Unhealthy eaters generally care more about satisfying their immediate appetites than their long-term health. The same attitude can also explain why Maryland government owes $11 billion in future retiree health care benefits, also known as Other Post-Employment Benefits (OPEB).
In May, a Moody’s Investors Service report criticized Maryland’s Montgomery County for not fully funding OPEB for two years in a row. Last year, the county diverted $65 million away from its OPEB trust, and it’s shifting another $90 million away from the fund this year.
According to Moody’s, this reduction in prefunding OPEB is “credit negative” because “the county will accumulate assets more slowly and thus carry higher unfunded liabilities.”
The warning does come with some irony because Montgomery County boasts having one of the most well-funded OPEB funds among all Maryland counties. Montgomery County’s OPEB is also in far superior condition compared to Maryland’s state OPEB. On June 30, 2018, the State Employee and Retiree Health and Welfare Benefit Program was just 3.02 percent funded. On the same date, Montgomery County’s OPEB fund was 26.99 percent funded.
Just like Montgomery County, Maryland used to pay OPEB expenses as they came up, a method known as “pay-as-you-go.” This was fine, initially, when Maryland and other states had relatively few retirees and near-retirees, but the fiscal calculus changed as the size of state workforces grew, making it necessary for states to pre-fund these benefits in order to avoid a severe future financial reckoning. In 2008, the federal Government Accounting Standard Board advised all states and localities to create OPEB trust funds and begin pre-funding the OPEB the same way pension funds are funded.
As a response, Maryland created the OPEB trust and began investing small amounts into this fund during the early days of the Martin O’Malley administration. But when the Great Recession arrived, contributions were scaled back significantly to meet other budget needs. Even during the subsequent recovery years, the state only contributed 71 percent of the amount recommended by actuaries.
Given this history, Moody’s warning to Montgomery County is also a warning for Maryland. For all Maryland counties and the state, the bad habit of diverting OPEB money to fill other budget holes must end.
Having OPEB trusts is meaningful only when elected officials fulfill promises to make recommended annual contributions to the trusts. Only when the OPEB trusts are adequately funded every year can they grow and be invested in a similar manner to how pension funds are invested to earn higher returns. If the OPEB money is invested wisely and the market is performing well, prefunding can lead to significant saving of taxpayers’ money in the long-run.
But if Maryland and the counties continue to divert millions of dollars of OPEB money every year, the only way to cope with increasing OPEB liabilities would be by raising taxes or reducing benefits. This is unfair for both the taxpayers and the public employees who depend on their elected officials to manage their money responsibly and provide them retirement security.
The OPEB liability is also an important factor in a jurisdiction’s debt profile and credit quality. If Maryland and the counties continue to neglect their OPEB health, it would be just a matter of time before their bond ratings are downgraded.
Therefore, it is time for Maryland and the counties to address OPEB debts by creating plans to fully fund their OPEB systems through a consistent and accountable funding schedule. This means that regardless of the economic cycle, the funding schedule must be respected. It also means that regardless of the political events, the pressure to divert must be fought.
When the Trump administration said it was moving forward with an “Opportunity Zones” program to spur investment in poor neighborhoods nationwide, Baltimore was catapulted to the center of the discussion — and for good reason.
Given the natural desire for the elected officials to allocate more budget for conspicuous short-term projects, it will take great political will to ensure that Maryland’s $11 billion OPEB liability does not further balloon out of control.