To Avoid a Potential Credit Downgrade, States Must Address Their OPEB Issue

With rising healthcare costs looming, many states need to pay closer attention and develop feasible action plans in one area, in particular—other post-employment benefits (OPEB). In a recent article for The Bond Buyer, author Lucius McGeHee discusses why OPEB is such a large liability for state governments and warns against the possible consequences of not taking steps to address the issue.

So what’s the issue with OPEB? McGeHee explains that the cost of these benefits, which are primarily made up of state obligations to pay for healthcare coverage for retired state employees, is growing rapidly. On top of that, most states only pay the minimum amount owed each year, allowing the issue to snowball. Increasing pressure is coming from the Governmental Accounting Standards Board (GASB), which passed stricter reporting standards, making the liabilities more transparent.

What are the foreseeable outcomes of states failing to address the growing OPEB issue? The biggest consequence is a credit rating downgrade. Though no states have been downgraded as a result of this yet, the new GASB reporting standards will give ratings agencies more information to work off of—for better or for worse.

Are any states currently working to address their OPEB issue? There are legislators in a number of state and local positions calling for action. Some have created OPEB trusts, the benefits of which are threefold. OPEB trusts:

  1. Offer greater fund management flexibility,
  2. Allow governments to use a higher discount rate on future payments (resulting in lower balance sheet liabilities), and
  3. Provide assurance to credit rating agencies that the problem is being addressed.

For more details, read the article in full at The Bond Buyer.