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.