State OPEB Funding Improved

States’ other post-employment benefit (OPEB) liabilities decreased 10%, to $627 billion, between 2010 and 2013, after adjusting for inflation, according to a report by The State Health Care Spending Project, an initiative of The Pew Charitable Trusts, and the John D. and Catherine T. MacArthur Foundation.

This drop resulted from lower rates of growth in health care costs and changes states made to their OPEB funding policies and retiree health plan provisions, the report says.

State-funded ratios increased from 5% in 2010 to 6% in 2013. However, this trend varied greatly among states—the funded ratio of eight states decreased, and Oregon increased its funded ratio by 25 percentage points.

States’ actual expenditures for OPEB totaled $18.4 billion in 2013, or 1.6% of state-generated revenue. If states had instead set aside the amount suggested by actuaries to pay for OPEB liabilities, their total payments that year would have more than doubled to $48 billion—4% of state-generated revenue—and spending to fully fund OPEB obligations would have outpaced what states contributed to active state employee health premiums.

The states that automatically increased their retiree health insurance premium contribution when the total cost of the premium rose had higher OPEB liabilities relative to the size of their economies in 2013, while the states that paid a fixed amount toward retirees’ health insurance premiums had relatively lower OPEB liabilities.

States varied in how they modified retiree health plan provisions, according to the report. For example, between 2000 and 2015, Idaho eliminated retiree health coverage for newly hired employees; at least five states stopped making any health premium contribution for certain retirees; and more than a dozen states changed the minimum age or the number of state service years required for retirees to be eligible for health benefits.

Thirty-five states have implemented Medicare Advantage or Employer Group Waiver Plans to provide health or prescription drug benefit coverage for Medicare-eligible retirees since these options were authorized as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. These cost-saving programs provide states with financial subsidies from the federal Medicare program to provide Medicare plus wraparound benefits, the report explains.

All states, with the exception of Idaho, offer newly hired public workers access to certain retiree health care coverage as part of their benefits package. Thirty-eight of these states have committed to making contributions toward health care premiums for such coverage.

Retiree health coverage for these state government workers stands in sharp contrast to the private sector, where the proportion of firms with 200 or more workers offering health coverage to retirees has dropped from 66% in 1988 to 23% in 2015. The report notes that rising health care costs, changes in accounting standards for reporting the cost of retiree health benefits, competition from overseas firms and small startup companies, and the addition of prescription drug coverage to the Medicare program have contributed to this drop in private-sector retiree health benefits, but although facing many of these same circumstances, most states continue to offer health benefits to their retired public workers.