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U.S. State Retiree Medical and Other Post-employment Benefit Liabilities Keep Rising as States Prioritize Other Obligations

Total unfunded state other post-employment benefit (OPEB) liabilities have increased, according to S&P Global Ratings' latest survey of U.S. states. Many states have completed new OPEB actuarial studies since our last survey (which used 2015 or previous studies) and total unfunded liabilities across all states increased $22.7 billion or 3.9% in fiscal 2016. The rise in unfunded OPEB liabilities in our fiscal 2016 survey builds upon a trend of rising liabilities reported in our fiscal 2015 survey ($59.4 billion or 12% growth) after stable to declining liability trends in our 2013 and 2014 surveys.

Despite recent efforts to curb liabilities, growth in total state OPEB liabilities have continued as most states fail to fully fund their actuarially required contributions (ARC). In our opinion, many have chosen to direct their limited resources elsewhere rather than prefund retiree health benefits, which are not legally protected in most states, because they face various budgetary pressures. According to our report,"Poised To Strengthen In Fiscal 2018, U.S. State Budget Conditions Remain Under Longer Term Pressure", projected budget gaps are smaller than those in recent years and states could see revenues rebound in fiscal 2018. Many states are forecasting tax revenue growth for fiscal 2018 but we believe it is unclear if improved performance would lead to significant progress in addressing unfunded OPEB liabilities in the near term.

Overview

  • Overall unfunded state OPEB liabilities growth has slowed but remains somewhat high.
  • Per capita liabilities remain low for most states, with several notable exceptions.
  • Only a handful of states meet their actuarially recommended OPEB costs as most prioritize other spending.
  • Despite many states' ability to change OPEB benefits, thus reducing liabilities, OPEB ratios still affect credit quality.
  • The upcoming implementation of Governmental Accounting Standards Board (GASB) Statements Nos. 74 and 75 could increase comparability across states but might mask plan funding progress.