Much Ado About Nothing? The Size and Credit Quality Implications of Municipal OPEB Liabilities
University of Washington
November 8, 2006
Employee health care costs are central financial management concern at all levels of government. Discussion of these issues has recently shifted toward the costs of providing health care and other post-employment benefits (OPEB) to public sector retirees. That shift is due in large part to new governmental accounting standards that will require jurisdictions to report a present value estimate of the costs of providing OPEB to current retirees, and to current employees who will likely retire. This paper examines both the size of those costs, and their implications for local government credit quality. The findings suggest the OPEB liability for a typical local government, which was derived from a simple actuarial model and survey data on local government health care plans, is approximately $100 per capita. However, several jurisdictions report much higher liabilities, some exceeding $2000 per capita. Those estimates were then incorporated into explanatory models of two different aspects of local government credit quality - one for a jurisdiction's credit rating, and another for actual borrowing costs - and both models were then estimated for a sample of 152 bond issues from 112 general purpose local governments from 2002-2003. The findings suggest these liabilities do not have an independent effect on credit quality. However, the results from a separate model specification show that the interplay between an issuer's OPEB liability and its ability to pay down that liability is incorporated into local government credit ratings. The implications of these findings for financial management theory and practice are discussed.
Keywords: municipal bonds, health care, local government, debt management
JEL Classification: H74, H72, I11
Date posted: November 12, 2006