Report: States Face $1 Trillion in Unfunded Liabilities
The California state capitol in Sacramento, Calif., on March 8, 2014. California leads all states in the amount of unfunded benefits, at $166.6 billion. (Andre m, CC BY-SA 3.0, Wikimedia Commons) US NEWS
States are facing more than $1 trillion in unfunded future liabilities related to health and life insurance benefits for their retired employees, a growing shortfall that amounts to about $3,100 for every person in the United States, according to a new report by the American Legislative Exchange Council (ALEC).
ALEC, which has come under attack by left-wing advocacy groups in recent years, describes itself as “the nation’s largest nonpartisan, voluntary membership organization of state legislators, with more than 2,000 members across the nation.”
Its mission is “to discuss, develop, and disseminate model public policies that expand free markets, promote economic growth, limit the size of government, and preserve individual liberty.”
The new study, the latest in an annual series from ALEC’s Center for State Fiscal Reform, comes after critics have complained for years that cash-strapped states don’t adequately fund their retiree-related obligations, which has allowed those sums to accumulate.
Its authors say that, “in the end, government must be held accountable for its actions.” Without policy changes, these liabilities could lead to future tax increases or force cuts to core public services in states.
Making governments use “more prudent actuarial assumptions and increasing transparency prevents state governments from making impossible promises and allowing unfunded liabilities to accumulate,” the report states.
These unfunded benefit programs for retired public employees fall under a category that fiscal analysts call “other post-employment benefits,” or OPEB. OPEB excludes public pension plans but includes benefits to retired workers such as health insurance, life insurance, supplemental Medicare insurance, and more. The study examined 132 OPEB plans from fiscal 2013 to 2017, drawing on the most current Comprehensive Annual Financial Reports (CAFRs) and Actuarial Valuation Reports.
“While a trillion dollars is a rounding error in Washington, D.C., at the state level, it’s a huge threat to government programs and taxpayers,” Jonathan Williams, chief economist and executive vice president of policy at ALEC, told The Epoch Times in an interview.
Jonathan Williams of the American Legislative Exchange Council. (Courtesy American Legislative Exchange Council)
“Governments, if they want to spend more money on new programs, need to view OPEB liabilities as a threat, so I think there is something for both parties to like from tackling these liabilities.”
Public pensions have generally been prefunded at 80 percent in order to be considered healthy, “but now a lot of us are thinking 100 percent is better.” OPEB items, by contrast, have generally not been prefunded at all, he said.
“OPEB liabilities have flown under the radar, but they have become more visible as a result of federal accounting rule changes that force states to list them on their balance sheets,” Williams said. Even so, they have been “overshadowed” by fiscal problems in Detroit and Puerto Rico.
“Unfortunately, this new transparency has left us with these very huge liabilities,” he said.
The states with the largest OPEB liabilities are California ($166.6 billion), New Jersey ($130.4 billion), New York ($129.3 billion), Texas ($115.7 billion), and Illinois ($64.4 billion), according to the study. The states with the smallest OPEB liabilities are Nebraska and South Dakota, which Williams said are tied at zero because they don’t pay for retired employees’ health care, followed by Kansas ($285,000), Oklahoma ($9.1 million), and Utah ($210.9 million).
“There is a lot of doom and gloom in the report,” but there are also a handful of states that are doing a good job getting a handle on their OPEB liabilities, Williams said.