Table of Contents
- Liabilities Are Likely To Grow As Nearly All States Fail To Meet Even Static Funding Levels
- Funded Ratios Remain Low For Most States Given Sectorwide Underfunding
- Decline In Liabilities Is Not Driven By Improved Plan Fundamentals
- States Report Responsibility For The Majority Of Net Plan Liabilities
- Understanding Plan Benefit Structure Is Key To Grasping The Credit Story
- Lack Of Prudent Fiscal Management Poses The Greatest Risk To State OPEB Plans
- Related Research
U.S. states continue to severely underfund their other postemployment benefit (OPEB) plans. S&P Global Ratings’ latest survey found that for most states, annual plan contributions do not keep up with growth in liabilities. Given the degree of underfunding, unfunded OPEB liabilities will likely escalate absent meaningful reform.
However, most states have not recently pursued reform efforts. Because the size of these unfunded liabilities varies greatly among states, progress toward reducing them is more pressing for some than others. S&P Global Ratings believes it crucial for states to prudently manage plan fiscal health ahead of a tipping point where rising OPEB costs lead to budgetary stress.
Despite contributions that generally fall short of growth in liabilities, S&P Global Ratings’ most recent survey data also indicates that total net OPEB liabilities for states fell by 7.3% in fiscal 2018. This drop occurred primarily due to an increase in the discount rate used to measure OPEB liabilities rather than improved funding or OPEB reforms. Generally, state plans have applied a discount rate based on a municipal bond rate due to a general lack of interest earning assets and Governmental Accounting Standards Board (GASB) methodology.