Ensuring Other Postemployment Benefits (OPEB) Sustainability

Best Practice
Approved by GFOA's Executive Board: 
June 2012

Compensation packages for active workers may include health-care and other similar benefits for employees who have completed their active service. Generically, these benefits are described as other postemployment benefits (OPEB) to distinguish them from pensions.1 Employers are required to recognize the cost of pension benefits as employees earn them, and the Governmental Accounting Standards Board (GASB) has now extended this same requirement to OPEB.2 The change in accounting standards has focused attention on the costs of OPEB as never before, including concerns about rising health-care costs and an aging public-sector workforce. The real issue is not the new accounting for OPEB, as such, but rather the underlying budgetary and funding challenge that those accounting standards highlight. Meeting this challenge will require government finance officers to ensure that these benefits are sustainable over the long term - that they are affordable to stakeholders, competitive, and sufficient to meet employee needs, and that they may be reasonably expected to remain so.


GFOA recommends that governments should develop a deliberative process to en sure the sustainability of any OPEB they offer to their employees. These steps should include:

  1. Developing principles and priorities to guide OPEB decision making that consider benefit design, actuarial costs and projections,3 funding approaches, and the needs of all stakeholders.4
  2. Carefully evaluating and designing benefits to ensure that they are sustainable. This can include:
    1. implementing health-care cost containment measures.5
    2. improving coordination with Medicare benefits (e.g., adjusting the amount of the OPEB benefit provided to retirees once they are eligible for Medicare or offering the OPEB benefit only to retirees who are eligible for Medicare).
    3. vesting rules that provide levels of benefits based on years of service.
    4. establishing eligibility rules that avoid including retirees, dependents, and spouses who are otherwise insured.
    5. considering a tiered system of benefits based on hiring dates.
    6. replacing defined benefits with a defined contribution or hybrid model.6
    7. considering whether to continue using the same blended or common premium for both retirees and active employees (i.e., the implicit rate subsidy).
    8. limiting annual increases to an index other than medical cost inflation.
    9. raising the eligibility age for OPEB.
    10. offering a fixed7 subsidy or service-based8 subsidy, which is not affected by increases in health-care costs, that the government will put toward retiree’s health-care premiums to partially offset the cost. Governments should consider reserving the highest level of health-care premium subsidy for those who have been employed for a full career as defined by the jurisdiction, but no earlier than the jurisdiction’s pension plan’s normal retirement date. Governments should also consider applying a smaller amount for retirees who are eligible for Medicare.
  3. Governments should choose an appropriate funding approach, which may include the following:
    1. requiring employee contributions.
    2. refraining from offering incentive packages for early separation without first considering their impact on OPEB costs.9
    3. deciding whether benefits will be funded as employees earn them (i.e., advance funding) or as benefit payments come due (i.e., pay-as-you-go).10 If the government elects advance funding of benefits, it should decide:
    4. which actuarial cost allocation method is most appropriate to its objectives and circumstances.
    5. whether to use advance funding for all OPEB liabilities or to exclude the implicit rate subsidy for health care.
    6. whether to establish a separate trust fund or to earmark resources that remain in the government’s control (e.g., a separate fund or account).
  4. Governments that establish trust funds should consider the following issues:
    1. whether it will be necessary to seek new legislation allowing appropriate trust arrangements and investment guidelines.
    2. the impact of prompt implementation and funding on the government’s annual required contribution.11
    3. the possibility of collaborating with other groups, including pension plans, to lower administrative costs and make use of investing expertise.
    4. the advantages and disadvantages of each trust option.12
    5. administrative and reporting requirements (e.g., the need for a private letter ruling from the IRS in certain circumstances).
    6. governance structure (e.g., oversight board, investment policy, investing infrastructure).13
    7. ensuring appropriate flexibility (e.g., being able to make appropriate adjustments if a form of state or national universal health care is adopted) without compromising compliance with GASB requirements for qualifying as trust for accounting and financial reporting purposes.
    8. providing for the dissolution of the trust and the reversion of any residual balances to the contributing parties.
  5. Governments should exercise considerable cauti on before issuing debt to fund their unfunded actuarial accrued liabilities.14
  6. Governments should consider how to most effectively communicate with and educate affected stakeholders on the impact of the decisions made regarding OPEB.
Governmental Budgeting and Fiscal Policy
Retirement and Benefits Administration

1Some government employers choose to augment other elements of employee compensation rather than providing OPEB.

2See GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. The Financial Accounting Standards Board (FASB) has required the same of private-sector employers since the implementation of FASB Statement No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions, which was released in 1990.

3Governments should present comparative data between pay-as-you-go and pre-funded trust concurrent with its actuarial valuation.

4Because OPEB are a form of employee compensation, they should always be considered an integral part of an employee’s total compensation package. Likewise, governments should avoid benefit reductions that place an undue burden on employees or risk making the government uncompetitive as an employer.

5See the GFOA Best Practice, Strategic Health Care Plan Design (2009).

6A hybrid model combines elements of a defined bene fit plan with elements of a defined contribution plan – for example, fixed employer payments (i.e., a defined contribution) combined with a guaranteed minimum earnings rate on the resources accumulated (i.e., a defined benefit).

7For example, a lump sum of $250 for employees who have served a full career.

8For example, the government might decide to apply $10 a month for each year of service, so a retiree who had worked for 30 years would receive $300 a month toward his or her pre-65 health-care premium.

9See the GFOA’s Advisory, Evaluating the Use of Early Retirement Incentives (2004).

10The GFOA recommends advance funding of OPEB benefits, particularly in regard to explicit OPEB benefits, in part because amounts accumulated for future benefits partially offset their cost. (See the GFOA’s Best Practice, Considerations for Prefunding OPEB Obligations (2008).

11As already noted, earnings on amounts accumulated for future benefits help offset the cost of these benefits. Thus, the sooner the trust is funded, the greater the impact on the cost of OPEB.

12See John Ruggini, “In an OPEB Trust We Trust?” Government Finance Review, February 2008.

13See the GFOA’s Best Practice, Governance of Public Employee Postretirement Benefit Systems (2010).

14See the GFOA’s Advisory, Need for Considerable Caution in Regard to OPEB Bonds (2007).