An Overview of the Pension/OPEB Landscape

WP#2016-11

Introduction

It is impossible to discuss municipal finance without considering the cost of pensions and other post-retirement employee benefits (OPEB), the largest of which is retiree health insurance.  These costs have received enormous press coverage, usually incorporating sweeping generalities about the burden of employee post-retirement benefits for the nation as a whole.  Much is made of the bankruptcies in Vallejo, California (2008); Prichard, Alabama (2010); Central Falls, Rhode Island (2011); Stockton, California (2015); and Detroit, Michigan (2015).  At the state level, the pension situation in Illinois, New Jersey, and Connecticut is often described as typical.  No one mentions Delaware, Florida, Georgia, Tennessee, and North Carolina – states that have done a good job of providing reasonable benefits, paying their required contributions, and accumulating assets.  The point is that the picture at the state and local level is extremely heterogeneous, so it is crucial to look at the numbers state by state and locality by locality.

This paper provides a comprehensive accounting of pension and OPEB liabilities for state and local governments and the fiscal burden that they pose.  The analysis includes plans serving more than 800 entities: 50 states, 178 counties, 173 major cities, and 415 school districts related to the sample of cities and counties.  The analysis apportions the liabilities of state-administered cost-sharing plans to participating local governments for a more accurate picture of which governmental entity is actually responsible for funding pension and OPEB liabilities.  The cost analysis calculates, separately, pension and OPEB costs as a percentage of own-source revenue for states, cities, and counties.  It then combines pension and OPEB costs to obtain the overall burden of these programs.  Finally, it adds debt service costs to provide a comprehensive picture of government revenue commitments to long-term liabilities.