from 3.155 percent to 2.637 percent in the past year. The lower the discount rate (reflecting assumed market earnings and thus the economic value of the OPEB promise), the larger the obligation.

Starting in fiscal 2019, a new government accounting standard will require New York State’s official financial “net position” table to report the state’s net unfunded OPEB liability, which is the difference between what the state actually has been spending on annual premiums and what it should have been depositing if it had been saving money to cover its retiree health care promises, amortized over a 30-year period. This new accounting guideline “is expected to significantly increase the State’s total long-term liabilities and show the State in a negative net position,” the financial plan update says.

In other words, New York will be in a state of what accountants call “balance sheet insolvency,” which means that the total amount owed by the state government will exceed the value of all that it is owed plus the value of its assets. It won’t be alone in that category, though. Most counties, cities and school districts, as well as larger towns, will find themselves in the same sort of spotlight.

New York City, alone among major state or local governments, has voluntarily chosen to list its entire unfunded OPEB liability (most recently pegged at $88 billion) on the face of its balance sheet in financial statements for a decade now. So far, credit rating agencies don’t seem to care, shrugging off retiree health coverage as a promise that, unlike the pension obligations, can be broken without violating the constitution or defaulting on a legal obligation. Which is technically true—but try telling that to public employee unions or retiree groups, which have blocked the last several New York governors, including Andrew Cuomo in his last budget, from attempting to restructure retiree benefits.

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- E.J. McMahon is the Research Director at the Empire Center for Public Policy.