Byron Lutz
Louise Sheiner

Working Paper 19779

1050 Massachusetts Avenue
Cambridge, MA 02138
January 2014

This paper was prepared for the 2013 NBER Conference on State and Local Health Plans for Active
and Retired Public Employees. We thank Anne Burton, Jeff Groesbeck, and Lena Yemelyanov for
truly outstanding research assistance. The paper would not have been feasible without them. We
thank Robert Novy-Marx and Josh Rauh for generously sharing their pension calculations and Michael
Morris of the Social Security Administration for providing us with the Social Security mortality rate
assumptions. We thank Don Boyd, Greg Duffee, Josh Rauh, Kim Rueben, Winthrop Smith and participants
at the 2013 Municipal Finance Conference, the 2013 NBER Conference on State and Local Health
Plans for Active and Retired Public Employees, the Federal Reserve Board Lunchtime Workshop
and the Cleveland Federal Reserve Seminar Series for helpful suggestions. We also thank the numerous
public officials who discussed the details of public sector retiree health care in their state with us. The
analysis and conclusions reached in the paper are the authors’ alone and do not indicate concurrence
by the Board of Governors of the Federal Reserve or the National Bureau of Economic Research.

NBER working papers are circulated for discussion and comment purposes. They have not been peer-
reviewed or been subject to the review by the NBER Board of Directors that accompanies official
NBER publications.

© 2014 by Byron Lutz and Louise Sheiner. All rights reserved. Short sections of text, not to exceed
two paragraphs, may be quoted without explicit permission provided that full credit, including © notice,
is given to the source.

The Fiscal Stress Arising from State and Local Retiree Health Obligations
Byron Lutz and Louise Sheiner
NBER Working Paper No. 19779
January 2014
JEL No. H0,H53,H72,H75


A major factor weighing down the long-term finances of state and local governments is the obligation
to fund retiree benefits. While state and local government pension obligations have been analyzed
in great detail, much less attention has been paid to the costs of the other major retiree benefit provided
by these governments: retiree health insurance. The first portion of the paper uses the information
contained in the annual actuarial reports for public retiree health plans to reverse engineer the cash
flows underlying the liabilities given in the report. Obtaining the cash flows allows us to construct
liability estimates which are consistent across governments in terms of the discount rate, actuarial
method and assumptions concerning medical cost inflation and mortality. We find that the total unfunded
accrued liability of state and local governments for the provision of retiree health care exceeds $1
trillion, or about ⅓ of total state and local government revenue. Relative to pension obligations discounted
at the same rate, we find that unfunded retiree health care liabilities are ½ the size of unfunded pension
obligations. We also find that using assumptions concerning the growth in health care costs that are
arguably more realistic than those employed by most states actually reduces the size of the liability
in most cases. Pushing in the opposite direction, we find that using plausibly more realistic mortality
assumptions increases the size of liability. The second portion of the paper places retiree health care
obligations into context by examining the budget pressures associated with retiree health on a continuing,
largely pay-as-you go basis. We find that much of the projected increase in retiree health obligations
as a share of revenue is the result of health care cost growth. On average, states could put their retiree
health obligations into long-run fiscal balance by contributing an additional ¾ percent of total revenue
toward the benefit each year. There is, however, wide variation across the states, with the majority
of states requiring little in the way of additional financing, but some states requiring a significantly
larger increase.

Byron Lutz
Federal Reserve Board of Governors
Research Division
20th and C Streets, NW
Washington, DC 20551-0001

Louise Sheiner
Federal Reserve Board
Research Division
20th and C Streets, NW
Washington, DC 20551-0001

I. Introduction

Obligations for retiree benefits are among the most important factors behind the long-term fiscal
imbalances of state and local governments (e.g. State Budget Crisis Task Force 2012). Although
state and local pension obligations have been analyzed in great detail, much less attention has
been paid to the costs of health insurance—the other major retiree benefit provided by these
governments. Almost all state and local governments provide this benefit to their former
employees and very few have put away funds with which to honor these obligations. Moreover,
the ever escalating cost of medical care is expected to push up the cost of providing the benefit
over time. This paper seeks to answer two fundamental questions surrounding state and local
government retiree health care liabilities. First, how large are these obligations? Second, are
these benefits fiscally sustainable over the long-term?

Retiree health insurance became prevalent in both the public and private labor markets following
the 1965 introduction of Medicare, which significantly lowered the cost of providing the benefit.
As with any fringe benefit, the coverage formed part of the employee compensation package and
it was also used to encourage early retirement (Blau and Gilleskie 2001; Marton and Woodbury
2006). Initially, both private firms and state and local governments accounted for the cost of the
benefit on an annual, cash basis – i.e. they accounted for only the annual expenditures for current
retirees. This situation changed for firms in 1989 when the Financial Accounting Standards
Board (FASB) required employers to begin accounting for retiree health care on an accrual basis
– i.e. the full expected future cost of promised benefits had to be acknowledged each year. The
accounting statements which followed revealed extremely large liabilities. At least partially in
response, firms began phasing the benefit out: In 1988, 66 percent of employers with 20 or more
employees offered retiree health insurance; by 1993, only 36 percent of firms offered coverage
(Kaiser Trust 2006). The prevalence of retiree health insurance in the private sector has
continued to decline since (Fronstin 2012). 1

In sharp contrast, the significant majority of state and local governments continue to offer their
retirees health coverage. Although there is immense heterogeneity in the provision of the
benefit, full coverage is often provided until the retiree reaches Medicare eligibility at age 65, at
which time the coverage either ends or converts to a supplemental plan. The coverage is usually
explicitly subsidized by the government offering it. In some cases, though, the subsidy is
implicit: the retiree is offered access to an insurance pool which includes both current workers
and retirees. The presence of the younger, current workers reduces the insurance premium for
the retirees (and raises the cost to the government of providing insurance to their current

In 2004, the Government Accounting Standards Board (GASB) issued a statement requiring state
and local governments to begin accounting for retiree health benefits on an accrual basis. The

This paragraph draws heavily from Clark and Morrill (2010).


actuarial reports which followed revealed extremely large unfunded liabilities for many
governments. Likely in response to both the acknowledgement of the size of the liabilities, as
well as the escalating cost of the benefit, many state and local governments have begun to pair
back the generosity of the benefit through actions such as increasing the percent of the premium
that must be paid by the retiree and by tightening eligibility standards (e.g. Clark, Morrill, and
Vanderweide 2013, Franzel and Brown 2012). Some governments have even eliminated the
benefit (Franzel and Brown 2013). Going forward, the availability of potentially-subsidized
health insurance through the health care exchanges operating under the Affordable Care Act
(ACA) may lead more governments to curtail their retiree health coverage. 2 Reducing and
eliminating the benefit, though, comes at a cost to governments as it reduces the level of
compensation being provided to its employees. In a competitive labor market, this will require
boosting other forms of compensation or accepting employees of lower quality (Qin and
Chernew 2013).

In order to answer our first question—how large are state and local government liabilities for
retiree health care?—we construct a comprehensive set of projections of these obligations. In
doing so, we build on past work by Clark 2009, 2010, Clark and Morrill 2010, 2011, GAO 2009
and Pew 2012 that has carefully analyzed the stated liabilities in the retiree health care actuarial
reports mandated by GASB. In addition to being the logical starting point for an analysis of
these liabilities, this approach benefits from being transparent (PEW 2010). Moreover, it has
clearly been successful in drawing considerable public policy attention to the issue (e.g. State
Budget Crisis Task Force 2012).

We advance this existing literature in two ways. First, in reporting the present value of future
liabilities, governments have significant latitude in setting the assumptions which underlie the
stated obligation. For instance, they have discretion over the rate at which to discount future
benefit payments, and also differ in their assumptions about underlying inflation and future heath
care cost growth. As a result, comparing the size of stated liabilities across governments is
problematic as it is unclear if differences reflect fundamental budget issues, such as the
generosity of the benefit, or merely reflect different actuarial and economic assumptions. We
address this lack of comparability by harmonizing the assumptions upon which the liability
estimates are based. Our estimates are therefore directly comparable to each other across
governments. Second, much of the past literature relies on the state government actuarial
reports. In some states, local government retirees receive their health insurance from the state
and are therefore captured by the state report. In other cases, local retirees receive the benefit
directly from their former local government employer and are not captured by the state report.
Thus, despite the fact that most local government retirees are eligible for the benefit, there is
significant variation across states in the percent of the local retirees captured by the state

For example, in May of 2013, the city of Chicago announced its intention to terminate its retiree health care
benefit. The city expects that retirees not yet eligible for Medicare will be able to find affordable coverage through
the ACA exchanges being setup by the state of Illinois (Shields 2013).


actuarial reports. The past work which has examined local government obligations has focused
on subsets of local governments. 3 Given that our aim is to assess the total fiscal burden of retiree
health within each state, we need to fully account for all local government liabilities. We
therefore develop a methodology and collect the data required to estimate the size of retiree
health obligations for all local government retirees.

We produce our liability estimates by projecting the annual cash flows upon which the stated
liabilities are based. (The stated liabilities are equal to the present discounted value of the
projected future cash flows needed to fund the benefit.) While such cash flows have been
constructed for retiree pension obligations (Novy-Marx and Rauh, 2011, 2013a), we are the first
to construct them for retiree health insurance. We reverse engineer the cash flows using the
information provided in the retiree health care liability reports mandated by GASB. As
discussed above, many of these reports cover only state employees and we therefore use
supplemental information to gross up these cash flows so that they cover the entire state and
local government sector. Once the statistical machinery is in place to produce the cash flows, we
can alter the assumptions upon which they are based. Specifically, we produce liability estimates
harmonized across three key factors: the discount rate, current and future life expectancy, and
health care cost inflation. Moreover, we impose a common actuarial methodology.

We answer our second question—are retiree health benefits fiscally sustainable over the long-
run—by performing a “current policy” projection. The projection assumes that state and local
government continue to offer retiree health care under the set of policies (e.g. eligibility
requirements) identified in the GASB mandated actuarial reports. A crucial aspect of this
analysis is the need to account for new workers—i.e. those hired in the future—as the liability
analysis only accounts for current workers and retirees. To do so, we develop a methodology for
projecting the flow of new workers and, ultimately, the flow of benefit payments required when
these workers reach retirement. We then add these payments to the payments for current
workers and retirees and assess the overall fiscal burden of the benefit over the long-run.

We find that the total liability of state and local governments for retiree health care equals around
$1.1 trillion dollars, equal to roughly 1/3 of the total annual revenues of the state and local
government sector. There is significant heterogeneity across the states, with several having
liabilities exceeding 80 percent annual revenues. The more thoroughly studied pension liabilities
provide a useful point of comparison. Discounting both pension and retiree health liabilities at
the same rate, we find that unfunded retiree health care liabilities equal around 50 percent of
unfunded pension liabilities. The standard datasets on government finance do not allow for
breaking out expenditures for retiree health care. Our cash flow estimates allow us to fill this
gap: We find that current annual outlays for the benefit equal around $31 billion, equal to about 1

For example, Clark 2010 examines obligations for teachers and GAO 2009 examines obligations for the 39 largest
local governments. We are unaware of any past work which has attempted to account for all retiree health
obligations at the local level in a detailed fashion. There are, however, back-of-the-envelope calculations which
attempt to account for the entirety of the local government sector (e.g. Zion and Varshney 2007).


In terms of fiscal sustainability. (8) the eligibility requirements for retiree health insurance. 4 . disability. Specifically. The scaling is based upon the best available information on a state-by-state basis. particularly on retirement and other termination rates. The paper proceeds as follows. The reports generally provide enough detail to construct a reasonable projection of the cash flows of the retiree health plan.percent of annual revenues. Section III presents the methodology and results for our second question—how much fiscal pressure will these liabilities apply to state and local governments. Section IV concludes. years of service and gender. with some states requiring a substantially larger funding increase to bring the benefit into fiscal balance. (2) the age and years of service matrix for the current workforce. In other states. First. and death by age and gender. including data elements such as the age distribution or gender mix of current 4 In some cases we obtained the 2012 report or the 2010 report. we find that health care cost inflation is likely to be the primary driver of growth in benefit payments. we find that state and local governments could fund their retiree health obligations in perpetuity by annually dedicating an additional ¾ percent of total revenue toward the benefit. and (12) the assumed health care cost inflation rate. State Government Employees For each state. we construct the cash flows for state government employees using detailed information on these liabilities. some of the necessary information was not included in either the health care actuarial report or in any of the above sources. (9) take up rates for retiree health insurance. There is significant heterogeneity. Section II presents the methodology and results for our first question—how large are the retiree health care liabilities. we scale up the state cash flows to account for liabilities at the local government level. In these cases we adjust our cash flow estimates to place them on a 2011 fiscal year basis. 4 Henceforth. (3-5) expected rates of turnover. The Present Value of Retiree Health Care Obligations We estimate the annual cash flows for state and local government retiree health care obligations in two primary steps. we refer to these reports with the shorthand of “GASB reports”. (6-7) matrices for retirement and quit/termination probabilities by age. For many states. for each state we collect the following 12 data objects: (1) the age distribution of current retirees by gender. (10-11) employer and retiree costs for retiree health insurance by age and gender. some of this information. we collected the 2011 fiscal year actuarial report required by GASB statements 43 and 45 which details the liabilities of the state retiree health insurance plan. was available only in the state government or state employee pension fund Comprehensive Annual Financial Reports (CAFRs) or the actuarial statement for the pension plan rather than in the GASB reports directly. Finally. II. Second. though.

we simply use the mortality tables to age the population each year. Some states issue multiple reports for different types of employees. for these states. cost sharing and expected medical inflation to calculate the state government cost for all surviving retirees over time. Present Value of Benefits (PVB) The present value of benefits (PVB) is a liability measure which includes both obligations already accrued. and quits/termination by age and years of service to create a matrix of newly-retired workers by year. though. We therefore. also calculate the cash flows for NYC. The methodology used to construct these cash flows is straightforward. account for such workers in the analysis presented in section III. disability. as well as obligations associated with the future service of current employees (who are assumed to retire according to actuarial assumptions). in addition to the states. For current retirees. In many cases this report also covers some or all of the local government workers in a state. as a result. Our state reports are the single report in each state which includes general state employees. and use the information on current employer retiree health insurance costs. These concepts only account for liabilities associated with current workers and current retirees. For example. neither Nebraska nor Oklahoma declared any liabilities for retiree health care in 2011 and. the procedure is considerably more cumbersome in practice but not more difficult conceptually. we do not calculate cash flows for these states. We age the workforce each year (incrementing years of service as well as age) and use the probabilities of retirement. For current workers. death. state university employees often are covered in a report distinct from the report for general state employees. They do no capture liabilities associated with employees hired in the future (after 2011). Finally. cost sharing.retirees or current workers. We use this information to construct the future cash flows required under two actuarial liability concepts – the PVB and the AAL. and health cost inflation to calculate the retiree health obligations for future retirees by year. it does not account for the future 5 . Actuarially Accrued Liabilities (AAL) The Actuarially Accrued Liability (AAL) is a narrower liability concept as it only captures liabilities accrued to date by current workers and retirees (i. We do. we used information from supplemental sources or information from an adjacent state with a similar retiree health plan.e. We then use information on take-up rates. The general employee report for New York City (NYC) reveals liabilities larger than any single state save New Jersey. We collected numerous additional state reports and these are used in the process of grossing up the state reports (see below).

T . y . It is based on the idea that employers invest a fixed fraction of an employee’s compensation each year so that the retiree health benefits will be fully funded at the time of retirement. 5 Following Novy-Marx and Rauh (2011). as well as on the likelihood that workers stay employed long enough to receive a benefit. an employee has to retire from the job in order to receive a health benefit (unlike pensions.t as the probability of remaining employed (1 + r ) from entry age (a-y) to time t. y . It depends on the rate of salary growth and the discount rate. the PUC measure of the AAL is just:  y  PUCa .T  ∑ φ Sa − y . the two most common being the Projected Unit Credit (PUC) method and the Entry Age Normal (EAN) method. the share of benefits already accrued is equal to the ratio of the years of service already completed to the years of service that will be completed by retirement. y . there is not much accruing of benefits for workers who leave before retirement).t = 1 for all i). y . with a present value of benefits equal to PVBa . We calculate both concepts for each state. GASB allows states and localities to use a variety of methods to calculate the AAL. and so 5 States differ in how they define the years of service at retirement—some states base it on the years of service that will have been completed at the time a worker is first eligible to retire with benefits. whereas others base it on years that will have been completed when the employee actually retires.T =   PVBa . y . then the PUC is equal to the EAN. the contributions to the “account” made on behalf of employees who leave before becoming eligible are used to fund the benefits of those who remain. for an employee age a with y years of service who will retire in T years. When replicating the states’ calculations. But if the rate of salary growth is smaller than the discount rate and/or many employees leave before they are eligible for a benefit. The AAL under this methodology is simply the value of such an account at any given time. Then. 6 Essentially. we note that. Under the PUC method. 6 .i i   i =1  If the rate of salary growth is equal to the discount rate (so that ϕ =1) and if every worker who is hired stays long enough to receive a health benefit (so that S a − y . Also define S a − y . Let p be salary growth and r be the discount (1 + p ) rate. and define φ = . then the EAN is larger than the PUC.T =  yi =+T1  PVB (2)   a .T (1)  y+T  The EAN uses a different method to accrue benefits over time. the EAN measure of the AAL is:  y i   ∑ φ Sa − y . 6 In most states. we use whichever method the state specified.i  EANa .accruals of current workers).

We calibrate our retiree and active worker cash flow streams separately.m is the calibrated cash flow estimate. although wage growth for the economy at large tends to be lower than the discount rate. which is the appropriate measure for the EAN calculation. 2011) we calibrate using a geometric series that starts at one: Ctcal . Similarly. in some states retirees can choose between several different health insurance plans. tends to be higher than the discount rate. Following Novy-Marx and Rauh (2009. 7 . Ctcal . holding constant the year t liabilities. ? is chosen to satisfy ∞ (1 + λ m )t −1 Ctm ∑ t=1 (1 + rstated ) m = PVstated (4) m Where PVstated is the present value of the retiree health care liability given in the GASB actuarial report. ? is the calibration parameter. t indexes year and m indexes the three actuarial methodologies underlying the cash flows: PVB.the EAN tends to be larger than the PUC. wage growth over an employee’s tenure. The GASB reports. we compare the present value of our projected cash flows to the present value for these flows given in the GASB report. The geometric series is appealing because it implicitly assumes that any errors due to unobserved data accumulate and intensify over time—a possibility we view as likely. the reports do not always contain information about the age distribution of their retirees or their workforces. The calibration uses state-level variation in the stated present values to proxy for unobserved variation in other variables. All states report a present value for either the EAN or PUC methodology. do not always provide information on the percent of retirees choosing a given plan and we are forced to make assumptions about the percentages. 7 Because the majority of states use the EAN for both retiree health and pension reporting. however. Using the PUC instead would reduce our estimates by an average of about 8 percent. Calibration Our cash flows inevitably contain some error. EAN and PUC.m Ctm *(1 + λ m )t −1 = (3) where Ctm is our cash flow estimate. We use the average salary growth over the first 10 years of tenure by state. Some states provide the PVB present 7 On the other hand. We then calibrate our projected cash flows such that we match the stated present value calculated with the state-chosen discount rate. For instance. primarily due to incomplete data in many of the reports which required the use of assumptions or data from neighboring states. we use it as our measure of accrued liabilities for all states (except for calibration purposes). To address these and other sources of measurement error.

the benefit is provided directly by the local government—e. This is often the case for K-12 teachers and other local education employees.value.—that had employed the retiree. there is hybrid provision with retirees simultaneously receiving both centralized provision and local provision. our average error is negative 1 percent and the mean absolute error is 5 percent (calculated over the 33 states and NYC which report a PVB). The first step is determining who provides retiree health care to these workers. Our uncalibrated estimates are. Clark and Morrill 2010). on average. different medical cost inflation) and then applying the calibration factor. Local Governments The provision of public sector retiree health care to local government workers varies both by state and by type of local government worker (Clark 2010. if the state does not provide the PVB present value. others do not. In at least a few instances (Pennsylvania. 8 We calculate the calibration factors using state-chosen values for medical cost inflation.S as a whole. Instead. reveals that the state plan covers only the negligible number of teachers employed directly by the state (or grandfathered into the state plan) while the vast majority of teachers in the state are not covered by the state plan. by recalculating the retiree health obligations under the different assumption (i.422 entities. mortality and other projections. Our average error for the total AAL liabilities (using the state-chosen actuarial method) is 6 percent. we use the EAN or PUC to calculate the calibration factor (depending on which AAL measure is provided in the report). 9 We therefore rely on additional sources of information. etc. school district. we calibrate directly to the stated present value based on the methodology upon which the cash flow is based — i. Once we have generated the calibration factors. We use the state GASB reports as a starting point. for example). county. Collecting and processing the GASB OPEB reports for local governments in the manner done for the state reports is infeasible. respectively. When available. we calibrate the PVB stream to the stated PVB present value. Massachusetts and Pennsylvania have 87 and 1. the reports are often insufficient or misleading in determining who covers the two types of local workers. 9 Several state GASB reports contain significant amounts of actuarial information for teachers which might be construed as suggesting that teachers are covered by the state retiree health plan.e.e. which potentially provide retiree health care. The mean absolute error is a bit larger at 11 percent. For the PVB liabilities. In practice. however. we can produce alternative cash flows based on different underlying assumptions. however.g. we collect information on the aggregate state AALs for the two principal types of local government workers: K-12 education and other. Further research. 8 . though. When the report does not contain the present value corresponding to the methodology underlying a given cash flow. such as 8 For example. fairly accurate and the calibration therefore does not play a large role in the present value liabilities we report for the U. To cite two admittedly extreme examples. In other cases. we calibrate the PVB cash stream using the AAL calibration factor. municipality. In some cases there is centralized provision at the state level.

For instance. we are assuming that the state workers provide a reliable proxy for the local workers in terms of factors which determine the contour of the cash flows. we use Census Bureau counts of local government education and non-education employment and similar counts of state government employment. we set so equal to the number of local workers divided by the number of state workers. though. non-government actors have produced similar reports. we set the scale factor s equal to the ratio of the count of local employees in question (education or non-education) to the count of employees covered in the state GASB report. For example. we gross up the state government cash flows to reflect the local obligations. Once we have obtained the aggregate AALs. Specifically. we multiply the state government cash flow at all points in time by (1+s) where s is the local scaling factor: s= se + so. Our preferred sources of this information are GASB OPEB reports (covering local workers). We are also implicitly assuming that aspects of the retiree health plan that influence the contour. if the aggregate AAL for local education workers plus the aggregate AAL for other local workers sums to 100 percent of the state reported AAL. These sources.) In these instances. (In many of these cases public officials in the state confirmed that no systematic collection of information has occurred on local OPEB obligations. We acknowledge. For non-centralized states and states for which we failed to locate the above reports. that the procedure is imperfect. we contacted public officials to collect the information. In other cases. 9 . are similar across state and local governments. we are further assuming that the per-active worker generosity of the program can be proxied for by the state cash flows. Many decentralized provision states have commissioned reports which provide the aggregate AAL across the localities within the state. we are assuming that the state workers provide a reliable proxy for the local workers in terms of the factors such as the age-service distribution of active workers and the mortality of retirees that determine the contour. The second step involves obtaining the information on the aggregate local AALs for the two classes of workers. we were unable to locate any information on AALs for education and/or other local workers. if we are lacking information on the aggregate AAL for non-education workers and the state GASB report covers only state workers. As before. In many instances. we rely on the best source of information available. and so=(aggregate local non-education AAL / state AAL). though. or slope. se=(aggregate local education AAL / state AAL). By grossing up in this manner. of the retiree health care cash flows.publications and web sources addressed to recipients of retiree health care and Chapter 6 of Clark and Morrill (2010). state government CAFRs and pension fund CAFRs. For some states. are generally only useful for states in which the provision of local retiree health care is centralized or for very large local governments such as central cities or large counties. such as the relative generosity of the pre and post-Medicare benefit. The validity of this assumption rests on the fact that state and local governments must compete for workers in the same labor market. Specifically. though. then s=1. In addition.

we base s on this. (Only one estimate is shown for retirees because the PVB equals the AAL for this group as all obligations for retirees are fully accrued. Appendix Table A1 contains the scaling factors for all of the states as well as detailed information on the sources of information underlying these scaling factors. Otherwise. we obtained the AAL retiree health liability for the City of Chicago and for Cook County (from their GASB reports) and scale up the stated liabilities based on these. When we are able to obtain an AAL liability for the group. As would be expected. the liabilities for the existing retirees fade over time. we rely on the ratio of the number of state government employees in the relevant category—e. as opposed to enforcing uniformity in the method at which these estimates are derived across the states. Panel A shows the total annual PVB and the AAL (using the EAN methodology) for the entire United States. we scale using the worker count method. We often use both the aggregate AAL method and the worker count method simultaneously. The nominal obligations peak somewhere around 2040 for most states. we have sought to obtain the best estimates possible for a given state. (This typically arises when localities have the choice of opting into the state retiree health program. For the remainder of local government employees in the state. The 5 percent discount rate is equal to the rounded average of the state-chosen discount rates. but not all. mortality begins to dominate medical cost inflation and the annual liability begins to fall. The fact that costs for Medicare-eligible retirees (age 65+) are generally less than costs for pre-Medicare retirees also plays a role. and Panel B decomposes these into a set of projections for retirees and current workers (actives). At this point. driven by actives moving into retirement and the increase in the cost of providing medical care. for the state of Illinois. 10 .g. In all cases.) Liabilities for current active workers rise over time.) These situations are handled on a case-by-case basis as discussed on Table A1. Table 1 reports the AALs and PVBs of the retiree health insurance obligations for our estimate of the joint retiree health obligations of state and local governments. using the EAN method to calculate the AAL and imposing a uniform discount rate of 5 percent across the states.We handle state government employees not covered in the primary state GASB in an analogous fashion to our treatment of local workers. The table also covers a few cases in which the state retiree health plan covers some. Results Figure 1 presents some simple plots of the nominal liabilities for retiree health that we calculate from the GASB reports. higher education—to the number of workers covered by the general state report. For instance. of one of the local worker categories.

labeled “U. As shown in the row at the bottom of the second page of Table 1.S. For some states. as a whole. Unfortunately. The scaling factor is extremely similar if the weights are instead set equal to each state’s PVB liability.2 scaling factor for the U.”. and Hawaii. we recalculate the local education liabilities using the employee count method. 10 The scaling factor can be decomposed into the portion based on the reported retiree health liabilities of local governments (as well as reported state liabilities outside the primary plan) and the portion due to inflating based on census public employee counts: The portion due to stated liabilities is 0.e. can be calculated as the weighted average of the scaling factors across the states. the manner in which we collected the non-education local scaling factor makes conducting this exercise for the non-education local liabilities cumbersome. See Appendix Table 1. as these governments operate under balanced budget requirements. the state retiree health plan covers only a small fraction of the state and local workers who receive retiree health insurance. 11 The 9 states are the states for which we account for the local education liabilities in isolation – i. In other states. around 20 percent of total revenues come from grants from the federal government and these grants cannot be adjusted 10 The 1. For instance. the scaling factor s equals 1. like Delaware. for the U.S. On average. and no grossing up is necessary. 11 For the U. the employee count method appears to produce a reasonable scaling factor.49. and the remaining 23 percent is based on scaling up on the basis of employee counts. with the weights equal to each state’s AAL liability. states and localities do not have the ability to adjust all elements of their revenue stream.S. we estimate that accrued state and local government retiree health care liabilities equal roughly $1.S.67 and the portion due to employee counts is 0. not as part of a general scaling up including more than just local education. Governments could address this liability by raising additional revenue and/or reducing expenditures. we examine the 9 states for which we account for local education liabilities by scaling up on the basis of stated liabilities in CAFRs or local education GASB reports.1 trillion dollars. all local workers receive their retiree health benefits through the state plan. For these states. Our liability estimate is equal to approximately 34 percent of total annual revenues. The 23 percent due to employee count scaling is clearly the portion of our estimates subject to the most uncertainty. Total annual revenue is therefore a useful metric for assessing the magnitude of the overall fiscal adjustment on both the spending and revenue side of the budget required to address retiree health care underfunding. In order to assess the likely accuracy of the employee count scaling.2 for the nation as a whole. 31 percent is based on scaling up the estimated cash flows on the basis of reported local government liabilities. New Jersey. 46 percent of the state and local government cash flow is based directly on our reverse engineering of the state reports. However.Column (1) of the table reports the scaling factor that we used to gross up the state obligations and assets to capture the retiree health obligations of local governments. 11 . The results are encouraging as the employee count scaling method produces an aggregate accrual liability equal to 91 percent of the aggregate liability produced using the local liability scaling method. like Minnesota and Florida. as whole. The total annual revenue of state and local governments roughly equals their total annual expenditure. Thus.

which incorporates liabilities associated with the future accruals of current workers.upward by state and local governments to address retiree health care funding. Turning to the right-hand side of Table 1. Retiree health obligations for state and local workers vary tremendously across the states. and Oregon are only about 60 to 70 percent unfunded. we estimate that for the U. Our retiree health care liability estimate is equal to roughly 60 percent of these revenues. This likely overstates the level of assets at the local level as local plans appear to generally hold lower level of assets than state plans. estimated that they were 95 percent unfunded. In contrast to our estimate of $1. Figure 2 shows the distribution of the PVBs and UAALs across the states. using the broader PVB concept. PEW (2012). total outlays—including any deposits or withdrawals from trust funds—equaled around $31 billion. with the present value of accrued actuarial benefits ranging from a low of nearly 0 percent of state and local revenue (Idaho) to a high of 91 percent (Hawaii and Illinois). although Ohio. PEW (2012) estimates accrued liabilities of $660 billion. In these instances we assume the percent unfunded is equal to percent unfunded in the primary state plan. the level of funding is sufficiently low that assumptions over local asset levels are unlikely to significantly influence the results. 12 . A similar pattern is found with the unfunded accrued liabilities (UAALs): many states have seemingly small obligations. both because the average retiree pension is larger than average health expenditures and because the cost of retiree health 12 In most cases we do not observe assets associated with local workers who are not covered by the primary state plan. results in a liability estimate of about $1. More than half of our states have PVBs that are less than 50 percent of 2011 revenues. so there are generally only modest differences between the AALs and the unfunded AALs (UAALs). focusing only on state-administered plans and utilizing the state chosen discount rate and actuarial methodology.S. they would most likely need to increase general own source revenue – basically taxes and fees. equal to roughly 1 percent of total state and local government revenue. as a whole. defined as the AAL less the assets in a dedicated trust fund. (The expenditures are lumped together with a variety of other types of expenditures. The benefits provided by retiree health plans are typically much smaller than those provided by pension plans. Arizona. In any case. We find that in 2011. focusing on state-run plans.1 trillion estimate. Expenditures for retiree health care are not available in any of the standard datasets covering state and local government budgets produced by the Census Bureau. retiree health benefits are 97 percent unfunded. If governments wish to address these liabilities solely through revenue side adjustments.5 trillion. but a number of states have PVBs approaching or exceeding 100 percent of revenues. Specifically. our estimates of these annual expenditures are of substantial interest. but there are a few states with more significant unfunded liabilities. Most retiree health plans are largely unfunded. 12 Similarly.) Thus. One way of gauging the severity of the fiscal stress associated with retiree health obligations is to compare them with the much more thoroughly studied obligations of state and local pension plans as measured in Novy-Marx and Rauh (2013a).

Alternate Assumptions As noted above. continuing rapid growth in health costs mean that retiree health expenditures rise at a faster pace than pension benefits. and Ohio. as shown in the top panel of Figure 3. The difference is potentially accounted for by a number of factors. While we find that unfunded accrued retiree health care liabilities amount to around 50 percent of unfunded accrued pension liabilities. on average and for almost all states. Furthermore. recalculate the liability and then apply the 13 . In order to place the pension and retiree health and pension benefits on the same footing. the present value of retiree health benefits is 22 percent of the present value of pension benefits. (Below we explore variations in the discount rate. in 10 states the retiree health UAAL is 75 percent or more of the pension UAAL. PEW only considers state-run retiree plans. using the state-chosen rate works to raise PEW’s estimate of the ratio of health to pension benefits relative to our estimates (which hold the discount rate constant across the two types of liabilities). we find that the retiree health UAAL is 49 percent of the pension UAAL. we discount both types of streams using a 5 percent discount rate. with states like Illinois. On one hand. Connecticut. Thus. As states typically use a substantially higher discount rate for their pension obligations than for their retiree health care obligations. As shown in the bottom panel of Figure 3. In 21 states. Figure 4 shows that there is some correlation between the size of the unfunded pension liability and the size of the unfunded retiree health liability. while the fiscal strains associated with retiree health obligations are. However. PEW’s liability estimates are based on the state-chosen discount rate. including Virginia. As pensions have a higher propensity to be state run than do retiree health plans. Comparing the unfunded liabilities. there is a wide variation across the states. in 6 states. the retiree health PVB is 50 percent or more of the pension PVB. they are not insignificant. they estimate a ratio of nearly 85 percent. once we have projected the cash flows for each state and calibrated them. On the other hand. the retiree health PVB is less than 10 percent of the pension PVB. New Jersey. this difference works to make our ratio larger than PEW’s and therefore cannot explain the discrepancy.) On average across the states. PEW (2012) finds a much greater relative importance of retiree health obligations.insurance falls sharply at age 65 once retirees become eligible for Medicare. But most state and local pension plans are significantly better funded than the retiree health plans. Colorado. we can easily adjust any of the input assumptions. On the other hand. On the other hand. smaller than those associated with pensions. Hawaii and Michigan all showing sizable unfunded liabilities as a share of revenue for both types of employee post- retirement benefits. a number of the states with large unfunded pension liabilities have relatively small unfunded retiree health liabilities.

the benefit in recent years (Clark 2009. An increase in life expectancy would have similar implications – it would push up the size of retiree health liabilities and simultaneously push up the marginal value of income for the taxpayer who now needs to finance consumption over more years of life. argues that liabilities should be discounted at a rate that reflects their risk. In this state of the world. She will simultaneously have an unexpectedly large obligation for retiree health care. This positive correlation points toward a lower discount rate and a higher valuation of the retiree health care liability. (Some of these. If retiree health insurance is viewed as a benefit provided at the discretion of the government in question. though. Consider medical costs. In this case. The choice of discount rate has been a contentious issue in evaluating the size of pension liabilities. like employee turnover. a court recently overturned the freezing of retiree health benefits for certain employees of Los Angeles. 14 . These facts argue for discounting public pensions at a risk-free rate (Novy- Marx and Rauh 2009. take-up rates. For example. In this case. Pensions have strong legal protections and there are historical examples of municipalities defaulting on debt obligations while preserving their pension obligations (Brown and Wilcox 2009). Financial economics. and mortality also apply to pensions. 13 It is thus not clear that these employee benefits should be viewed as a promise that will be fulfilled in all states of the world. Given the ambiguous implications of the uncertainty around medical cost inflation and other determinants of retiree health for the discount rate. These obligations have substantially weaker legal protections than do pension promises and numerous states and localities have reduced the generosity of. or even eliminated. We then harmonize all of the assumptions simultaneously in order to produce liability estimates which can be cleanly compared across governments. though. Alternatively. do have limits on their ability to alter retiree health care benefits due to collective bargaining agreements and other factors. Governments have traditionally discounted at the expected rate of return on their pension assets – often around 8 percent. we do not address it directly and instead focus solely on default risk. larger in size. 14 13 Some governments. mortality. whereas others—like take-up rates and medical cost inflation. benefit changes are sometimes challenged in court. 14 There are many other uncertainties beyond default risk that have implications for the choice of discount rates. CA (Chin 2013).e. Again. Suppose medical costs are pushed up by new technologies that boost the cost of health insurance but also have important medical benefits. a discount rate in excess of the risk free rate should be used. the positive correlation points toward a relatively lower discount rate. We proceed by first varying the key assumptions one-by-one in order to assess their importance. Franzel and Brown 2013). and medical cost inflation. the negative correlation between retiree health care costs and the marginal utility of income suggests that the discount rate should be relatively higher and the size of the liability lower. Moreover. including uncertainty surrounding employee turnover and retirement rates. retiree health care costs are high. as opposed to as a guaranteed benefit. The situation is much less clear cut for retiree health care obligations. The first assumption we explore is the discount rate. 2011). do not. but the marginal value of income likely low because the economic growth has increased the income and asset values of the taxpayer. medical costs may be pushed higher by robust economic growth and the resulting increase in demand for medical services. the obligation is more onerous – i. retirement. because the retiree health obligation is relatively large in states of the world where the income needed to fund the obligation is particularly valuable.) The implications of these sources of uncertainty depend on the correlation between the realizations of these variables and the marginal utility of income for the ultimate payer of retiree health care obligations – the taxpayer – in the same state of the world. Intuitively.calibration factor. the taxpayer may have a high marginal utility of income given the need to fund her own unexpectedly high health insurance costs.

15 The Treasury yield curve produces a PVB that is 12% higher than the liability produced by the 5 percent discount rate.7 percent in 2011 to 0 percent by 2085. In contrast. using a 5 percent rate. 16 In addition to differences in “excess” cost assumptions. we employ the relatively high.Ideally.S. The first row again displays the results for the U. The sensitivity of the AALs to the discount rate is just a bit less than the PVBs. The next row shows the liabilities using the state-chosen discount rates. In the final row. The PVB liability is 30 percent lower than the baseline 5 percent discounting. which likely also contributes to differences in expected health inflation. although the effects varies significantly across the states. We are unaware of any such asset and therefore present several different possible discount rates on Table 2. on average. 16 See The 2011 Long-Term Budget Outlook and the accompanying Data Underlying Scenarios and Figures available at the CBO website (CBO. This risk-free discounting can be viewed as expressing the size of the liability under the hypothetical assumption that governments view these benefits as having iron-clad guarantees. discount rate of 7 percent. Sack and Wright (2006). we would discount by the return on a financial asset which defaults in exactly the same states of the world as those in which the government in question defaults on its retiree health care obligation. reflecting the fact that the AALs are more heavily weighted toward current benefits (as many of the far off future benefits are as yet unaccrued). Table 3 examines the sensitivity of the retiree health benefit liabilities to the assumption about health care cost growth. 17 Of course. states vary in how they determine health cost inflation and it is not clear if they would adjust their expected health cost inflation one-for-one with differences in their long-term inflation rates. for our fully harmonized runs presented below. The assumptions underlying the GASB reports almost universally assume that health care costs will slow over time. shows only a slightly lower liability from the Treasury yield curve. but often to a rate that continues to exceed inflation and compensation growth. For example. Overall. we view the 7 percent discount rate as not unreasonable given the ease with which benefits can be adjusted. we employ the more conservative 5 percent discount rate. in their 2001 Long-Term Budget Outlook. 2011 – the end of the 2011 fiscal year for most state governments. both CBO and the Center for Medicare and Medicaid Services (CMS) assume that private-sector health cost growth will slow over time to a rate in line with per capita GDP growth. which. 15 The zero-coupon treasury yield is estimated as of June 30. 2011). states also differ in their assumptions about general long-term inflation. The next row uses the federal government borrowing rate—the zero-coupon Treasury yield curve—to discount the cash flows. It is estimated using the methodology of Gurkaynak. 15 . Nonetheless. 17 Applying the CBO’s assumptions for medical cost inflation to the retiree health liabilities allows us to compare the cash flows across the states on a consistent basis. CBO assumed that the “excess cost growth” in private insurance premiums—defined as the excess of health cost growth per beneficiary over GDP per capita—would decline from 1. Doing so lowers our measure of the PVB and AAL for state and local retiree health liabilities by an average of about 5 percent. In six states (Ohio. and admittedly somewhat arbitrary.

intermediate.) Many state projections of retiree health obligations assume that life expectancy remains constant over the forecast horizon—an assumption at odds with historical experience and with the methodology used by the actuaries for the Social Security Administration and CBO.Michigan. 20 Table 5 reports our preferred estimates of the present value of retiree health obligations. National Research Council 2012). CBO excess cost growth. the table reveals significant heterogeneity across states: Harmonization increases the unfunded AAL by 30 percent or more in 9 states. We use mortality tables by age and sex for healthy white collar annuitants as the starting point. 18 Table 4 reports the effect of allowing life expectancy to increase over time. The decline is at least 20 percent in three states (Idaho. while it decreases it by 15 percent or more in 8 states. 18 Roughly one-half of the states make some adjustment for future life expectancy increases. North Dakota. either by using a lower mortality rate throughout (a “static” approach) or by allowing mortality rates to decline over time (a “generational” approach. the states with the largest accrued retiree health obligations as a share of total revenue are in red. and high—where low assumes the smallest increase in life expectancy. and a 5 percent discount rate. the intermediate assumptions for life expectancy. and then allow mortality rates to decline over time according to the rate of decline assumed in each of the three sets of assumptions used by Social Security (low. Maryland. The full harmonization result in a slightly lower estimate of the retiree health obligations than that implied by the assumptions in the state reports—with the unfunded accrued liability 3 percent lower.5 trillion. using the EAN methodology. Assuming that life expectancy increases according to Social Security’s intermediate assumptions boosts the average AAL and PVB by about 7 percent. 19 Allowing life expectancy to increase raises the present value of the retiree health obligations. 20 Many experts argue that Social Security’s intermediate projection underestimates the likely increase in life expectancy (e. 16 . and high the largest). The Social Security annual mortality changes. and Rhode Island) the CBO health cost assumption boosts the PVBs. Delaware. and the present value of benefits 8 percent lower.g. In the remainder of the states the PVBs are unchanged or decline. Figure 5 provides a useful summary of the heterogeneity across the states.) 19 Our starting mortality rates can be found in the Society of Actuaries RP-2000 Tables. while those with the lowest liabilities are in yellow. As can be seen from the last line of the table.1 trillion and our preferred PVB estimate is $1. were provided to us by Michael Morris from the Social Security Administration. Arkansas. our preferred UAAL estimate is equal to $1. and New Mexico. However. which are the rates underlying the 2011 Trustees Report. this increase rises to 13 percent under the assumption of faster life expectancy increase.

22 Outlays for retiree health care rise much more rapidly under both the excess cost assumptions employed by the CBO—the blue line—and the assumption that excess cost growth continues at its current pace—the green line. although states have an unfunded liability. and all programs with a pay-as-you-go component—including Social Security and Medicare—have unfunded accrued liabilities. and feeding these workers through our machinery to predict future retiree health benefits. but compares a variety of health care cost assumptions. But these programs are only unsustainable if their costs rise at a faster pace than the underlying stream of revenue with which they are funded. The aging of the baby boom appears to play a surprisingly small role in the increase in retiree health outlays over time. 17 . The Sustainability of Retiree Health Care Benefits The existence of unfunded accrued liabilities tells us little about the sustainability of retiree health benefits or about the fiscal pressures associated with them. retiree health obligations decline a bit as a share of GDP between now and 2030. social security obligations as a share of GDP rise about 20 percent (from 5 percent of GDP to 6 percent of GDP) in that same time period. In order to assess the fiscal pressure retiree health obligations are likely to impose in the long run. 22 The annual pension outlays of state and local governments calculated by Novy-Marx and Rauh 2013a. Under that assumption. states and localities operate their retiree health insurance as a pay-as-you-go program. (3) using the projections of total state and local employment to create a stream of new state and local government workers. Figure 6 plots the sum of the annual retiree health obligations across the states for current workers and retirees as a share of national GDP (as projected by CBO). These graphs are based on the cash flows that we estimated from the GASB report. We do this by (1) projecting population by state. also do not rise significantly as a share of CBO’s projected GDP over the next decade or two. 21 Programs can become unsustainable if (1) there are demographic changes that increase the growth in outlays and/or lower the growth of revenues (2) benefits rise faster than the underlying source of revenue because of increasing benefits promised over time or (3) a program that had been fully or partly financed experiences a drop in the value of the assets (thus increasing the size of the unfunded portion). and it is also necessary to construct a projection of state GDP and tax revenues. (2) using these population projections to construct projections of GDP and state and local employment. The issue of risk and the appropriate discount rate could be brought into this analysis by determining the proper discount rate for “government taxes less other expenditures” and comparing it to the proper discount rate for retiree health liabilities. The figure uses our harmonized discount rate and mortality assumptions. which are based on very similar demographic data as the retiree health projections. it is necessary to construct a projection that includes these workers. at least on average. in contrast. they also have an asset equal to the present value of revenues less the present value of other expenditures. 21 In other words. The red line shows the trajectory of retiree health obligations under the assumption of no excess health costs—health costs per beneficiary simply rise with GDP per worker. To a large extent.III. and do not account for the future benefits of any employees hired after 2011.

plus the growth rate of GDP per worker. should be proportional to GDP per worker.Population Projections We use the Census Bureau’s most recent set of state population projections from 2000-2030 by age and sex. Figure 7 plots the distribution across the states in the change in the adult population (top panel) and the change in the aged dependency ratio (bottom panel). but some states (Utah and Texas. Specifically. and the elderly and the national growth rates for these groups from 2025 to 2030. Unfortunately. and New Mexico) show much larger increases. which were based on the 2000 census and released in 2005. adults. Our methodology is as follows. adults. 2011). assuming no changes in adult labor force participation. while other states (Montana. for example) have somewhat smaller increases. which we assume does not vary across the states. by 2085. the basic population dynamics. and apply a multiplicative calibration factor to adjust each year’s population so that the totals match the Social Security total population. are not likely to have changed for most states. we assume that there is no convergence or divergence in state rates of productivity growth. The aged dependency ratio— the ratio of the aged population to the working age population—rises 14 percentage points for the country as a whole. Wyoming. States with more 18 . from 23 percent in 2011 to 37 percent. Almost half the states show an increase in the aged dependency ratio of between 12 and 15 percentage points. and deviations in the growth rate of GDP across states stem only from differences in demographics. the adult share of the population declines by 5 percentage points by 2030. all states have the same growth rates for kids. adults. and the elderly. Our calculations beyond 2030 assume a gradual convergence (over 55 years) between each state’s age-specific population growth rates and the national ones produced by the Social Security Administration (Board of Trustees. We then add up the total population of kids. which are summarized in Table 6. There is some variation across the states. which. so that. Nonetheless. For each state. and the aged share of the population—the share of population aged 65 or greater—increases by 6 percentage points. and assume that this difference dissipates at a constant rate between 2030 and 2085. We take CBO’s projection of nominal national GDP by year and divide it by our projection of the population aged 20 to 64 to get a measure of GDP per adult population. the growth rate of GDP per year is assumed to be equal to the growth rate of the adult population. and elderly. although most exhibit this basic pattern. Thus. State GDP Projections We use the population projections to develop our baseline state GDP projection. and extrapolate them beyond 2030. taken from our population projections. For the country as a whole. the kid share of the population declines by 1 percentage point. the Census Bureau has stopped producing these estimates. and thus our estimates are somewhat dated. we calculate the percentage difference between each state’s growth rates for kids.

We acknowledge the significant uncertainty surrounding our state GDP estimates. with estimates by state ranging from lows of around 3 percent (West Virginia) to highs of around 6 percent (Arizona and Nevada). The bottom panel of the figure shows the streams for retirees. the recent and rapid growth in the state due to the boom in shale oil raises the possibility that this prediction will be incorrect. Because the liabilities associated with future workers continue indefinitely. The total workforce (the solid blue line) rises slowly over time in step with our projected rise in the adult population by state. However. we simply add employees to the remaining 2011 workforce year by year in order to hit this total target workforce. we can then calculate the total workforce of the sector by state. We assume that new employees enter the workforce at the same ages as the existing workforce—that is. Under the assumption that wage growth in the state and local government sector rises with productivity growth in the general economy. Figure 8 shows the distribution of our projected GDP growth rates across the states. Given the GASB 23 To calibrate the cash flows associated with future workers. we simply assume that they flow through the work years with the same termination. and are replaced by newly hired workers.slowly growing working age populations are expected to grow more slowly than other states. using this methodology results in an average nominal GDP growth rate of 4½ percent per year. 23 Figure 9 shows our projection of the state and local labor force for the workers covered by the state GASB reports. mortality. they are nonetheless ad hoc and worthy of further study. For instance. our estimates suggest that. we use the age distribution of those with less than 1 year of service from the GASB reports to determine the age distribution of new workers. To create new entrants to the workforce. North Dakota will have the lowest average rate of GDP growth going forward. Over time. More generally. among the 50 states. proportional calibration makes more sense than the geometric calibration used for the existing workforce. we multiply by the average error between our liability estimate for existing workers and the corresponding stated liability in the GASB report. the existing workers quit or move into retirement. As shown in Table 7. and retirement probabilities as the existing workforce. although both our assumption about the rate of convergence between the state-specific Census population growth rates and the national ones and the assumption of no convergence or further divergence of productivity growth across regions seem reasonable to us as a baseline projection. disability. which is just equal to the existing workforce covered by retiree health insurance in 2011 multiplied by the growth rate of the adult population. the methodology to create new workers is straightforward. We assume that state and local payroll rises with projected state GDP. 19 . The top panel shows our workforce projection. Once these workers are added to the stock of existing workers. Projecting New State and Local Government Workers Once we have our state population and GDP projections. Unforeseen events can alter the trajectory of growth in a given state.

it plots the projected ratios of retiree-age to working-age population using two different definitions of retirement age: The long-dashed green line uses a “retirement age” of 55. 25 Social Security early retirement age is 62 and full retirement age is currently 66 and moving to 67 by 2027. Board of Trustees (2011)). Although the ratio of retirement-age to working-age population rises less when age 55 is treated as the retirement age. We find the lack of a demographic bulge puzzling and think it is worthy of further study. and increasing employee contributions (which lowers projected take-up. thus lowering our projection of future beneficiaries. on average.2.B. whereas the short-dashed red line uses a “retirement age” of 65. there still is a much larger rise in that ratio than in the one we project for state and local retiree health insurance—the solid blue line. increased labor mobility over time may have lowered the probability that a given worker will be eligible for retiree health insurance and the increase in two-worker households may have lowered the probability that retirees elect spousal coverage. often with full access to the retiree health insurance benefit. In particular. the share of current workers eventually receiving retiree health benefits is quite low. There are several possible explanations for this remaining difference between our retiree health demographics and those for the population as a whole. It is unclear whether excess cost growth should be 24 The line plotted is the ratio of Old-Age and Survivors Insurance (OASI) beneficiaries to covered workers under the Intermediate set of assumptions (Table IV. Even including retirees from newly-hired workers.) Second. the age of eligibility for Social Security benefits is.report assumptions on employee turnover and eligibility. The top panel of Figure 10 compares the ratio of retirees to workers in our projections to those projected by Social Security. despite the significant increases in the share of the elderly population in all the states. increasing the years of service required to qualify. 25 Thus. First. Many state and local plans allow early retirement at 50 or 55. later than the age of eligibility for state and local retirement benefits. we can now project retiree health costs on an on-going basis. 24 The figure shows a large difference between the effect of demographic change on Social Security versus the effect on state and local retiree health insurance. Finally. it is clear that many states and localities have already taken measures to lower the costs of their retiree health benefits: these include eliminating the programs for newly-hired workers. states may be systematically overestimating quit and firing probabilities or underestimating take-up. it is possible that more general changes in the labor market have had an impact on retiree health benefits. there is no large bulge in the population of retirees. Retiree Health Financing over the Long Run With our projections of flows into retirement from newly-hired workers. The bottom panel of Figure 10 uses the Census population projections (summed across the states and available only through 2030) to get a sense of the importance of this difference in retirement age. For example. Of course. 20 . the aging of the population may have pushed up the ratio of retiree health beneficiaries to workers in the years prior to the 2011 start of our data. where the Social Security line reports the ratio of beneficiaries to covered workers over time.

If. and changes in excess cost growth would affect the mix of compensation. needs to be taken into account. 26 Given the uncertainty about the incidence of these benefits. 2013. or a third alternative in which excess cost growth is a constant 1. The long-dashed red. there is only limited evidence on the incidence of such insurance in the public sector.7 percentage points up until 2100 (the CBO value for 2012) and then 0 thereafter.considered a factor over the long run. the incidence of retiree health insurance is on workers. but not the total amount. on the other hand. an alternative in which health costs grow with wages and there is no excess cost growth. which may be quite different (Qin and Chernew. In the absence of excess cost growth. where total revenues are assumed to rise with state GDP.8 percent of total annual revenues by 2060 under our baseline and about 2 percent of total revenues under our constant excess cost growth assumption. because it hard to value and is not guaranteed. 21 . yet we do not model payroll costs as rising over time because of this factor. it is an obligation that the state and local governments have already accrued. 27 Retiree health care outlays reach around 1. and dashed-dot orange lines represent the projected retiree health costs under three different assumptions about excess health costs: our baseline. Although there is a substantial literature suggesting that private-sector workers bear the cost of their employer-provided health insurance. and so any increase in retiree health benefits would be offset by lower compensation elsewhere. If public sector workers do not bear the cost of retiree health insurance. our projections of annual retiree health insurance costs should be viewed as upper limits on the total fiscal stress associated with retiree health liabilities. existing workers. The solid blue line displays 2012 outlays for retiree health (including any contributions to trust funds). excess cost growth for existing retirees. Almost no empirical evidence exists about the incidence of health insurance that is provided after retirement. In a perfectly competitive labor market. and to a lesser extent. 2013) found that public sector employees bear little of the cost of their current health insurance. Of course. because the answer depends on the incidence of these costs. Figure 11 presents our estimate of national retiree health costs over the long run as a share of total revenue of the state and local government sector. which seems even less likely to be borne by workers. then total future compensation would be invariant to excess health costs. 27 Health costs have to eventually slow to the rate of GDP growth or they will end up comprising 100% of GDP.) One recent study (Clemens and Cutler. workers would be paid their marginal product. these outlays consume less than 1 percent of revenues by 2060. One way to concisely summarize the imbalances represented in the figure is to calculate the percentage change in revenues that would be required to set the present value of costs equal to 26 For example. which uses CBO health cost growth. even under this assumption. then increases in health costs represent a burden for the state. short-dashed green. health insurance costs for current workers also rise with excess costs. But the effect of excess health costs on future workers is more difficult to pin down. in any case. as it might have already been “paid for” in the form of lower wages during the working years and.

our calculations suggest that no adjustment would be necessary—a reflection of the lack of demographic bulge discussed earlier. would.5 percent. 28 Table 8 tabulates the required increases in total revenues by state under the three assumptions about excess cost growth. if anything. Without excess cost growth. under the CBO health cost assumption. we are implicitly projecting a risk-adjusted budget that assumes that (1) states and localities will not default on their retiree health obligations and that the risks associated with mortality. Call the present value of state j’s revenues ∞ Rev j .t ∞ Costs j .5 percent inflation). equal to the value in 2011. which average about 5. (6) PVR j The value we choose for c j is quite important. the adjustment would be much larger. The discussion of the appropriate discount rate. Our current methodology is to set the contribution.5 percent of total revenues. starting in 2012. as we are calculating fiscal stress as the excess needed over what is currently being contributed. about 1. health costs. considerable heterogeneity across the states. the constant change in revenues or expenditures as a share of total revenues that would put the retiree health program into long-run balance satisfies: (k j + c j ) PVR j + Aj = PVC j (5) or PVC j − Aj =kj − cj. and other parameters are uncorrelated with taxpayer marginal utility (see footnote 13). 22 . and (2) any increments to the federal rate received by states and localities on their investment represent a return for holding risk. r matters for these calculations as well. Nationally. c j . k j . the 2012 (1 + r ) 2012 (1 + r ) j current spending on retiree health benefits as a share of revenues as c j . the present value of retiree health costs PVC = ∑ t − 2012 . We are using path of federal borrowing rates that CBO projected in their June 2011 Long-Term Budget Outlook. with the states experiencing the greatest increases in expenditures requiring an adjustment of 1 percent to 3 percent of total 28 CBO projected that borrowing rates would rise from their unusually low levels of 3.3 percent (nominal) in 2011 to a long-run average of 5. lower than average. we calculate that a 0. There is.7 percentage point increase in total revenues. However. By using the federal government borrowing rate. Then. of course.t PVR j = ∑ t − 2012 . This may be somewhat problematic as 2011 was an unusual year both in terms of state contributions to trust funds and in terms of the level of state and local revenues. produce enough revenues such that retiree health expenditures would be financed in perpetuity. the contribution was. and the assets held in a retiree trust fund Aj . biasing upward our estimates of rj . With continued excess cost growth (and assuming that the value of future retiree health benefits rises as health costs rise and other compensation does not decline).5 percent (3 percent real and 2.the present value of revenues.

our calculations suggest that there will be no significant rise in the ratio of state and local government retirees receiving health insurance to state and local government workers. states and localities have far more leeway to cut back the health insurance benefits of existing retirees and workers than they do the pension benefits. we calculate that.revenue. On the other hand.1 trillion dollars. they take into account the different expected growth rates of states (which is reflected in the present value of revenues). so that the expected increase in expenditures for retiree health insurance as a share of GDP stems mostly from excess cost 23 . they could simply allow expenditures on retiree health to increase over time. with the states with the largest burden having to raise own revenues by up to 5. we calculate the present value of the health insurance benefits already accrued by state and local retirees and workers. the increase in revenues necessary would be greater at first. In that case. Using a 5 percent discount rate. but lower later. We also calculate the annual costs of these benefits and assume that states and localities continue to provide the same level of health insurance to future retirees. These calculations represent only one possible way in which states could manage these costs. Conclusion Obligations for retiree benefits are an important factor in the long-run fiscal imbalances of state and local governments. We examine the costs of these benefits to state and local governments in two ways. and hence more valuable. financing them with additional revenues or cuts in other state and local spending. we examine the burden to state and local governments of continuing to provide these benefits in to the future. these estimates can also be interpreted as the cut in spending that would be required to offset the costs of increasing retiree health insurance costs. In any case. by current workers if it is pre-funded. While pension benefits have been widely studied. under our CBO excess cost assumption. the benefit may be viewed as less risky. Because expenditures and revenues are very similar at the state level. a 1. if states do continue to finance these programs on a mostly pay-as-you-go basis. However. roughly ½ of the value of accrued pension obligations.3 percentage point increase in own revenues would be required to finance retiree health expenditures on average. the already-accrued liability associated with retiree health obligations may be significantly less than ½ that of pensions. First. these statistics present a useful way of comparing the size of the problem across the states. states may be able to pay lower wages if they pre-fund (Novy- Marx and Rauh 2013b). For example.2 percentage points. Appendix Table A2 presents analogous calculations using general own source revenue. we estimate that accrued state and local government retiree health care liabilities equal around 1. If so. Second. obligations for retiree health care have received much less attention. For instance. if states wanted to move toward full funding. In addition. Using this measure. Surprisingly. suggesting that a higher discount rate might be warranted. States may wish to prefund for a number of reasons.

We attempt to convey the variation across the states in the burden of these benefits by calculating what changes in revenue. We find that states would have to increase revenues or cut spending by an amount equal to about ¾ percentage point of total revenues. 24 . the burden is negative or close to zero for many states. However. on average.growth in health care rather than demographic change. but much larger–up to 3 percent–for others. would be sufficient to fund these benefits in perpetuity. if begun immediately and maintained forever.

Bond Buyer. Robert and Melinda Morrill. Clark. Population Projections by State. Long-Term Budget Outlook.cbo. Maria. Census Bureau. 2013. “Who Pays for Public Employee Health Costs?”. Chin. “Retiree Health Plans for Public School Teachers after GASB 43 and 45.References Blau.” Education Finance and Policy. Fall 2010. “Will Public Sector Retiree Health Benefit Plans Survive? Economic and Policy Implications of Unfunded Liabilities. http://www. 2013. April 2011. 2013. 2011. Clark.” May 13. Brown. Clark. 2000-2030. “Retiree Health Insurance for Public School Employees: Does it Affect Retirement and Mobility?” working paper. Jeffrey and David Cutler.” American Economic Review 99(2). Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Robert and Melinda Morrill.” Journal of Pension Economics and Finance. Clemens.gov/publication/41486. Fitzpatrick. October 3. and David Vanderweide. John Carlson. 533-37. Robert. 2013. Board of Trustees. Jeffrey and David Wilcox. 2013. 2001. 2009. “The Funding Status of Retiree Health Plans in the Public Sector. Robert. “The Effect of Retiree Health Insurance Plan Characteristics on Retirees’ Choice and Employers’ Costs”. accessed October 15. 2010. Robert. “Discounting State and Local Pension Liabilities. “Fitch: California OPEB Ruling Could be Credit Negative”. “Do Public Pension Obligations Affect State Funding Costs?” working paper. working paper. 2013. Emre Ergungor and Patricia Waiwood. Clark. 438-462. Retiree Health Plans in the Public Sector: Is There a Funding Crisis? Northhampton. Melinda Morrill. June 2011. “Retiree Health Insurance and the Labor Force Behavior of Older Men in the 1990s” Review of Economics and Statistics. “The 2011 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Jean. 2009 Burson. Congressional Budget Office. David and Donna Gilleskie. 25 . MA: Edward Elgar Publishing.” American Economic Review. Tonya. Clark. pp 291-314. January 14. working paper.

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by Year 40 30 Billions of $ 20 10 0 2010 2020 2030 2040 2050 2060 2070 2080 2090 year Retirees AAL for Actives PVB for Actives Note. The AAL liabilites are calculated under the EAN methodology. The panels display cash flows for state government retiree health care obligations. Figure 1 Panel A: Total Retiree Health Care Liabilites. See the text for additional information. by Year 50 40 Billions of $ 20 10 0 30 2010 2020 2030 2040 2050 2060 2070 2080 2090 year PVB AAL Panel B: Retiree Health Care Liabilites for Actives and Retirees. . The cash flows are calibrated to match the discounted value of the cash flows stated in the state GASB report.

Figure 2 Panel A: Distribution of PVB as a Share of State and Local Revenue 15 ID ND OR WY 10 Number of states MS SD IN CO AZ KS VA UT IA MT LA 5 WI TN WA WV RI AR GA MN ME MO NM OH FL VT CA NV KY AL MD NJ NH PA TX MI IL CT SC DE MA AK HI NC NY 0 0 20 40 60 80 100 PVB Retiree Health Liabilities as a Share of Total State and Local Revenues Panel B: Distribution of UAAL as a share of State and Local Revenue 20 15 ID ND Number of states OR MS SD IN 10 WY AZ CO KS IA VA MT UT MN KY WI AR 5 NM TN NV LA RI MO ME WA FL GA TX NC AK WV VT AL NY CT OH CA SC DE MI HI PA MD MA IL NJ NH 0 0 20 40 60 80 UAAL Unfunded Retiree Health Liabilities as a Share of Total State and Local Revenues All values are for the 2011 fiscal year and are produced using a 5% discount rate. In these cases. For some states the GASB report upon which the liabilities are based pertain to the 2010 or 2012 fiscal years. the liabilities are adjusted so as to be on a 2011 fiscal year basis. The UAAL liabilities are produced using the EAN methodology. .

Retiree Health and Pensions 20 ID 15 OR ND CO Number of States MS AZ VA WY 10 KS IN UT TN RI NV IA AR MN NM SD KY MT WA VT 5 MO WV MI WI LA FL GA OH CA NJ MD SC AL NY PA ME TX IL MA HI CT NH AK DE NC 0 0 100 200 300 400 UAAL Retiree Health as a Share of UAAL Pensions . Figure 3 Panel A: Comparison Between PVBs .Retiree Health and Pensions 15 ID 10 Number of States OR ND MS CO WY SD VA RI UT MO IN MT WI 5 TN AZ MN KS WA IA AR NM MI NV LA GA AL FL CA ME MD OH TX MA KY NY WV PA VT IL CT AK SC NJ DE NH HI NC 0 0 20 40 60 80 PVB Retiree Health as a Share of PVB Pensions Panel B: Comparison Between UAALs .

Figure 4 Unfunded Retiree Health and Pension Liabilities 100 Retiree Health UAAL as a Percent of S&L Revenues HI IL AK CT 80 NH NJ 60 MA MI NY NC DE MD AL 40 TX PA SC CA GAME VT 20 LA NM KY OH WV FL MO NV WA AR MT MN RI TN WI IA UT KS VA CO AZ SD ND IN WY ID MS OR 0 0 50 100 150 Pension UAAL as a Percent of S&L Revenues .

Figure 5 Distribution of UAAL as a Share of Total Revenue .

Figure 6 Retiree Health Obligations Existing Workers and Retirees .05 0 .3 .2 2012 2022 2032 2042 2052 2062 2072 2082 year CBO Excess Cost No Excess Cost Continued Excess Cost .25 Share of GDP (%) .15 .1 .

Figure 7 Demographic Projections Panel A: Distribution of Changes in Adult Population 20 MT 15 RI CT VT Number of States MI MA KS LA 10 WI MS ND AL WV IL WY KY AR SD HI SC IA IN NH NM MO MN 5 ME OK TN CA PA DE MD GA OH NJ CO OR NY AK NC NE ID TX VA UT WA NV FL AZ 0 -20 0 20 40 Cumulative Percent Change in Adult Population from 2011-2030 Panel B: Variation in Population Aging Across the States 20 GA MD IL IN 15 NC Number of States CO WA CA OK ID NJ 10 TN OH AR LA VA KS AK MA NY CT MI AL NV MS 5 MO RI MN NE HI KY PA NH IA DE UT SC SD ND WI AZ TX VT ME WY OR WV FL MT NM 0 10 15 20 25 30 Percentage Point Change in Aged Dependency .

2011-2030 20 15 NM ME PA Number of States OH NY NE MT 10 RI CT VT MI MA KY KS HI LA IN NH WI MO 5 MN CA MS OK ND AL TN GA DE MD WV IL NJ OR WY CO NC AR AK TX SD SC ID VA WA UT NV IA FL AZ 0 3 4 5 6 Average Annual Nominal GDP Growth Rate from 2011 to 2030 . Figure 8 Distribution of Nominal GDP Growth Rates.

4 .8 1 2010 2020 2030 2040 2050 2060 year Total Workers Existing Workers Workers hired after 2011 Panel B: Retirees. All States 1.2 Number relative to total actives in 2011 .6 0.4 .6 0 .2 Number relative to total retirees in 2011 .8 1 2010 2020 2030 2040 2050 2060 year Total Retirees Retirees from Existing Active Workers Existing Retirees Retirees from Newly-Hired Workers . Figure 9 Panel A: Current Active and Newly Hired State and Local Government Workers.2 .2 . All States 1.

2 1 1.6 1. Figure 10 Panel A: Demographic Change: Retiree Health vs Social Security 1. Workers 65+ Population/20-64 Population 55+ Population/20-54 Population .4 Ratio relative to 2011 1 1.6 Ratio relative to 2011 1.8 2010 2020 2030 2040 2050 2060 2070 2080 2090 year RHI Beneficiaries/S&L Gov.2 . Workers Social Security Retirees/Workers Panel B: Demographic Change: Retiree Health vs Census Population Projections 1.4 2010 2015 2020 2025 2030 year RHI Beneficiaries/S&L Gov.

Cost Growth . Figure 11 Retiree Health Obligations as a Share of Total S&L Revenue 2 Share of Revenue (%) 1.5 1 2010 2020 2030 2040 2050 2060 year Current OPEB Expenditures CBO Excess Cost Growth No Excess Cost Growth Continued Exc.

310 13% $8.493 5% CT 0.2 $1.477 2% $1.873 62% MN 8.064 28% MI 2. the liabilities are adjusted so as to be on a 2011 fiscal year basis.918 91% $18.445 24% $4.965 98% IN 3.3 $3.488 105% DE 0.8 $47. .5 $142.9 $26. For some states the GASB report upon which the liabilities are based pertain to the 2010 or 2012 fiscal years.909 14% AZ 0.4 $6.318 4% $2.8 $17.263 51% AR 0.053 5% CA 1.370 10% $9.5 $10.560 56% $57.0 $2.0 $14.709 59% ME 0.3 $3.612 34% LA 0.8 $37.033 11% $3. Table 1 State and Local Retiree Health Care Liabilities Actuarial Accrued Liability (AAL) Present Value of Benefits Local Scaling % of State and Local % of State and Local State $ millions $ millions Factor Revenue Revenue (1) (2) (3) (4) (5) AK 0.875 27% HI 0.750 114% IA 3.622 24% MA 1.156 67% MD 2.948 45% $37.5 $28. In these cases.972 44% $6. All values are for the 2011 fiscal year and are produced using a 5% discount rate.9 $126.250 56% FL 3.4 $16.2 $10.8 $47.074 20% $11.8 $21.477 14% $30.6 $1.009 26% $195.188 4% $1.012 5% $3.063 91% $135.313 14% MS 0.140 52% $56.0 $4.0 $94 0% $50 0% IL 2.270 36% CO 0.7 $7.365 44% $20.195 24% $23.651 6% KY 2.218 14% MO 2.868 99% AL 3.532 4% $2.993 3% KS 3.1 $691 2% $839 3% Note.491 87% $18.631 16% GA 3.7 $3.185 6% ID 0.532 25% $14.6 $1.176 88% $44.

965 80% OH 0.451 6% VA 0.527 33% WA 0.058 20% $7.464 48% $65.469 9% $10.2 $211 2% $244 3% TN 1.125 42% Note.728 5% $4.333 63% $101.051 32% $1.0 $67.0 $3.651 29% $48.097.0 $168.284 7% $5.4 $14.3 $1.128 69% ND 0.928 96% NM 0.7 $86.1 $1.702 39% RI 0.527 42% SD 2.854 8% WV 0. All values are for the 2011 fiscal year and are produced using a 5% discount rate.4 $3.9 $9.528 12% $5.0 $249 2% $258 3% US 1. In these cases.495 11% SC 0.2 $3.583 19% $4.507 24% WY 0.117 35% OR 0.) State and Local Retiree Health Care Liabilities Actuarial Accrued Liability (AAL) Present Value of Benefits Local Scaling % of State and Local % of State and Local State $ millions $ millions Factor Revenue Revenue (1) (2) (3) (4) (5) MT 1.750 55% UT 1.751 80% $12.3 $39.4 $5.385 30% NV 3.791 9% TX 2. .887 32% $19.829 24% $2.369 6% VT 1.1 $799 2% $927 2% PA 1.679 20% NY 1.8 $4.2 $1.623 6% $4.298 13% NC 0.938 33% $53. Table 1 (cont.7 $1.984 51% $263.662 37% $128. For some states the GASB report upon which the liabilities are based pertain to the 2010 or 2012 fiscal years.370 13% WI 3.634 103% NJ 0.416 6% $1.9 $985 10% $1.5 $45.455.0 $3.0 $78 1% $122 1% NH 2.211 9% $1.0 $7.8 $44. the liabilities are adjusted so as to be on a 2011 fiscal year basis.

All values are U. the liabilities are adjusted so as to be on a 2011 fiscal year basis.988 Note.615.063 $1. total liabilities for the 2011 fiscal year.) . The Treasury Yield Curve is the zero-coupon Treasury yield curve as of June 30.022. . The AAL liabilities are produced using the EAN methodology.444 $1.629.510 States' Chosen Discount Rate $1.S. In these cases.576 $1. 2011 (the end of the 2011 state government fiscal year in most states.051 $1.125 Treasury Yield Curve $1.188. For some states the GASB report upon which the liabilities are based pertain to the 2010 or 2012 fiscal years.209.902 7 Percent $829.455.097. Table 2 State and Local Retiree Health Care Liabilities under Various Discount Rates ($ millions) Actuarial Accrued Liability Present Value of Benefits (AAL) (PVB) 5 Percent $1.

385.784 -19% PA $44.264 $1.779 -18% C. In these cases.140 $50.912 7% $37.228 -16% $7.924 -20% FL $26. All values are for the 2011 fiscal year and are produced using a 5% discount rate.836 3% AR $3.631 $24.117 $54.910 -4% $1.199 5% $3. Largest Percent Differences in PVB MD $28. Smallest Percent Differences in PVB ID $33 $27 -20% $50 $39 -22% ND $78 $64 -18% $122 $98 -20% NM $5. National Estimates US $1. the liabilities are adjusted so as to be on a 2011 fiscal year basis.455.364 7% $56. .658 -5% B.702 $43. Table 3 State and Local Retiree Health Care Liabilities Under CBO's Medical Cost Growth Assumptions Actuarial Accrued Liability (AAL) Present Value of Benefits (PVB) State Medical Cost CBO Medical Cost Percent Difference State Medical Cost CBO Medical Cost Percent Difference State Growth Assumptions Growth Assumption Between (2) and (1) Growth Assumptions Growth Assumption Between (5) and (4) (1) (2) (3) (4) (5) (6) A.420 13% Note.909 $4.097.217 13% OH $39.938 $36.783 -18% $30.873 $64.091 5% MI $47.948 $30.058 $4. The AAL liabilities are produced using the EAN methodology.051 $1.307 9% $48.477 $21.709 $38.033 $3.623 -19% $53.385 $5. For some states the GASB report upon which the liabilities are based pertain to the 2010 or 2012 fiscal years.048.651 $43.

476 110% 114% 119% $5.S.014 Percent Difference 104% 108% 113% 103% 107% 113% B. Mortality State Assumption Assumption Assumption Assumption Assumptions Assumption Low Assumptions Assumption Low Middle High Middle High (1) (2) (3) (4) (5) (6) (7) (8) A. Assumption CO $2.455. For some states the GASB report upon which the liabilities are based pertain to the 2010 or 2012 fiscal years.S. All values are for the 2011 fiscal year and are produced using a 5% discount rate.513 $1.064 111% 116% 124% WY $259 124% 127% 130% $258 122% 124% 127% Note.621 $1.179.750 95% 99% 105% MS $709 103% 103% 103% $839 99% 100% 100% B.563. Mortality S. the liabilities are adjusted so as to be on a 2011 fiscal year basis.298 107% 115% 127% NV $3.S. The AAL liabilities are produced using the EAN methodology.051 $1. National Estimates US $1.519 99% 99% 99% $2.264 $1. Largest Percent Differences Between State PVB and Middle S. Assumption NJ $66. Table 4 State and Local Retiree Health Care Liabilities Under Differing Mortality Assumptions Actuarial Accrued Liability (AAL) Present Value of Benefits (PVB) S.638 $1.928 109% 115% 122% MT $971 106% 114% 123% $1. Mortality State Mortality S.529 113% 119% 126% $4.S. Smallest Percent Differences Between State PVB and Middle S.346 92% 94% 96% $2.380 $1.854 98% 99% 99% IA $1. Mortality S.S.137.646.185 99% 99% 99% HI $15.S.097. . in the column headers refers to the Social Security Administration.054 $1.679 111% 116% 123% ME $3. In these cases.493 92% 94% 97% WI $3.537 99% 99% 99% $4.234. Mortality State Mortality S. Mortality S.500.657 108% 113% 119% $101.080 96% 101% 106% $18. S.S.S.S.

254 104% $68.014 81% $1.454 162% AL $15.469 70% IA $1. .648 107% AR $3.159 $25.532 108% $26.255 $1.841 $14.547 394% $2.551 $4.649 89% MD $32.347 131% CT $31.188 155% $11.834 171% $2.564 112% $4.320 $23.157 96% CO $1.629 93% ME $2.213 130% $6.465 $16.486 $8.425 111% $1.496 $5.816 $22.401 97% $7.383 96% $43.130 98% $13.358 $13.504 $17.415 72% KY $8. Table 5 Harmonized State and Local Retiree Health Care Liabilities Unfunded Actuarial Accrued Liability (UAAL) Present Value of Benefits Harmonized Harmonized State State Assumptions (2) as a percent of (1) State Assumptions (2) as a percent of (1) Assumptions Assumptions (1) (2) (4) (5) (6) AK $10.857 $31.566 100% AZ $393 $1.723 85% MA $44.938 116% $20.836 $8.180 $6.577 98% LA $10.429 $1.962 $1.551 132% MS $752 $686 91% $897 $808 90% Note.241 $56.317 $147.195 $3.045 118% DE $5.324 $1.325 83% $2.584 $5.418 97% HI $16. the liabilities are adjusted so as to be on a 2011 fiscal year basis.563 $7.890 $2.263 $21.455 91% IN $1.476 $26.100 96% $147.591 $1. In these cases.325 122% $39.412 83% $9.408 $38.326 $56.286 103% $63.791 $2.475 $16.627 172% MI $54.380 75% $37.876 81% ID $31 $27 87% $58 $39 67% IL $130.185 $125.394 $18.883 $46.470 $40.605 97% $14.860 $72.298 96% $216. All values are for the 2011 fiscal year.683 $4.417 $134.380 $10.498 $7.110 $3.240 $3.810 $11.001 106% KS $1.895 133% $1.101 147% CA $153.719 71% GA $20. For some states the GASB report upon which the liabilities are based pertain to the 2010 or 2012 fiscal years.170 81% $23.886 96% FL $31.287 $1.159 $46.762 82% MO $5.555 $208.649 106% MN $6.

184 $1.028 $1.693 $171.189 $39.008 $5.088.297 92% Note.165 93% $55.992 87% ND $65 $64 98% $122 $98 80% NH $9.796 94% WA $6.363 90% $7.121 78% OH $24.452 93% VA $2.139 $65.321 107% $13.303 83% NC $45.895 79% $7. .768 128% $48.619 99% $19.367 $270.594 $4.) Harmonized State and Local Retiree Health Care Liabilities Unfunded Actuarial Accrued Liability (UAAL) Present Value of Benefits Harmonized Harmonized State State Assumptions (2) as a percent of (1) State Assumptions (2) as a percent of (1) Assumptions Assumptions (1) (2) (3) (4) (5) (6) MT $974 $974 100% $1.553 $1.962 $2.615.313 96% NM $4.824 94% $6.034 190% $3. For some states the GASB report upon which the liabilities are based pertain to the 2010 or 2012 fiscal years.536 $80.645 81% $11.458 97% NJ $71.569 201% WY $219 $315 144% $258 $444 172% US $1.649 $5.768 $7.931 122% OR $283 $563 199% $658 $960 146% PA $42.031 98% $2.925 $3.936 $5.637 $10.829 $31.693 81% NY $207. All values are for the 2011 fiscal year.417 86% $5.585 99% $76.551 104% SC $14.571 85% RI $1.429 $1.116 $110.930 80% NV $3.626 100% $115.695 $14.104 103% SD $212 $211 100% $285 $234 82% TN $4.385 $5.931 $47.073 $3.223 82% $348.961 $3.938 $13. In these cases. Table 5 (cont. the liabilities are adjusted so as to be on a 2011 fiscal year basis.372 $71.764 $7.292 $4.649 $5.200 101% $1.556 81% WV $2.491.441 135% VT $2.902 $1.753 $3.534 64% WI $3.504 101% UT $1.665 $3.784 $117.121.188 100% $116.170 78% TX $80.593 97% $1.117 $58.078 $44.495 $1.566 $1.126 110% $1.527 $20.077 $2.502 131% $3.

Table 6 Projected Demographic Change Percentage Point Change in Population Shares from 2011-2030 (1) (2) (3) (1) (2) (3) Kids Adults Aged Kids Adults Aged AK 8% 0% 5% MT -7% 0% 4% AL -4% 0% 4% NC 17% 1% 5% AR 3% 0% 4% ND -17% -1% 3% AZ 40% 2% 6% NE -8% 0% 4% CA 12% 1% 5% NH 4% 0% 4% CO 8% 0% 5% NJ 0% 0% 4% CT -7% 0% 4% NM -10% -1% 4% DE 0% 0% 4% NV 40% 2% 6% FL 28% 1% 6% NY -8% 0% 4% GA 14% 1% 5% OH -9% 0% 4% HI -2% 0% 4% OK -1% 0% 4% IA -11% -1% 4% OR 16% 1% 5% ID 19% 1% 5% PA -9% 0% 4% IL -4% 0% 4% RI -7% 0% 4% IN -2% 0% 4% SC 3% 0% 4% KS -5% 0% 4% SD -12% -1% 3% KY -2% 0% 4% TN 6% 0% 4% LA -5% 0% 4% TX 25% 1% 5% MA -5% 0% 4% UT 27% 1% 5% MD 8% 0% 5% VA 10% 1% 5% ME -10% -1% 4% VT -6% 0% 4% MI -6% 0% 4% WA 20% 1% 5% MN 4% 0% 4% WI -4% 0% 4% MO -1% 0% 4% WV -15% -1% 3% MS -4% 0% 4% WY -13% -1% 3% TOTAL -1% -5% 6% .

3% 4. Table 7 Changes in the Adult Population and Projected GDP Cumulative Average Annual Average Annual Cumulative Average Annual Average Annual Percent Change in Growth Rate of Nominal GDP Percent Change in Growth Rate of Nominal GDP Adult Population Adult Population Growth Rate Adult Population Adult Population Growth Rate 2011-2030 2011-2030 2011-2030 2011-2030 2011-2030 2011-2030 (1) (2) (3) (1) (2) (3) AK 8% 0% 5% MT -7% 0% 4% AL -4% 0% 4% NC 17% 1% 5% AR 3% 0% 4% ND -17% -1% 3% AZ 40% 2% 6% NE -8% 0% 4% CA 12% 1% 5% NH 4% 0% 4% CO 8% 0% 5% NJ 0% 0% 4% CT -7% 0% 4% NM -10% -1% 4% DE 0% 0% 4% NV 40% 2% 6% FL 28% 1% 6% NY -8% 0% 4% GA 14% 1% 5% OH -9% 0% 4% HI -2% 0% 4% OK -1% 0% 4% IA -11% -1% 4% OR 16% 1% 5% ID 19% 1% 5% PA -9% 0% 4% IL -4% 0% 4% RI -7% 0% 4% IN -2% 0% 4% SC 3% 0% 4% KS -5% 0% 4% SD -12% -1% 3% KY -2% 0% 4% TN 6% 0% 4% LA -5% 0% 4% TX 25% 1% 5% MA -5% 0% 4% UT 27% 1% 5% MD 8% 0% 5% VA 10% 1% 5% ME -10% -1% 4% VT -6% 0% 4% MI -6% 0% 4% WA 20% 1% 5% MN 4% 0% 4% WI -4% 0% 4% MO -1% 0% 4% WV -15% -1% 3% MS -4% 0% 4% WY -13% -1% 3% TOTAL 7% 0.5% .

6% 5.0% 0.3% 2.0% VT 0.2% 0.1% TN 0.3% 0.3% ND 0.0% 0.2% -0.4% 1.3% SD 0.0% 0.1% MN 0.6% OR -0.2% 1.5% -0.1% -0.4% -0.5% MS 0.6% 2.5% 0.1% NH 2.2% 0.7% 0.0% 0.9% -0.6% -0.0% 1.3% OH 0.1% 1.7% 5.7% LA -0.3% 1.0% 1.2% NM 0.2% 0.1% -1.5% -0.6% 0.7% VA -0.9% 0.1% 0.4% CT 2.9% 0.4% AZ -0.1% CO -0.8% -0.0% 0.6% 1.1% AK 0.0% 0.0% HI 0.8% 0.2% AR 0.2% IL 1.2% 2.2% RI -0.3% 0.2% MO 0.2% 1.0% 0.2% -0.2% -0.9% ME 0.0% 0.2% 0.2% MI 1.0% WI 0.3% TX 2.8% 0.0% -0.1% -0.1% 0.1% -0.0% 0.3% -0. Table 8 Retiree Health Obligations: Increase in Revenues to Balance Over Perpetuity Excess Cost Growth Assumption Excess Cost Growth Assumption CBO None Continued CBO None Continued (1) (2) (3) (4) (5) (6) NY 3.6% -0.4% 0.6% MD -0.4% 3.7% PA -0.3% -0.0% 0.8% 0.4% -0.2% -0.4% WA 0.9% 0.4% -0.3% KY -0.0% 1.1% -0.6% IN 0.2% MT 0.0% 0.3% 0.1% -0.0% CA 0.1% 0.1% 0.8% 3.3% -0.0% MA 0.1% SC 0.2% 0.2% NV 0.7% 0.2% -0.0% 0.3% -0.3% WV 1.4% 0.2% WY 0.5% NC 1.7% GA -0.1% 5.4% US 0.1% 0.1% 0.4% 0.3% UT -0.2% -0.1% DE 0.1% 0.7% 0.0% 0.1% 0.4% -0.2% IA 0.5% -0.3% NJ 2.0% 1.1% 0.1% 0.6% 4.7% KS -0.1% -0.9% ID 0.1% 0.3% FL 0.0% AL 0.2% 1.3% 1.5% .2% 0.0% 0.

and non-ed.864: ratio of 2. The report only misses a few workers in 3 small state pension plans and 3 local plans. judges.082. but pay 100 percent of the cost.097.000. while the state OPEB report is for fiscal 2011." (https://www.485.45. The workers in the 3 state plans are offered retiree health care from the state (Clark and AZ x x 0.69 x The LGHIP website states that it provides retiree health coverage in some cases: "An active employee who retires from a unit that allows retirees to continue coverage has the option of electing retiree coverage or COBRA.023. Thus. 126. The teacher AAL is relatively low because it only refers to the provision of a Medicare supplement plan. retired teachers may obtain health care from their former districts. For those hired after 2006. 539.) Given the state reported AAL of nearly $18 billion. many employees of cities and towns.505. teachers are covered by their own plan and are not captured in the state report. 995 . The report (table 3) calculates the UAAL for all retiree health liabilities in the CA 1. .000 = )is therefore applied to the liability streams calculated from the state GASB report.905.copera. Office of the State Comptroller. The State Teacher's Retirement System GASB OPEB report suggests an AAL of $3. Table A1: Scaling for State and Local Employees not Covered in Primary State Report State GASB Report Scaling Captures teacher: teacher: local non-ed. state troopers.41.41 equals $2. equal to 27 percent of the 208. Given the state AAL of $7.17. public school teachers in the state. State GASB report appears to cover all local government workers (including teachers) with the exception of a couple of very small groups such as DE x x volunteer firefighters.5 (=(total liability . making the UAAL based scaling factor a reasonable approximation.org/pera/about/overview.896.g.369. 2008.000.7. (Table 6 of the report shows that only 14 percent of total state and local retiree health liabiliteis are pre-funded. the AAL AK x 0.e.880.state liability) / state liability =( 118. indicates that this refers to a very small number of state employees covered by the Teacher's Retirement System. compared to a state reported retiree health care AAL of 3." https://www.) The state GASB report captures most state and local employees.939 actives captued in the state GASB report. State retiree health care is linked to receipt of a pension from the state pension system (PERS).aspx The state report captures all state workers and the vast majority of non-education local workers.000." State of California. many CO x x university and college employees. The state report is for the State Employee's Health Insurance Plan (SEHIP).47.081.995 active members for all the state's pension plans according to the Census Bureau.000. Dr. Woodruff also confirmed that local non-education employees receive retiree health care directly from local CT 0.000 for 2011. PERS had 45. State GASB repot covers state employees and some local workers. A phone conversation with Thomas Woodruff. this yields a teacher scaling factor of 0.200 active members actives in 2011 relative to AR 0.). Prior to Medicare. AL 2. Healthcare Policy & Benefits Service Division. 995 = 0.PERA.076.alseib.288. PERA membership include: "employees of the Colorado state government.org/healthinsurance/lghip/FAQ. Notes non.809. In general. A scaling factor of 1.htm) The state GASB report only covers state government employees. State GASB report captures most state employees (although excludes higher-ed. Thus. Retiree health insurance in linked to receipt of a pension benefit from the state pension sysytem -. The state also has a Local Government Health Insurance Plan (LGHIP).346. The STRS report is for fiscal year 2012. 200) / 134. this implies a scaling factor of 0. and whom are on a different retiree health care plan. The state GASB report captures the bulk of state and local government employees (including both local ed. the total AAL for retiree health care is $3.67 134.17 x governments and are not captured in the state report. we use an overall scaling factor of (134. including some school district employees. The Teacher's Retirement Systemt (TRS) CAFR gives an AAL of $3.000)/47. employees outside of CSU system -.50 state. (This ia an average of the reported 2010 and 2012 AAL provided by the report. The state report does refer to individuals covered by the State Teacher's Retirement System.000.000 for workers hired before 2006.27 Morrill 2010). Supplemental Source for general scaling: "Funding Pensions & Retiree Health Care for Public Employees: A Report of the Public Employee Post-Employee Benefits Commision. The calculations suggest that the State GASB report captures 40 percent of total state and local government retiree health liabilities. the UC system and community colleges are excluded).880.334. and the employees of a number of other public entities. It does not cover any teachers.079. The Census pension data indicates that these 6 plans have total active membership of 56.428. based on general: based on : based on education liabilities in based on State teachers census census local teacher supplememt employee employee employees OPEB report al sources counts counts or CAFR The 2011 AAL for teacher retiree health care is equal to 9.67.

http://www.g. Employee counts refer to full-time workers as measured by the Census Bureau. There are 326.5% discount rate (the same used by the state GASB report used as the basis of the cash flows for the state). Notes non. The total scaling factor for the state is equal to the two additional state reports (0.407 active employees in the GSP plan.9 billion and assumes that the benefits which have been provided under the settlement agreement continue indefinitely. an employee of the Florida State Group Insurance Plan. The state GASB report covers all state employee. May 21. ID x x State GASB report appears to capture all state and local government employees.6 billion.org/city/en/depts/fin/provdrs/ben/alerts/2013/jan/retiree_healthcarebenefitscommissionreporttothemayor.753 k-12 employees and 168. The school personnel report indicates that the retire health care AAL is equal to 2. Moroever.583 state employees. Retiree Healthcare Benefits Commission. The remaining non-teacher local workers (e.58 x state workers.) The exclusion of local workers (both K-12 and non-ed.) The AAL equals IL 2. equal to 38 percent of the state GASB report AAL. (The state GASB report counts 159. As a result. The agreement expires on June 30. (Report to the Mayor’s Office on the State of Retiree Healthcare. Executive Director of the Indiana Retired Teachers Association. The City of Chicago and Cook County have a combined retiree health care AAL of 12. HI x x Report covers all state and local government workers.) . reported in Status of Local Pension Funding Fiscal Year 2011: An Evaluation of Ten Local Government Employee Pension Funds in Cook County. other than the legislature and conservation and excise police which are distinct from state police. Local non-education workers are not covered in these three reports. (The RHBC was created as a condition of the settlement agreement. Some districts do not even offer access to their health plans to retirees and those that do almost never provide a subsidy. This is not consistent with our current policy assumption. The provision of retiree health care at the local level is handled by the individual governments with varying levels of subsidy according to a telephone conversation with Gary Green of the FRS.1 billion for retiree health benefits. January 11. These second two reports contain AALs jointly equal to 63 percent of the AAL in the first report. we generated the cash flows from the state police portion of the report and then scale up these cash flows by a 0. We calculated annual liabilities for the GA x 2. the state police cash flows scaled up to reflect all state government employees. The provision of retiree health benefits in the City of Chicago is subject to the provisions of the settlement of City of Chicago v.24 teachers or other local employees. based on general: based on : based on education liabilities in based on State teachers census census local teacher supplememt employee employee employees OPEB report al sources counts counts or CAFR The state GASB report covers the provision of retiree heatlh care under the State Group Insurance Plan (GSP). The first report .38) + remaining non-teachers in state (1. The state police account for 76% of the total present value of the retiree health care liablities. We therefore use the AAL reported by the Retiree Healthcare Benefits Commission (RHBC). calculated under a 4. The Civic Federation.cityofchicago. Table A1: Scaling for State and Local Employees not Covered in Primary State Report State GASB Report Scaling Captures teacher: teacher: local non-ed.24 factor. The state GASB report is two reports appended together: one for state workers and one for k-12 personnel. 2013. The local scaling up is based upon the full state cash flows (i. 2013. but is basically two separate reports: one for state police and one for everyone else. Although the FRS covers local employess (including teachers). However. this was computed using a 7. We collected information on the AALs of both the City of Chicago and Cook County. excluding Chicago and Cook County) were handled using a scaling factor equal to the ([number of local non-primary and secondary education instructional workers in Illinois] - [number of City of Chicago and Cook County non-primary and secondary education instructional workers]) / number of state workers = 1. 2013 and the city's CAFR statement values the OPEB obligations assuming the termination of the benefit on this date.) The state report does not cover IN x x 0.6 times the state retiree health care AAL.91 $10. A phone conversation with Nancy Tolson.9.63) + Chicago and Cook County non-teacher (0. the GSP health insurance only applies to state employees.7 billion AAL. Eligibility for GSP health insurance as a retiree is contingent on qualifying for a pension benefit from the Florida Retirement System (FRS). (Retiree health benefits to non-police employees . Korshak. We collected three state-wide GASB OPEB reports. As this occurred after our "base" fiscal year of 2011 we do not account for this termination. We utilize the $1.5% discount rate. The second report covers these college workers and the third report covers k-12 teachers. the number of active employees in the state GASB report is much too FL x x small to include local workers.e. which is the basis of our cash flow projections. covers state employees other than some "college" employees. are relatively small as there is no explicit subsidy.html) (In May 2013 Chicago announced it was terminating the subsidy for retiree health care.9) = 2.) was confirmed in a telephone call with Sally Wade. indicates that teacher retiree health care is handled on a district-by-district basis.91.) The Cook County Employee's Annuity and Benefit Fund reports an AAL of $1.

The number of active employees covered matches up well with the count of non-higher ed.000. 293.000 for retirees and $12. worker) and 102.63. in almost all cases the higher ed. employees to non- higher-ed. "University of Maine System Report of the Retiree Health Plan Task Force II". 979. the number of actives in the plan in the 2011 fiscal year.5% (state police). 24 2008 makes it clear that the University of Maine system independently provides its retirees health care. Based on a phone coversation with an employee of LA x x the statewide municipal pension fund (MERS: 800-820-1137. including education employees and teachers. (Although there are a "handful" of university employees covered by the state plan. A report by a special commission on retiree health benefits estimates that the retiree health care AAL for the state's municipalities is $30 billion. The Annual Financial ME x x 0.000 for actives = $27. most cities and towns have accepted the necessary provisions of the law which permit them to be able to provide this service.000. The report suggests that only the state and municipal governments provide retiree health care in Massachusetts. the scaling ratio equals 1. and other). "The Commonwealth of Massachusetts Special Commission to Study Retiree Healthcare and Other Non-Pension Benefits Final Report". Head of Benefits Education. Year Ended June 20. Thus. state employees. Communications Director for the Kansas Public Employees Retirement System (KPERS). 610)= 0.mass. but not universally as some of the very small governments do not.336. confirms that all local government retirees. following a discussion of eligibility for retiree health benefits.gov/perac/guide/mainguide28. 11 .gov/anf/docs/anf/opeb-commission/opeb-commission-final-report.08.18. www.pdf) The Public Employee MA 1.000.496. Given the state AAL of $1.63 retiree health plan only applies to state employees outside of higher ed. 106. The state GASB report does not cover state police.981.mass. Submitted January 11. state employees: (15. 36. the total scaling factor is 2. However. based on general: based on : based on education liabilities in based on State teachers census census local teacher supplememt employee employee employees OPEB report al sources counts counts or CAFR The state GASB report contains essentially no information on who is covered. Kristen Basso.8 times the state government's retiree health AAL.) KY 2. Notes non. Furthermore.4% (k-12 employees). teachers or non-education local workers (who are covered under the "County" retirement system. The state GASB report makes it clear only state employees are covered by the plan (both higher ed.90. equal to 1.550. are provided with health care on case-by-case basis as determined by the individual local government. (http://www. this implies a scaling factor of 0. The ratio of each groups retiree health care AAL to the state retiree health care AAL is: 9.80 Retirement Administration Commission (a state government entity which oversees the 105 retirement sytems in the state) website states the following in regards to local government retiree health care: "While continuation of insurance coverage for retirees is an optional matter for the various governmental units in the Commonwealth. The state GASB report appears to captures state employees and teachers.000.000. Jim Pierson. As the MI 1. teachers. Iowa Department of Administrative Services.046. Every single department covered by the plan in listed on pgs. other school and state police. (http://www. Sept.htm) 2012 school retirement fund CAFR shows a 2011 OPEB AAL of $14. The state GASB report covers the following workers: state. 2013.792.mersla. 2012.) The scaling factor is the ratio of state higher ed.4% (local non-ed. 38.103. gives a fiscal 2011 OPEB AAL of $160. the count of active members in the state GASB report appear much too small to include MD x x teachers. KS x x nearly matches the number of full-time state government employees counted by the census. has an unlabeled table listing several state pension systems.610) /(40. The Teacher's Retirement System is listed in the table. Table A1: Scaling for State and Local Employees not Covered in Primary State Report State GASB Report Scaling Captures teacher: teacher: local non-ed.08 Report of the University of Maine. institutions direclty provide the benefit. This was confirmed by a conversation with a staff member of the Legislation and Research Division of the Maryland State Retirement and Pension System who indicated that the state did not provide retiree health benefits to any K-12 teachers in the state of Maryland.com) individual local governments typically provide coverage.000. .000. 561-15.18 We obtained a separate GASB report for each of these groups.12 and these are clearly all state agencies. The state GASB report. confirmed that the state IA x x 0. However.251.90 x state declared AAL equals $14.

530. to account for K-12 local workers we use a scaling factor of 2. The general scaling factor reported in the table is the sum of the local non-ed. almost all k-12 employees are employed by local governments.000 in total current spending in the fiscal year to which the state report refers in Minnesota.676. The total of these revenues for the reporting districts was $5. The Census Bureau's Public Elementary- Secondary Education Finance Data reports $8. municipal employees we scale by (162.978.119 in Minnesota. The GASB report for state higher ed. workers as follows.e. non-ed.364.46 dollar terms on a district-by-district basis. Ronald. 119 / 33.599. The only measure of district size given is operating revenues.141.000. For instance.146 administered plans. The report contains the results of a survey of the declared GASB OPEB liabilites of school distircts in the state (see Table 6).069.530.392 .html for non-teacher education retirees). These local k-12 MO x x retirees receieve. employees.15 .404. The counts for these 6 plans are much too small to be inclusive of all members in these plans.91 ($2.186. April 2011.115 employees. Thes four plans have a total of 162. Office of the State Auditor.020.364) by 1.381.232.trs. scaling factor and the state higher ed.46.646)/141.404.psrsmo.062. NE The state of Nebraska does not issue a GASB report as it has negligible liabilities. they opted out of their local plans to join the state plan). As total local.978. Given the state present value of $1. by law.16 = 5. The state GASB report covers only state employees. The state plan picked up a number of local employees (i.44 ($8.714. The state GASB reports states "Eligible retirees will include State and School employees retiring from the State of Mississippi and electing coverage at retiree contribution rates.16 to account for the state higher ed.org/PEERS/HealthInsurance. for local non-education workers we use data on GASB declared OPEB liabilities from non-ed. Local public retirees currently receive health care directly from the local government for whom they worked.071) to obtain an AAL of $2.mt.000.2007 non-state public retirees could opt for the state retiree health plan.asp) The wording of the state report suggests these workers are likely directly employed by the state (e.468.646.gov/Retirees/InsurancePremiums.000. Thus. retiree health from the local government which had previously employed them (see https://www.local breakdown in Nevada is unusually complicated. (http://www. 2009. workers we use a scaling factor of 5. 115) to obtain an AAL of 3. "OPEBs: What lies beneath the balance sheet" FedGazette. The state GASB report covers state employees and small numbers of employees from 6 state administered pension plans (other than the primary plan for state workers). Notes non.528. based on general: based on : based on education liabilities in based on State teachers census census local teacher supplememt employee employee employees OPEB report al sources counts counts or CAFR The state report only covers state workers and excludes state higher education workers.000. the CFO of the Public Employee's Benefits Program. Finally. employees (the Minnesota State Colleges and Universities Postretirement Medical Plan Actuarial Valuation) shows a present value of future benefits of $163. NV x x The above information was provided by Celestina Glove.062 / $693. a small number of K-12 teachers employed in state run organizations). They also match up well in MN 2. Given that local retirees could only opt in over a five year window and that all of the actives are state employees. March 31. we gross up the reported AAL by 2. The state GASB report has an AAL of $693.599. but the bias should be small.000).646 = 0. the Teacher's Retirement System MT x x website makes it clear that in most cases teacher's receive retiree health benefits directly from their former school district. public employment is 73. Actives in the 2011 GASB report are nearly 100 percent state employees.665.680.html for teachers and https://www. Minneapolis Federal Reserve. State of Minnesota.297. All public pensions in the state fall under one of four state MS x 0. State of Nevada. 145 and 48 individuals.psrsmo.297. Thus.071. The state GASB report has an AAL of 693.020. To capture non-ed.org/PSRS/HealthInsurance.468." We scale for municipal.) We gross-up the reported AAL of responding districts ($1.013. non-ed. The Census Bureau data on public employment shows these governments have 33.925. we treat the state report as if it pertains only to state employees. .000 / $5. Furthermore. particurarly as actives account for 70% of the present value of liabilites. The web appendix has data for 18 local governments and reports a total OPEB AAL for these entities of $1.g. from the Teacher's Retirement System and the Shefiff's Retirement System are covered. We proceed with this assumption and scale up based on census employee counts. The state .186. not the state. local governments in Minnesota tabulated in a web appendix to Wirtz. Table A1: Scaling for State and Local Employees not Covered in Primary State Report State GASB Report Scaling Captures teacher: teacher: local non-ed.30. This will slighly overstate total state and local liability. K-12 educational employee OPEB obligations are based on "Special Study: Other Postemployment Benefit Liabilities of School Districts in Minnesota".21 (73. Although "state" employees who are receceving a pension from the teacher's pension system (PSRS) are eligible for retiree heatlh care from the state.91 5. scaling factor: 5. to account for local non-ed.381. From 2003 .30 + 0. The total AAL for responding districts was $1.392 actives and the GASB report shows 141. respectively. we use a scaling factor of 0. Government Information Division.297. (The Census total current spending category matches up conceptualy well with the state reported total operating revenues.

However.083 actives. Table A1: Scaling for State and Local Employees not Covered in Primary State Report State GASB Report Scaling Captures teacher: teacher: local non-ed.430. The local gross up factor is therefore (32. Note that these governments also provide UAALs based on the Frozen Entry Age method and many publications which cite OPEB liabilities use the Frozen Entry Age figures. 514. (The UAALs for both the State of New York and New York City are based on the Entry Age Normal actuarial method. . Moreover. However. Collectively the two pension funds (PERA and ERB) which provide the retiree health benefits covered in the state report have 122. 28." NDPERS covers essentially all state and local workers in the state other than teachers. Local workers. The report states that retired employees receiving a pension benefit from the New Hampshire Retirement System who meet "certain requirements" are eligible for the state retiree health care benefit. including the SUNY system. again based on the UAAL. 499 full-time local education workers in the same year and 15. 11.) NC x x State report covers state workers and teachers. State GASB Report includes state workers.97. Thus. Mahon NY x 0. This includes Group 1 retirees -. the number of actives in the GASB report. although teachers have their own pension system in North Dakota. State of New Hampshire confirms that only retired state employees are eligible for the state retiree health care plan. It also covers "participating" local employers.gov/rio/tffr/publications/retirement.97 (2012) catalogs the declared UAAL liabilities for 87 local governments and provides an estimate for the remaining local governments. based on general: based on : based on education liabilities in based on State teachers census census local teacher supplememt employee employee employees OPEB report al sources counts counts or CAFR The state GASB report covers only state employees.115 is relatively close to the number of toal active public pension members in the state as recorded by the census. The state GASB report covers all state and all k-12 employees. 105 / 90.36. The scaling factors. and some local government workers. 32.a group which includes teachers. for SUNY and the Component Units of NYC are 0. A coversation with the staff of the Risk Management Unit of the Department of Administrative Services. As described in the text. Mahon. (The NYC UAAL is equal to 175 percent of the state UAAL.nd. 548 full-time state workers)." Empire Center For New York State Policy. Thus. 083) = 0. "Iceberg Ahead: The Hidden Cost of Public-Sector Retiree Health Benefits in New York. State GASB report includes state and local workers excluding teachers. The state NM x x* 0. This accounts for essentially the entire universe of NM active public pension plan members captured in the Census Bureau pension plan data. Notes non. We therefore infer that there are 32. the retiree health benefits for teachers are nonetheless provided by NDPERS (see ND x x http://www.36 GASB report captures 90.86. 105 local employees whose employer have opted not to participate in the state retiree heatlh plan and assume they are providing this benefit at the local level instead. The ratio of the UAAL from Mahon (2012) to the UAAL for the state (excluding SUNY) and NYC (excluding the Component Units) is 0. the state GASB report appears to capture all retiree health care liabilities in the state. both education and non-education.188 active members according to their 2012 CAFRS. September 2012. We exclude the portion of the report for "Component Units" of NYC.08 and 0.J.03. We calculate our state cash flows exclusively on the portion of the report excluding SUNY employees. the count of actives in the GASB report.28 equal to 27 percent of the state reported retiree health care AAL. We then scale up this joint cash flow using the following source: E.htm). we also explicitly calculate cash flows for New York City (NYC) using its GASB report. respectively. The state report covers "A employee of the North Dakota Public Employees Retirement System (NDPERS) that is covered by an employment contract which provides for post-retirement benefits. are not covered. we employ an overall scaling factor of 0. is too small to cover both state workers and teachers (there were NH 31. The2011 teachers retirement system CAFR reports a retiree health care AAL OH x 0. NJ x x State report covers all state and local public employees.) We first add the state and NYC cash flows together.

e.070.339. OSEEGIB. which provides a OR see note see note 0.perc. The total state AAL (RHIA plus RHIPA) is $495.us/premiumasst. non- education. retiree health is handled solely by each individual government. life and disability insurance for active employees and retirees of state agencies. 645 active pension members at the County level and an additional 10. the PSERS OPEB valuation refers to a Premium Assistance (PA) program available to retirees with out-of-pocket premium expenses for health insurance through the PSERS health insurance coverage (which is funded 100% from retiree premiums including funds from the Premium Assistance Program) or from a school district's group health plan. Table A1: Scaling for State and Local Employees not Covered in Primary State Report State GASB Report Scaling Captures teacher: teacher: local non-ed. 475 active pension members responded with information on their OPEB AAL's which totaled $1.) Accounting for 58.060.000) * (110. almost all school districts provide funding for retiree health care over and above the state funded PA program. Notes non. this implies a scaling factor of 0. Effective January 1.215. and non-ed. We acknowledge that the scaling is imperfect since it is distributed over both pre and post Medicare liabilities whereas it would ideally be distributed over only pre-Medicare liabilities.000.) Local.000. Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans. based on general: based on : based on education liabilities in based on State teachers census census local teacher supplememt employee employee employees OPEB report al sources counts counts or CAFR The state no longer issues an OPEB reported.400. Given the state reported AAL of $15. The Oregon Public Employees Retirement System (OPERS) is a state administered pension system covering almost all state and local (ed. OSEEGIB determined its activity related to covered retirees of participating employers does not meet the definition of an OPEB plan.000 /$ 495. Municipalities with 63.444. is only available to state government employees. 2008. As noted in the Fiscal 2011 CAFR of the Oklahoma State and Education Employees Group Insurance Board "During 2006 and 2007.000. we do not use the 0.) government employees.000. .13 benefit to pre-Medicare retirees. There are two retiree health plans:the Retiree Health Insurance Account (RHIA) and the Retiree Health Insurance Premium Account (RHIPA).785 local government employees. dental.14 counts and thereby implicitly assume that the school districts set their level of retiree health care benefits such that when they are added to the state PA program. 499 actives whose employers either did not respond to the survey or failed to provide a AAL value.833) = 0." The state versus local breakdown is unusually complicated for Oregon. and therefore is not subject to GASB 43. OK as OSEEGIB is not a cooperative group of governmental entities joining together to finance exposure to risk. (The active counts come from PERC data on pension liabilities.state. Commonwealth of Pennsylvania (www.833 total full-time state government employees in Oregon and 110. we scale up for education employees based on census employee PA x 0. OSEEGIB changed its financial statement accounting and reporting presentation and reported results in a single enterprise fund presentation and no longer included an agency fund. During 2008.000. believes the preferred method of accounting and reporting presentation is a special-purpose government engaged solely in business-type activities. Accounting and Reporting for Risk Financing and Related Insurance Issues.000.070. The state report covers only state employees.087 for education workers. Additionally. RHIPA. the total non-education local AAL scales to $2.000.000. The AAL for RHIPA only (as opposed to the combined RHIPA and RHIA) is $34.087 scaliong factor. (I.us). the total benefit is equivalent to the benefit provided to state workers.12. this implies a scaling factor for these workers of 0.htm) According to James McAneny.400. The Public School Employee's Retirement System (PSERS) Actuarial Valuation for 2011 (which values both pension and OPEB liabilities) shows an AAL of $1.psers. However. Executive Director of the Public Employee Retirement Commission (PERC). and presented the portion of its activity related to covered active employees of participating employers as a public entity risk pool and the portion of its activity related to covered retirees of participating employers as an agency fund in accordance with the guidance for multiple-employer OPEB (other post-employment benefits) plans that are not administered as trusts. and provide group health. as an instrumentality of the State of Oklahoma created to administer. There are 59.000. OSEEGIB applied the provisions of GASB Statement No. As a result. 43 (GASB 43).000. more specifically an insurance enterprise.785 / 59. which provides a subsidy for Medicare eligible retirees. PERC generously shared the underlying data.000. manage.state.000. 10.pa. school districts and other governmental units. PERC conducted a survey of all municipal OPEB liabilities in the state. OSEEGIB is not subject to GASB Statement No.14.000. RHIA.pa. is available to those receiving a pension from OPERS and includes both state and local government retirees. This is done on a district-by-district basis and their is no systematic collection of the size of these liabilities. (http://www. We scale up the ratio of the RHIPA AAL to the total state AAL (RHIA plus RHIPA) times the ratio of local to state employees: ($34. Although the results are unpublished. Given the state reported AAL of $15.

Any other OPEB benefits offered to the employees of the State of South Carolina are outside the scope of this report. this yields a TX 1. 1. and SC x x also include the basic long term disability benefits provided to State employees.011. Instead it is accounted for under GASB 16. This new benefit does not trigger liabilities under GASB 43 or 45. and 0. However.) Teachers 2011 GASB shows 681.us/hbenefits/openenroll2012/NonMedicareRetireePremiums2012. the state offers health insurance to state retirees through the Health Insurance Benefit for State Retirees program. This was confirmed by Bob Willett of the Department of Employee Trust Funds.000. Division of Accounts. Although the program is available to "participating" political subdivisions (i. SD x x The state GASB report only covers state workers. The Health Insurance Credit Program (HICP) supplements the pension benefit by providing $4 a month per year of service (no COLA. 1. covered by the retiree health insurance evaluated: "For the State of South Carolina. local governments).011. Teacher Plan.pdf. the retiree health care in the state report covers state and local school employees. The state GASB report appears to only cover state employees and this was confirmed by Marcie Handy. Division of Finance.77 x Teacher's Retirement System in fiscal 2011: $780. The Tennesse Department of Finance and Administration. The state report appears to only cover state employees. Office of the State Treasurer. but not non-education employees.299 (5. Tennessee Plan (Medicare Supplement Plan which is separate from the State plan) and the Local Government Plan. these benefits primarily include medical.33 (Tennessee Plan). based on general: based on : based on education liabilities in based on State teachers census census local teacher supplememt employee employee employees OPEB report al sources counts counts or CAFR RI x x State GASB report covers state employees and teachers. and is not.34.457 actives and a UAAL of $28. the retiree health program was converted to a plan which places money into a Health Reimburesement Account (HRA) which can be used to purchase health insurance.77) for teachers. School District employees.851. State of Vermont.000. although localities can use the state health plan for their workers and retirees. The state GASB report covers only state workers.032. There are four plans in total: State Plan (the basis of our cash flow projections). (In 2014. Notes non. cannot exceed monthly health insurance premium). The state GASB report is unusually clear about who is. Both ed. The state valuation covers liabilities accrued before Jan.) WA x x Reasonable clear that state report gets all state and local workers as there are categories for: state (including higher ed. and non-ed.69 (Teacher Plan).782. Department of Administrative Services. WI x x State of Wisconsin.state." Thus. prescription drug and dental insurance benefits provided to all eligible State and School District retirees. the state GASB VA x x report only covers state employees and teachers. we use scaling factor of (780.434. the state of Utah Assistant State Comptroller. All four plans are unfunded and these ratios cannot there be thought of as based on the relative AALs. The respective ratios of plan UAAL TN 1. The 2011 Annual Report states that the State has no liabilities for local government workers other than teachers and that the individual local governments produce their own valuations for these liabilities. The Texas municipal retirement system does not provide retiree health care and their fact sheet states this is done directly by localities.34 x scalng factor of 1. 2011 Local Plan OPEB report. this only provides access to the insurance pool as the state pays none of the cost (http://www. On Jan. 0. 23. Table A1: Scaling for State and Local Employees not Covered in Primary State Report State GASB Report Scaling Captures teacher: teacher: local non-ed.25% discount rate). the state does not fund this and all actuarial accounting for local retiree health is done by each individual local government. The 2011 Annual Report. Given the state AAL of $21. including k-12. Willett also provided the information that.032. .894.502.dhrm. local retiree heatlh care is completely decentralized and handled by UT x x individual governments.851=0. see pg.gov/finance/act/OPEB. the HRA program will terminate.) The state GASB report used to generate the cash flows only pertains to state employees covered by the Vermont State Employee Retirement System (VSERS) . 2006. WY x x The state GASB report appears to cover all state and local government employees in the state.06 (Local Government Plan). (The Local Plan AAL reported on the above state website excludes some of the obligations and the above ratio is therefore based upon the AAL value in the July 1. January 2012 provides the OPEB AAL for the Vermont State VT 0. Given the VSERS AAL of $1.). k-12 and political subdivisions WV x x State GASB report covers all state and local workers.tn. provides a summary of all public OPEB obligations in the state (http://www.shtml).va.e. In addition to the HICP. Mr. including higher ed.000/1.76 to the UAAL for the State Plan are: 0. and employees for Local Political Subdivisions.782.

1% VT 1.4% ME 0.1% DE 0.4% AR 0.2% 0.2% 0.1% HI 1.8% MO 0.8% NC 3.7% -0.5% MD -0.0% 8.9% -0.8% IN 0.8% 8.6% OR -0.0% WI 0.6% -1.1% MA 1.6% 2.1% -2.1% CA 1.0% 0.6% 0.1% CO -0.2% SC 0.0% RI -0.4% 6.2% 2.7% US 1.8% -0.4% 0.1% 7.7% MN 0.3% WY 0.3% 0.4% GA -0.0% AL 1.5% -0.3% MT 0.2% MS 0.6% FL 0.2% -0.4% 3.2% 1.1% -0.2% SD 0.7% -0.6% .1% 0.6% 0.3% 3.0% 2.5% 0.0% 0.5% TX 3.2% -0.2% 0.3% NM 0.6% -1.0% 0.4% -0.7% -1.3% 1.7% IA 0.5% 0.6% 6.4% -0.1% 0.3% NV 0.0% 0.4% VA -0.5% 0.8% 0.0% WA 0.5% PA -0.2% 0.0% 0.2% 0.4% 1.3% 2.6% AZ -0.1% AK 0.2% 1.1% 0.5% 0.4% -0.4% -0.8% 0.1% 0.8% -0.2% -0.0% -0.0% 0.8% CT 4.2% -0.2% -0.3% 0.0% 0. Table A2 Retiree Health Obligations: Increase in General Own Source Revenues to Balance Over Perpetuity Excess Cost Growth Assumption Excess Cost Growth Assumption CBO None Continued CBO None Continued (1) (2) (3) (4) (5) (6) NY 5.2% -0.3% LA -0.1% 2.8% ND 0.2% NH 4.2% 0.4% -0.3% 2.4% -1.0% -0.4% KS -0.9% 4.4% -0.2% 0.3% 1.5% WV 2.2% -0.7% UT -0.1% -0.5% OH 1.0% 6.1% 2.3% 1.0% 0.5% -0.4% MI 1.1% 2.0% 0.5% -0.1% 0.6% 1.0% -0.0% 0.2% ID 0.2% 2.3% 1.0% 2.3% -0.5% -0.5% NJ 3.1% 0.7% 1.5% KY -0.2% TN 0.7% -1.4% IL 2.4% 3.1% -0.