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BENEFITS BEAT
Controlling OPEB Costs
Pennsylvania takes some small but commendable steps.
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Pennsylvania state officials say they have successfully whittled the state's $14 billion liability for retirement medical benefits down to a more manageable $8 billion level. Partisan critics may challenge the calculation methodologies used for that comparison — such as the magical immediate actuarial impact of a higher discount rate that results from simply funding a long-term investment portfolio to support the benefit — but the state's leaders deserve kudos for taking important steps in the right direction. They have provided an example that other public leaders may want to study if not follow.
There's an old saying that "if you're stuck in a hole, and want out, the first step is to stop digging." The Pennsylvania state management team has not completely stopped digging, as I will explain later, but they are at least using a smaller shovel.
The focus here is the state's newly recognized "other post-employment benefits" (OPEB) liability, which must now be displayed on the state's financial books under the Government Accounting Standards Board's principles of full disclosure.
To their credit, the management team has squarely addressed some of the key drivers of OPEB costs. Some of the measures they have invoked include:
• Requiring recent retirees to contribute 1 percent of their final salary for medical costs.
• Requiring future retirees to contribute 3 percent of final salary.
• Requiring longer service periods to qualify for retiree medical benefits.
• Requiring higher co-payments.
• Pre-funding the plan to achieve higher long-term investment returns and an improved actuarial assumption, thus an immediately lower liability.
The state has made major progress, with big scores in the first inning of what will likely be a double-header. There is more work to do. They haven't really stopped digging the hole they're in if they don't also consider using total cost caps, CPI cost caps, and a defined contribution or hybrid plan structure for new and younger workers to reduce employer liabilities for potentially runaway future medical cost inflation.
Likewise, the state should take a closer look at the amortization policies used in its actuarial assumptions, to make sure that the actuaries are not using a longer period to repay these obligations than the natural career lives of the employees and the expected lives of the retirees. Otherwise, the reported cost savings could be illusory.
Even so, Pennsylvania is one of the first large, traditionally labor-friendly states to take responsible measures to own up to its legacy promises and begin the painful process of bringing benefits in line with the ability of taxpayers to absorb them. For that, Pennsylvania officials deserve some praise from their peers and citizens. Keep up the good work, and try to stop digging as soon as possible.
Girard Miller, an analyst of benefits and investments with 30 years of experience in the public, private and nonprofit sectors, can be reached at Girardinmalibu@charter.net. His general market observations and institutional investment strategies are his own and should not be construed as investment advice or recommendations concerning specific securities. More biographical information.