OPEB Funding Policy Opportunities

New Governmental Accounting Standards Board (GASB) statements 74 and 75 are intended to make accounting for OPEB (Other Postemployment Benefits, usually retiree medical) more transparent by moving the entire unfunded liability to the face of the financial statements. This post discusses some of the OPEB funding policy opportunities that employers should consider as they prepare to implement GASB 74/75 over the next two years.

Opportunity #1: The potential for funded status improvement. Unlike pension plans which are generally pre-funded, most public sector OPEB liabilities are unfunded and benefits are pay-as-you-go. But employers should consider that ANY funding policy is better than nothing – and even a modest level of pre-funding will improve the plan’s funded status and balance sheet impact.

Opportunity #2: A funding policy can help lower the calculated liability. The ultimate cost of retiree medical benefits can never be known exactly until benefits are actually paid in the future. However, the best estimate of those costs in today’s dollars is impacted by how (and if) funds are invested. To the extent that investment returns can help fund future benefit costs, an OPEB trust with higher expected returns can help reduce your calculated OPEB liability.

Opportunity #3: Attention can drive action. OPEB liabilities are becoming front-page headlines – particularly because of their unfunded nature. Employers should harness this increased scrutiny to compel stakeholders (e.g., employers, employees, and taxpayers) to collaboratively review OPEB terms and create a strategy to prudently prefund these promises.

There will be pitfalls along the way. It may be difficult to secure additional funding sources when employers and employees are already trying to eliminate existing pension debt. Plus, OPEB costs are usually more volatile than pensions, so an OPEB funding policy will need to consider strategies to deal with this “moving target”.

There may also be situations where an employer does not want to prefund OPEB. Perhaps they fear that “committing” money towards OPEB will reduce their ability to reduce benefit levels in the future. However, this rationale just skirts the larger issue of knowingly promising benefit levels which are unaffordable.

GASB 74/75 is a catalyst for public employers to revisit their OPEB funding policies. There is a limited timeframe for stakeholders to develop a meaningful funding strategy before the entire unfunded liability goes “on the books”.