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May, No. 250a

On March 12, 2008, the Federal Reserve Bank of Chicago and the Civic Federation held a forum on retiree health care for state and local government employees. The participants focused on strategies to finance and administer other post-employment benefits, or OPEB.

Last Updated: 04/17/2008

Facing the Challenge of Retiree Health Care: Liabilities and Responses of State and Local Governments—A Conference Summary

Rick Mattoon

Beginning in fiscal year 2008, many state and local governments will begin reporting the costs of paying for nonpension retiree benefits on their financial statements in response to new accounting standards issued by the Governmental Accounting Standards Board (GASB). These costs are referred to as other post-employment benefits (OPEB), with retiree health care representing the single largest component. The challenge facing state and local governments in meeting OPEB liabilities stems largely from the unplanned (and accelerating) increases in health care costs. Recent estimates suggest that state and local governments have OPEB liabilities of between $600 billion and $1.6 trillion, and virtually all of this is unfunded. The historical method of using a “pay-as-you-go” system to meet retiree OPEB costs (where current revenues pay for these costs) would crowd out spending on other key government functions. This will be a particular challenge to governments that face both underfunded pension and OPEB liabilities.