Other Postemployment Benefits Research Articles

When it matters to keep promises: Funding of retiree benefit and government borrowing cost

While funding of retiree benefits has become a critical challenge to the fiscal sustainability of U.S. local governments, little is known about the consequences of public expenditures on OPEBs and pensions. This study examines whether and when annual contributions to other post-employment benefits (OPEBs) plans affect government borrowing costs. By reducing unfunded liabilities, OPEB contributions may decrease borrowing costs. As two parts of deferred employee compensation, expenditure tradeoffs may exist between OPEBs and pension contributions. Fiscal capacity can further moderate these expenditure tradeoffs. Results show that, as U.S. city and county governments make more contributions to OPEB plans, they pay lower borrowing costs when the pension contribution is low and when fiscal capacity is low. They pay higher borrowing costs when the pension contribution is high and when fiscal capacity is low. These findings suggest that the savings of borrowing costs from OPEB contributions depend on the tradeoffs between OPEB and pension expenditures and the availability of fiscal resources.

Does financial disclosure matter? GASB 45 and municipal borrowing costs

ABSTRACT Financial disclosure is crucial to achieve fiscal transparency and government accountability. In 2004, the Governmental Accounting Standards Board (GASB) issued Statement No. 45 to require the disclosure of information about other postemployment benefits (OPEB). Using a panel of U.S. counties and the bonds they issued between 1999 and 2012, this paper examines the effects of GASB 45 on municipal borrowing costs. GASB 45 increases borrowing costs of county governments, with the effects decreasing over time. GASB 45 has a larger effect on borrowing costs of county governments issuing bonds of lower credit quality and adopting the generally accepted accounting standards (GAAP).

Unions, Parties, and the Politics of State Government Legacy Cost

AbstractMany American state governments have made extensive promises to pay for employees’ health care and other benefits in retirement. Currently estimated at over $1 trillion in unfunded liabilities, these other postemployment benefits (OPEB) are creating a major fiscal problem for state governments. In this article, we examine the politics of OPEB. We seek to explain the variation in the generosity of OPEB across U.S. states. We argue that party competition theories do not adequately explain the outcomes we observe. Instead, we draw on the emerging Schattschneiderian approach to the politics of public policy to show that public union strength conditions a party's incentives to represent unions’ interests. In states where public sector unions are strong, unions can find their way into either party's coalition. We find that Republicans are more responsive to public union interests than either their ideological brand or prior research would suggest. It is only in states where public employees are weak that Republicans can act unilaterally and enact their preference for less government spending. To test our theories, we carry out an empirical analysis using a newly assembled data set of per capita OPEB liabilities across 49 states.

Walking a Tightrope: Are U.S. State and Local Governments on a Fiscally Sustainable Path?

This paper develops a new measure of state and local fiscal sustainability called the which is based on socioeconomic and other fundamental factors and removes the short-term influence of the business cycle. The paper estimates the trend gap and finds that the nationwide per capita trend gap has been on a growing path over the past three decades, a different conclusion than found in previous studies. Social insurance and income maintenance programs have played a major role in the growth of the trend gap, while pension and other post-employment benefits (OPEB) plans have become increasingly important in driving it up. In addition, there are large and growing disparities in the trend gap across states.

Public university opeb burden: Recognition, funding and future obligations

Public universities began reporting the costs for nonpension retiree benefit obligations known as other postemployment benefits (OPEB) in their fiscal 2008 financial statements. The reported OPEB obligation is the projected benefits to be paid after an employee retires. This descriptive study examines the status of OPEB funding at land grant universities, composition of the benefits provided, and whether modifications are under consideration. Results indicate land grant institutions cover their costs on a pay-as-you-go basis, OPEB liabilities are significantly underfunded, and universities provide comparable types of benefits in their OPEB plan. Revenue shortfalls and current fiscal pressures raise concerns about how they can support the OPEB liabilities. Thus many institutions are evaluating the OPEB cost and the benefits currently provided.

Changing and/or funding opeb promises: A typology of local government responses to gasb 45 and the realization of opeb liabilities

GASB Statement No. 45 addresses how governmental units account for employees' other post-employment benefits (OPEB), requiring government employers to replace OPEB reporting on a pay-as-you-go basis with an accounting of the cost of current and future benefits. This requirement and the resulting OPEB liability may prompt government employers to reconsider key questions regarding their OPEB provision. The size of the OPEB liability depends on both the benefit promises made to employees and the assets to fund these promises. We propose a typology that defines four approaches for governments to respond to GASB 45 and their OPEB liabilities. These approaches represent different combinations of strategies involving OPEB promises and assets. We illustrate these strategies and responses using selected counties and nine mid-Atlantic cities.

TIPS, the Triple Duration, and the OPEB Liability: Hedging Medical Care Inflation in OPEB Plans

The adoption of FAS 158 forces sponsors of post-employment health benefit plans to consider how to manage the volatility that changes in medical care inflation create in the OPEB (Other Post-Employment Benefits) liability. By choosing carefully how the nominal discount rate used for the liability is decomposed into real rates and inflation, I illustrate that the true exposure to an OPEB plan is to the spread of medical care inflation above (or below) the overall inflation rate. The implication is that an effective immunization strategy exists that can eliminate most of the volatility in the OPEB account.

California’s Public Sector Pension Plans in Perspective

The recession of 2001 caused funding problems for public sector pension plans in California and throughout the United States. By 2007, they had largely recovered only to be devastated by the Great Recession that began in the fourth quarter of 2008, the effects of which are still with us. Matters have been exacerbated and complicated by the adoption of Governmental Accounting Standards Board’s Statement 45, which requires that other postemployment benefits (OPEBs), mainly retiree health care obligations, be included in financial statements. Pension plans are prefunded. OPEBs are not. For this and other reasons, the two should be addressed separately. Although there are problems, California’s public sector pension plans are in better shape than one would gather from what has been reported by the media. OPEBs are a larger and more difficult problem.

Implementing GASB 45: Recommended Best Practices in Local Government

The Governmental Accounting Standards Board issued Statement No. 45—Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions in 2004, requiring local governments to actuarially determine their annual required contribution to fund other postemployment benefits (OPEB) and to account for the unfunded amount as a liability on annual financial statements. This article discusses best practices on the implementation and management of this accounting standard, including actuarial practices, funding decisions, and benefit changes. It also presents how Phase I cities and counties in North Carolina implemented Statement No. 45 for further explanation. The hope is that these best practices will serve as a guidepost for making OPEB policy decisions, especially among smaller local governments, on the criteria of financial accountability and sustainability.

Ensuring State and Municipal Solvency: A Financial Innovations Lab Report

As the recession drags on, states and municipalities find themselves in a deep hole. For the first time since the Great Depression, income, sales and property taxes have declined in unison. The cyclical challenges are clear: falling tax receipts, high unemployment, tepid investment returns, and overall economic uncertainty.But even more daunting are the long-term structural issues that are simultaneously coming to a head: trillions of dollars in unfunded pension obligations, the escalating costs of other post-employment benefits (OPEB), record numbers of retirees poised to tap pensions and benefits, increasing longevity, and significant revenue/expenditure mismatches.Against this urgent backdrop, the Milken Institute and the Kauffman Foundation hosted a Financial Innovations Lab in July 2010. Unlike any previous meeting addressing current conditions in state and municipal finance, the Lab brought together a diverse group of state and local officials, union representatives, experts from the capital markets, money managers, academics, public-sector attorneys, and representatives from bond rating agencies. Together they explored both immediate fixes and broader strategies that could help prevent future crises.It’s clear that achieving long-term solvency for states and municipalities will require painful paradigm shifts. There is no simple approach that will work for all 91,000 local governmental units in the U.S. But the sooner governments address their long-term structural challenges, the better off they and their residents will be. The short-term expediency of simply laying off workers to meet hard budget constraints is not sustainable in the long run and will deprive citizens of services (safety, sanitation, education) they want and deserve. The Lab produced some noteworthy options, including: adopting standardized actuarial assumptions, perhaps similar to corporate-sector accounting standards; implementing multi-year budgeting plans/rainy-day funds; reassessing possible economies of scale from shared services/consolidation; bringing together all the key stakeholders - government workers and the unions that represent them, bondholders, and citizen-taxpayers - in jurisdictions facing the most immediate problems to find ways of sharing the burden of fiscal adjustment to ensure long-run solvency; establishing control boards as a last resort for states and municipalities in extreme distress; possibly providing short-term federal aid to states and municipalities that actively implement steps to restructure their finances.The Lab sparked a critical conversation, and this report summarizes the information and perspectives shared during the day’s proceedings.

Trouble Keeping Promises? An Analysis of Underfunding in State Retiree Benefits

This article examines the funding of two key components of state government total compensation: pensions and other postemployment benefits (OPEB), the latter consisting primarily of retiree health care. A brief overview of the economic, political, and legal environments of state pensions and OPEB is followed by an analysis of the unfunded liabilities for these respective benefits. Regression results suggest the importance of state management capacity, per capita income, and public employee density in understanding differences in the states' pension and OPEB funding performance. Additionally, employers' level of pension contributions, legislative professionalism, and fiscal constraint are significantly related to pension funding, while political ideology and levels of state pension funding are significantly related to OPEB funding. The article concludes by discussing the tensions that states face in attempting to balance the fiscal imperative of funding retiree benefits liabilities with the human capital challenge of attracting and retaining a professional workforce. Failure on either could be costly to state government.

Unfunded Public Employee Health Care Benefits and GASB No. 45

The Government Accounting Standards Board (GASB) recently released Statement No. 45, Accounting and Financial Reporting by Employers for Post-Employment Benefits Other Than Pensions and its companion Statement No. 43 for pooled stand-alone health care plans, which will profoundly affect American governmental finance. The goal of this article is to encourage governments to consider carefully a full range of options in funding and restructuring other post-employment benefits (OPEB). This article will review Statement No. 45's potential impact on governments and review existing disclosures in financial reports as well as bond offering statements. The article will discuss the statement's impact on budgets and governmental operations, including collective bargaining. Funding options under Statement No. 45 will be detailed, including the advantages and disadvantages of irrevocable trusts and OPEB bonds. The article will also discuss the impact of Medicare Part D subsidies received by governments, as well as the bond rating implications of policy decisions surrounding OPEB. As the largest government entities are just now implementing GASB Statement No. 45, estimates of the magnitude of unfunded OPEB liabilities are limited as are the strategies likely to be adopted to cover these obligations. This article offers a summary of the unfunded OPEB liabilities reported by states and major cities and suggests some measures for assessing the ability of these entities to address these costs.

Potential State Government Practices Impact of the New GASB Accounting Standard for Retiree Health Benefits

The Governmental Accounting Standards Board (GASB) has adopted a new accounting standard for state and local government retiree healthcare benefits that, for many states, will require accrual accounting for such benefits for the first time. The purpose of this paper is to examine the recent reporting practices of state governments with respect to retiree health insurance programs sponsored by the states in order to determine the dimensions of potential state employer practices likely to be changed by the new Other Postemployment Benefits (OPEB) standard with respect to accounting for such state plans, as well as financing and offering such state plans.

Accounting pedagogy based on extant authoritative rules versus decision-oriented analysis: The case of other postemployment benefits

Contemporary financial accounting pedagogy has been criticized for its excessive concentration on extant authoritative rules and preparer-oriented mechanics. An alternative decision-oriented pedagogy would emphasize the economic consequences of financial account- ing choices, analyze the role of accounting information within a broader economic, legal and political context, and consider emerging issues that remain authoritatively unresolved. This article illustrates a decision-oriented accounting pedagogy for the treatment of the other pos- temployment benefits (OPEB) issues. This article has two primary objectives. First, it provides a source for relevant economic, legal, and accounting background information and a set of decision-oriented, conceptually-motivated cases and topics for class discussion. Second, it uses the OPEB topic to illustrate the general pedagogic principle of addressing accounting issues from a decision-oriented rather than a preparer-oriented perspective. This approach could be equally useful for the treatment of a variety of accounting related topics, including asset reversions from defined benefit pension plan terminations and curtailments, corporate restruc- turings and downsizings, or employee stock options and deferred compensation agreements. Recently, accounting educators have been criticized in both academic and professional quarters for their excessive concentration on extant accounting practices and authoritative rules to the exclusion of a more decision-oriented analysis. In lieu of a rule-dominated pedagogy, a number of broader objec- tives have been proposed, including developing: