Pension and OPEB costs weigh on government balance sheets
For too long, citizens and government officials were not provided with the financial information needed to make knowledgeable tax and spending policy decisions. This resulted in all 50 states accumulating a combined $1.5 trillion in debt related to pension and other post-employment benefits, while elected officials claimed balanced budgets.
Just like private workers, state workers receive compensation packages that include salaries and benefits, such as retirement and health care benefits. As workers earn their compensation each year, their employer (the government) becomes obligated to pay the benefits. Most salaries and health care benefits are paid by the government in the form of paychecks and health insurance. But governments defer paying a portion of their employees’ compensation packages.
The largest deferred compensation costs relate to employee retirement benefits, such as pensions and OPEB. OPEB comprises mainly retiree health care costs. In the private sector, companies offering retirement benefits must, by law, put money into the retirement accounts of employees as the benefits are earned during each pay period. Governments however, defer paying some of these costs by not putting enough money into the funds from which those future benefits will be paid. When the benefits are not funded as they are earned, the government incurs a liability that will have to be paid by future taxpayers.
Ever since governments started offering retirement benefits, pension and OPEB liabilities have been hidden off government balance sheets, which are called Statements of Net Position. The good news is that thanks to the Governmental Accounting Standards Board, which sets GAAP for state and local governments, governments are now providing more information about their unfunded retirement obligations, which must be considered debt because they represent money owed.
Starting in fiscal year 2015, governments using GAAP to prepare their Comprehensive Annual Financial Reports have been required to report their unfunded pension liabilities on their balance sheets. Last year, those governments had to begin reporting their unfunded OPEB liabilities as well.
While government balance sheets are still not perfect, they now provide citizens and elected officials with a better view of their government’s true financial position by including unfunded pension and OPEB debt. Fortunately, citizens and the mainstream media have finally begun to pay much-needed attention to unfunded public pension debt, and governments have begun to set aside more money to pay for promised pension benefits. For example, while there is a lot of room for improvement, in FY 2018 states set aside 65 cents for every dollar of promised pension benefits.
There is still some bad news: Very little attention has been focused on OPEB, as the 50 states have accumulated $664.5 billion of unfunded debt. Unlike pensions, most states handle earned and promised OPEB on a pay-as-you-go basis. Benefits are paid when retirees receive health care. Under this system, no money is paid by taxpayers who received the services from the retired employees when the benefits were earned. Current taxpayers are paying the benefits of earlier employees, now retired. The promised benefits have been, and still are, being passed on to future taxpayers. For FY 2018, less than seven cents was set aside to pay for every dollar of promised OPEB.
Sadly, future taxpayers are going to be stuck paying for current pension and OPEB benefits. They will receive no government services or benefits for the taxes that go to pay for retired employee benefits. In addition, state retirees are counting on these promised benefits that have not been funded. It is extremely difficult to change these obligations that are contributing to the debt and fiscal health of so many state governments.