OPEBs – Just How Awful Is This Funding Issue?

I’ve spent most of my career focused on general pension-related issues, and recently with a more laser focus on funding policies and asset allocation geared to the pension plan’s liabilities.  Anyone who reads this blog knows that we have many issues in this country when it comes to funding pension systems and protecting those important benefits. But, pension funding issues may just be a drop in the bucket for municipalities and states, as other post-employment benefits (OPEBs) appear to be a greater issue looming on the horizon. OPEBs primarily consist of post-retirement healthcare.

Just how bad is the issue? We’ll need to do much more research to provide a more comprehensive and accurate response, but here is an example that was shared with me. According to the audit as of June 2018, Warwick, RI, has an OPEB liability of $405.8 million. Alarmingly, the ARC for the city’s OPEBs recently jumped from $21 million to $34 million, representing an increase of  61.9%! More unimaginable is the fact that the city hasn’t contributed 1 penny to this >$400 million in liabilities.

It is interesting that they recently contributed $13.4 million to fund the city’s four pension plans. The current pension liability is roughly $435 million. Unfortunately, pension inflation and healthcare inflation have very different growth rates. The fact that one promise is being funded while another seems to be totally neglected is perplexing. Both liabilities will need to be paid. I certainly wouldn’t want to be an elected official in that town when the piper comes calling.

Let’s hope that this situation is unique, but I fear that I’m being too optimistic. Much more to come!

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