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entitled 'State and Local Government Retiree Health Benefits: 
Liabilities Are Largely Unfunded, but Some Governments Are Taking 
Action' which was released on December 23, 2009. 

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Report to the Chairman, Special Committee on Aging, U.S. Senate: 

United States Government Accountability Office: 
GAO: 

November 2009: 

State and Local Government Retiree Health Benefits: 

Liabilities Are Largely Unfunded, but Some Governments Are Taking 
Action: 

GAO-10-61: 

GAO Highlights: 

Highlights of GAO-10-61, a report to the Chairman, Special Committee on 
Aging, U.S. Senate. 

Why GAO Did This Study: 

Accounting standards require governments to account for the costs of 
other post-employment benefits (OPEB)—the largest of which is typically 
retiree health benefits—when an employee earns the benefit. As such, 
governments are reporting their OPEB liabilities—the amount of the 
obligation to employees who have earned OPEB. As state and local 
governments have historically not funded retiree health benefits when 
the benefits are earned, much of their OPEB liability may be unfunded. 
Amid fiscal pressures facing governments, this has raised concerns 
about the actions the governments can take to address their OPEB 
liabilities. 

GAO was asked to provide information on governments’ retiree health 
liabilities. GAO described (1) what has been reported in state and 
local governments’ comprehensive annual financial reports (CAFR) 
regarding OPEB liabilities, (2) actions state and local governments 
have taken to address retiree health liabilities, and (3) the overall 
fiscal pressures these governments face. GAO reviewed the CAFRs for 50 
states and the 39 local governments with at least $2 billion in total 
revenue. GAO also reviewed the actions taken to address retiree health 
liabilities by 10 state and local governments, selected based on 
geography and variation in approaches to address their liability. 
Finally, GAO simulated the fiscal outlook for the state and local 
sector and projected health care costs for state and local retirees. 

What GAO Found: 

The total unfunded OPEB liability reported in state and the largest 
local governments’ CAFRs exceeds $530 billion. However, as variations 
between studies’ totals show, totaling unfunded OPEB liabilities across 
governments is challenging for a number of reasons, including the way 
that governments disclose such data. The unfunded OPEB liabilities for 
states and local governments GAO reviewed varied widely in size. Most 
of these governments do not have any assets set aside to fund them. The 
total for unfunded OPEB liabilities is higher than $530 billion because 
GAO reviewed OPEB data in CAFRs for the 50 states and 39 large local 
governments but not data for all local governments or additional data 
reported in separate financial reports. Also, the CAFRs we reviewed 
report data that predate the market downturn. Finally, OPEB valuations 
are based on assumptions about the health care cost inflation rate and 
discount rates for assets, which also affect the size of the unfunded 
liability. 

Some state and local governments have taken actions to address 
liabilities associated with retiree health benefits by setting aside 
assets to prefund the liabilities before employees retire and reducing 
these liabilities by changing the structure of retiree health benefits. 
Approximately 35 percent of the 89 governments for which GAO reviewed 
CAFRs reported having set aside some assets for OPEB liabilities, but 
the percentage of the OPEB liability funded varied. Among the 10 
selected governments whose actions GAO reviewed in more detail, 
officials from the governments that were prefunding at least a portion 
of their retiree health liability reported using irrevocable trusts. 
However, these governments varied with regard to the source of the 
money used to prefund their retiree health liabilities and how they 
determined the level or amount to commit to prefunding each 

year. To address their retiree health liabilities, the governments GAO 
selected made three key types of changes to their retiree health 
benefits: changes to the type of retiree health benefit plan, to the 
level of government contribution, and to the eligibility requirements 
employees need to meet to qualify for retiree health benefits. Changes 
to the level of government contribution, such as reductions to the 
amount or proportion of health insurance premiums paid for by the 
government, was the most common benefit change reported. Some of the 
selected governments made more than one change to their retiree health 
benefit structure. The changes were most often applied to the retiree 
health benefits of newly hired employees or currently active employees. 

State and local governments face unfunded OPEB liabilities and 
decisions about addressing liabilities amid increasing fiscal pressure. 
Assuming the continuation of current policies, by 2050 the size of the 
projected operating budget imbalance for the state and local government 
sector is 4.7 percent of gross domestic product, attributable largely 
to increases in health-related spending. Though Medicaid is the largest 
health-related expenditure, spending on state and local government 
retirees’ health benefits is projected to more than double as a share 
of total operating revenues to 2.1 percent by 2050. 

View [hyperlink, http://www.gao.gov/products/GAO-10-61] or key 
components. For more information, contact John E. Dicken at (202) 512-
7114 or dickenj@gao.gov, or Barbara D. Bovbjerg at (202) 512-7215 or 
bovbjergb@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Unfunded OPEB Liabilities for State and Local Governments Exceed $530 
Billion: 

Some State and Local Governments Have Taken Actions to Address Retiree 
Health Liabilities through Prefunding and Making Benefit Changes: 

Health-Related Spending, Including OPEB Liabilities, Is Increasing 
State and Local Governments' Fiscal Pressures: 

External Comments: 

Appendix I: Supplemental Scope and Methodology for State and Local 
Government CAFR Review: 

Appendix II: Supplemental Scope and Methodology for Description of 
State and Local Governments' Fiscal Pressures: 

Appendix III: Aggregate Other Postemployment Benefits Liability Data 
for States and Local Governments We Reviewed: 

Appendix IV: State and Local Governments' CAFR Internet Addresses: 

Appendix V: GAO Contacts and Staff Acknowledgments: 

Tables: 

Table 1: Examples of Vehicles for Prefunding Retiree Health 
Liabilities: 

Table 2: Examples of Retiree Health Benefits Changes Made by Selected 
Governments since 2004: 

Table 3: Aggregate OPEB Liability Data for 50 States, Based on the Most 
Recent Governmentwide CAFRs: 

Table 4: Aggregate OPEB Liability Data for the 39 Largest Local 
Governments, Based on the Most Recent Governmentwide CAFRs: 

Table 5: State and Local Governments' CAFR Internet Addresses and 
Hyperlinks: 

Figures: 

Figure 1: Percentage of State and Local Government CAFRs We Reviewed 
Reporting Some Assets Set Aside for OPEB Liabilities, as of Their Most 
Recent CAFRs: 

Figure 2: State and Local Government Operating Budget Balance, as a 
Percentage of GDP: 

Figure 3: Health and Nonhealth Expenditures for the State and Local 
Government Sector, as a Percentage of GDP: 

Figure 4: Receipt Classifications of State and Local Governments: 

Figure 5: Expenditure Classifications of State and Local Governments: 

Abbreviations: 

ARC: annual required contribution: 

CAFR: comprehensive annual financial report: 

GASB: Governmental Accounting Standards Board: 

GDP: gross domestic product: 

NIPA: National Income and Product Accounts: 

OPEB: other postemployment benefits: 

SLGE: Center for State and Local Government Excellence: 

VEBA: voluntary employees' beneficiary association: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

November 30, 2009: 

The Honorable Herb Kohl: 
Chairman: 
Special Committee on Aging: 
United States Senate: 

Dear Mr. Chairman: 

When state and local governments (referred to in this report as 
governments) provide health benefits to their retired employees, they 
may do so by paying for a portion of the costs of these benefits. 
Governments have typically funded their share of the cost of retiree 
health benefits when they are paid or provided to retirees (i.e., 
during retirement), as opposed to during active employment.[Footnote 1] 
Under accounting standards issued in 2004, governments are required to 
account for the costs of postemployment benefits other than pensions-- 
referred to as other postemployment benefits (OPEB)[Footnote 2]--as 
employees earn the benefits and the costs are accrued, not when the 
benefits are paid or provided.[Footnote 3] The largest OPEB is 
typically retiree health benefits.[Footnote 4] Under the accounting 
standards, fiscal year 2008 was generally the first year that the 
largest governments were to begin reporting, in annual financial 
statements, the amount of government's obligation to employees who 
have earned OPEB;[Footnote 5] these amounts are known as OPEB 
liabilities. While the standards include requirements for the 
reporting of governments' OPEB liabilities, they do not include 
requirements for funding OPEB, such as retiree health benefits. 

Because state and local governments have historically funded retiree 
health benefits when paid or provided rather then when the benefits are 
earned, much of their OPEB liability may be unfunded. This has raised 
concerns about the fiscal pressures that state and local governments 
will face in the coming decades and leads to questions about the 
actions state and local governments can take to address their OPEB 
liabilities, such as changing their retiree health benefits. 

In general, state and local retiree benefits are not subject to federal 
laws governing private sector retiree benefits. Nevertheless, there is 
a federal interest in ensuring that all Americans have a secure 
retirement. Additionally, reporting of governments' OPEB liabilities 
has brought renewed focus on how governments will address these 
liabilities. Given concerns about state and local governments' fiscal 
challenges and the potential erosion of retiree health benefits, you 
asked us for information on state and local governments' retiree health 
liabilities. This report describes (1) what has been reported in state 
and local governments' comprehensive annual financial reports (CAFR) 
about unfunded OPEB liabilities, (2) actions state and local 
governments have taken to address the liabilities associated with 
retiree health benefits, and (3) the overall fiscal pressures these 
governments face. 

To describe state and local governments' unfunded OPEB liabilities, we 
reviewed the most recent CAFRs for the 50 states and 39 large local 
governments (cities and counties with total revenue of $2 billion or 
more according to U.S. Census Bureau data). We determined that the 
state and local government CAFR data were sufficiently reliable for our 
purposes, which were to describe the total unfunded OPEB liability 
reported; the total OPEB liability, assets, and unfunded liability for 
each of the individual governments for which we reviewed CAFRs; as well 
as the ranges of unfunded OPEB liabilities, assets, and funded ratios 
reported. To complement our CAFR review, we contacted experts on public 
retiree health benefits and reviewed various studies and data sets that 
looked at state or local governments' OPEB liabilities. Appendix I 
provides a more detailed methodology for that review and the 
limitations of our work. 

To describe actions taken by state and local governments to address 
their retiree health liabilities, we reviewed information about actions 
taken by 10 selected state and local governments.[Footnote 6] To select 
these governments, we reviewed available literature to determine what 
was known about the actions state and local governments have taken to 
address their retiree health liabilities. Based on that information, we 
selected the 10 state and local governments to obtain geographic 
diversity and variation in the approaches used to address retiree 
health liabilities.[Footnote 7] Officials from the selected governments 
responded to questions about the governments' OPEB liability, retiree 
health benefits, and activities to address the retiree health 
liability. Additionally, to supplement officials' responses, we 
reviewed relevant information from the selected governments, such as 
laws and documents describing retiree health benefits. The information 
from our selected governments provides insight about state and local 
government actions to address retiree health liabilities, but cannot be 
generalized to other states or localities. To supplement our in-depth 
reviews of the actions taken by the selected governments, we reviewed 
the results of a 50-state survey conducted from December 2007 through 
March 2008 by North Carolina State University researchers and published 
in December 2008 by the Center for State and Local Government 
Excellence (SLGE).[Footnote 8] The survey included questions about 
states' retiree health benefits and their current approaches and plans 
for addressing their retiree health liability. To assess the 
reliability of the survey results, we reviewed the survey methodology 
and interviewed the individuals responsible for fielding the survey and 
analyzing the results. Based on our review, we determined that the data 
were sufficiently reliable to provide general aggregate information 
about the responses that were most or least common across the states 
related to their actions or plans for managing their retiree health 
benefits.[Footnote 9] 

To describe the fiscal pressures facing state and local governments, we 
used our model that simulates fiscal outcomes of the state and local 
sector in the aggregate for several decades into the future. The model 
is not designed to highlight the fiscal position of individual states; 
rather it projects the levels of aggregate receipts and expenditures of 
all state and local governments in future years based on historical 
spending and revenue patterns. Appendix II provides a detailed methodology 
for the model as related to projection of receipts and expenditures for 
the state and local government sector and projections of health care 
costs for state and local retirees. A January 2008 report provided 
a detailed description of how we constructed the model. [Footnote 10] 
In January 2009 GAO updated information regarding the fiscal challenges 
facing the state and local government sector. [Footnote 11] 

We conducted our work from October 2008 through November 2009 in 
accordance with all sections of GAO's Quality Assurance Framework that 
are relevant to our objectives. The framework requires that we plan and 
perform the engagement to obtain sufficient and appropriate evidence to 
meet our stated objectives and to discuss any limitations in our work. 
We believe that the information and data obtained, and the analysis 
conducted, provide a reasonable basis for any findings and conclusions 
in this report. 

Background: 

The costs to state and local governments that offer retiree health 
benefits can vary based on several factors. These include the design of 
the retiree health benefits that governments provide, the eligibility 
requirements that retirees must meet in order to receive those 
benefits, and the degree to which governments contribute to the cost of 
the benefits for their retirees. 

Funding Retiree Health Benefits: 

As we have previously reported, most governments have typically funded 
their share of the cost of retiree health benefits when they were 
provided (i.e., during retirement) as opposed to during active 
employment.[Footnote 12] This practice is commonly referred to as pay- 
as-you-go. 

Accounting for Retiree Health Benefits: 

Governments have typically accounted for the cost of their retiree 
health benefits on a pay-as-you-go basis, reporting just the amount 
paid each year for employees who have already retired. Recently adopted 
accounting standards, however, require governments to change the way 
they account for the cost of retiree health benefits, specifying that 
governments should account for these costs on an accrual basis. Under 
an accrual basis, the cost of retiree health benefits is recognized 
when an individual earns the benefits, not when the benefits are paid 
or provided. As such, a government would periodically estimate and 
report the value of benefits that are earned for both past and current 
employees as a liability in its financial statements. Specifically, in 
2004, the Governmental Accounting Standards Board (GASB)--an 
independent, private sector organization that maintains standards for 
accounting and financial reporting for state and local governments-- 
issued Statement 45, Accounting and Financial Reporting by Employers 
for Postemployment Benefits Other Than Pensions, which requires state 
and local governments to measure, recognize, and report future 
obligations for providing OPEB, the largest of which is generally 
retiree health benefits. Under Statement 45, governments should 
periodically have an actuarial valuation performed, through which an 
actuary estimates the amount that will be needed to pay for future 
benefits, assuming that the current provision for benefits remains in 
effect.[Footnote 13] More specifically, the actuary estimates the 
following values, which governments are to report in their financial 
statements and related notes. 

* The "actuarial accrued liability" or "liability" reflects the value 
of benefits that are attributable to employees' past service, assuming 
the current provision of benefits. 

* The "actuarial value of assets" represents the actuarial value of 
cash, investments, and other assets that are set aside to fund OPEB. 
[Footnote 14] 

* The "unfunded actuarial accrued liability" or "unfunded liability" 
equals the excess, if any, of the liability over the assets. Thus, 
unfunded liabilities indicate the amount of benefits earned for which 
no assets have been set aside. 

* The "funded ratio" is assets expressed as a percentage of the 
liability. The funded ratio indicates the extent to which a government 
has set aside enough assets to pay its liability. For example, a funded 
ratio of 80 percent indicates that there are enough assets to pay for 
80 percent of the liability. 

* The "annual required contribution" (ARC) is an estimate of the amount 
that if paid in full each 

year would be expected to fund currently accruing costs as well as a 
portion of any unfunded liability. Although referred to as a "required" 
contribution, accounting standards do not establish funding 
requirements--governments can choose to pay more or less than this 
amount. 

Valuations of OPEB liabilities are inherently complex because they 
involve estimates of future events that affect the amount and timing of 
payments. Such estimates are developed through the application of 
actuarial cost methods and assumptions, such as health care cost 
growth, discount rates,[Footnote 15] and worker and retiree mortality. 
For example, there are six GASB-approved actuarial cost methods and 
each method has a different approach to allocating the value of future 
benefits. Under some cost methods, governments accrue more liabilities 
in the early part of employees' careers than later. Differences in the 
actuarial cost methods and assumptions used can result in significant 
differences in OPEB liability estimates, which can make it challenging 
to compare estimates across governments. 

Implementation of the OPEB reporting standards is being phased in over 
a 3-year period, with the largest governments--governments with total 
annual revenues of $100 million or more--to report their liabilities 
generally beginning in their fiscal year 2008 financial statements and 
apply other requirements of the standard. State and local governments 
are required to follow GASB standards to receive an unqualified, or 
"clean," audit opinion on financial statements prepared in conformity 
with U.S. generally accepted accounting principles. Additionally, many 
state laws require local governments to follow GASB standards, and bond 
raters consider whether GASB standards are followed when assessing the 
fiscal health of state and local governments.[Footnote 16] 

Addressing Retiree Health Liabilities: 

While governments may continue to fund their retiree health benefits on 
a pay-as-you-go basis, one option for addressing their liability is to 
prefund some or all of the retiree health benefits before employees 
retire. By prefunding, governments can reduce the unfunded liability 
reported in their financial statements, take advantage of the 
compounding effects of investment returns on plan assets, and provide 
greater benefit stability for employees and retirees. To reduce a 
government's liability, funds must be deposited into a trust or 
equivalent arrangement, as GASB Statement 45 only considers funds in 
such an arrangement as assets.[Footnote 17] Several funding vehicles 
that can be established as trusts are available under the federal tax 
code to help facilitate state and local government efforts to prefund 
their retiree health liabilities. (See table 1.) While prefunding is 
generally more cost effective for a government in the long term, in the 
short term it will require a higher level of government contribution. 

Table 1: Examples of Vehicles for Prefunding Retiree Health 
Liabilities: 

Funding vehicle: Health benefits subaccount; 
Section of the Internal Revenue Code: 401(h); 
Vehicle description: A separate subaccount of a defined benefit pension 
trust that allows up to 25 percent of the total employer contribution 
to the pension fund to be allocated to retiree health benefits. 
Investment income on assets in the subaccount accumulates tax free, and 
retiree health benefit payments made from the subaccount are not 
taxable to retirees. 

Funding vehicle: Governmental trust; 
Section of the Internal Revenue Code: 115; 
Vehicle description: A trust established by a governmental employer to 
fund an essential government function, which may include providing 
retiree health benefits. Contributions to the trust are not limited. 
The investment income on the trust is not taxed, and the benefits ought 
to be tax free to the retiree when received, with confirmation from the 
Internal Revenue Service. 

Funding vehicle: Voluntary employees' beneficiary association (VEBA); 
Section of the Internal Revenue Code: 501(c)(9); 
Vehicle description: A tax-advantaged entity, usually a trust, for the 
benefit of a voluntary membership of active and retired employees, and 
from which tax-free distributions may be made for qualifying health 
care expenses of retirees. 

Sources: Internal Revenue Code and Congressional Research Service, 
2006. 

[End of table] 

Prefunding retiree health benefits has its advantages, but it does not 
change actual health care costs. Reducing health care costs by making 
benefit changes may be another way for governments to address their 
retiree health liabilities.[Footnote 18] The extent to which benefit 
changes can reduce a government's liability depends on the nature of 
the changes and whom the changes affect. For example, reductions in the 
liability would be greater if the government were to make benefit 
reductions effective for all current and future retirees. In 
comparison, if changes were only effective for future retirees, it 
could be some time before the government would experience significant 
savings from the changes. 

Unfunded OPEB Liabilities for State and Local Governments Exceed $530 
Billion: 

We found that the total reported unfunded liabilities for OPEB (which 
are primarily retiree health benefits) for state and select local 
governments exceed $530 billion.[Footnote 19] The $530 billion includes 
about $405 billion for states and about $129 billion for the 39 local 
governments we reviewed. We reported in 2008 that various studies 
available at that time estimated the total unfunded OPEB liability for 
the states and all local governments to be between $600 billion and 
$1.6 trillion, although the studies' estimates were based on limited 
government data.[Footnote 20] It is not surprising that our total is on 
the low end of that range because we did not review data for all local 
governments, though we did review reported liability data for the 
largest local governments and all 50 states. Five-hundred and thirty 
billion dollars is still a large unfunded liability for governments. As 
variation between studies' totals shows, totaling unfunded OPEB 
liabilities across states and local governments can be challenging. 
This may be attributable, in part, to some OPEB data being reported in 
plans' separate financial reports that are not included as part of the 
government's CAFR. In addition, over time valuations of OPEB reflect 
more up-to-date assumptions, policy decisions, and data. For example, 
the variety of actuarial approaches used can result in variations among 
the OPEB data reported in the CAFRs, such that two valuations of the 
same underlying OPEB can differ.[Footnote 21] 

Reported state and local governments' unfunded OPEB liabilities varied 
widely in size. For example, unfunded state liabilities ranged from $71 
million for Arizona to $62 billion for California, and unfunded local 
government OPEB liabilities ranged from $15 million for a county in 
Arizona to over $59 billion for New York City. (See appendix III for 
individual state governments' and large local governments' aggregate 
OPEB liabilities, assets, unfunded OPEB liabilities.) However, the 
significance of each government's unfunded OPEB liability is relative 
to its ability to fund those benefits through currently available 
assets, future revenues, or a combination of the two. In addition, 
reported liabilities may vary based on various factors, including 
differing plan benefits, assumptions, and government contributions. 

Most state and local governments for which we reviewed CAFRs have not 
set aside assets to fund OPEB liabilities (see figure 1).[Footnote 22] 
Approximately 35 percent of the governments for which we reviewed 
CAFRs--18 of 50 states and 13 of 39 local governments--reported having 
set aside at least some assets for OPEB liabilities for one or more 
entities in the government, as of their actuarial valuation.[Footnote 
23] Setting aside assets for OPEB indicates that a government may have 
prefunded at least a portion of its liability associated with retiree 
health benefits.[Footnote 24] In total, the state and local government 
CAFRs we reviewed reported having set aside at least $25 billion in 
assets to fund their OPEB liabilities, constituting less than 5 percent 
of the $559 billion total OPEB liabilities reported.[Footnote 25] Thus, 
most state and local governments included in our review are paying for 
their OPEB liabilities for active and retired workers in a given year 
from their current revenues. 

Figure 1: Percentage of State and Local Government CAFRs We Reviewed 
Reporting Some Assets Set Aside for OPEB Liabilities, as of Their Most 
Recent CAFRs: 

[Refer to PDF for image: pie-chart] 

No assets set aside for OPEB reported: 65%; 
Some assets set aside for OPEB: 35%. 

Source: GAO review of the most recently issued CAFRs for the 50 states 
and the 39 local governments. 

Notes: The CAFRs for three states and three local governments did not 
include any OPEB liabilities data. As a result, it cannot be determined 
from the CAFR review if these governments have liabilities or have set 
aside assets for OPEB; under GASB standards there is no reporting 
requirement when a government's OPEB liability is not material or 
nonexistent. The CAFRs reviewed were the most recent CAFRs as of June 
30, 2009. One of these CAFRs was for fiscal year 2007, before the 
reporting standard for OPEB was required. CAFRs issued more recently 
for those governments may include OPEB data. 

[End of figure] 

The total unfunded OPEB liability for state and local governments is 
larger than the roughly $530 billion because we reviewed OPEB data in 
select governmentwide CAFRs. Although we reviewed CAFRs for all the 
states and focused our review on CAFRs for the 39 largest local 
governments, and included some of the largest unfunded liabilities, we 
did not review OPEB data for all governments.[Footnote 26] Thus, a 
review of all local government CAFRs would show a higher total unfunded 
OPEB liability than what we found. In addition, we reviewed 
governmentwide CAFRs and not information for component entities or cost-
sharing multiple-employer plans that is reported in separate financial 
statements and not in the CAFRs.[Footnote 27] For example, in fiscal 
year 2008, $2 billion in unfunded OPEB liabilities for one state's 
public employees' retiree health and life insurance plans was reported 
in the plans' own financial statements and not in the state's CAFR. 
Consequently, the $2 billion is not included in our total for states' 
unfunded OPEB liability. 

In addition, the ultimate cost of OPEB may significantly differ from 
estimated OPEB liabilities because (1) the CAFRs we reviewed report 
data that predate the market downturn and (2) significant uncertainties 
affect the estimation of OPEB liabilities. We reviewed the most 
recently issued CAFRs, as of June 30, 2009, which reported OPEB assets 
valued and liabilities based on discount rate assumptions set before 
the market downturn. In most cases, the most recently issued CAFR was 
for fiscal year 2008.[Footnote 28] The value of those assets has likely 
fallen, which means the total unfunded OPEB liabilities are likely higher 
in mid-2009 than the total we found, at least for the minority of entities 
with at least some assets. In addition, when market interest rates 
fall, to the extent that actuaries apply lower discount rates to OPEB 
valuations, the value of unfunded OPEB liabilities will increase--all 
other factors remaining equal. Uncertainties affecting the estimation 
of OPEB liabilities include potential differences between assumptions 
used and actual experience, as well as potential and future changes to 
eligibility and government contributions. [Footnote 29] Governments 
have some discretion in what assumptions they use. Two significant 
assumptions used in OPEB liability calculations are the discount rate 
and the health care inflation rate. When governments value their OPEB 
liabilities, a decrease in the discount rate or increase in the health 
care inflation rate used results in higher unfunded OPEB liabilities, 
holding other factors, like the benefit plan and employee population, 
constant. A July 2009 study prepared for SLGE reported that one state's 
unfunded OPEB liability increased by almost 20 percent based on a 1 
percent increase in the health care inflation rate assumed. As the July 
2009 SLGE study showed, actuarial valuations for state OPEB assumed 
discount rates ranging from 3 percent to 8.5 percent.[Footnote 30] Our 
review of 10 states' most recently issued CAFRs found that 5 states 
used discount rates on the high end of that range.[Footnote 31] 
Further, in accordance with GASB guidance, when governments value OPEB 
liabilities, governments apply a health care inflation rate based on 
expected long-term future trends. According to the July 2009 SLGE 
study, virtually all state governments assume their expected long-term 
future rate to be about 5 percent, although actual health care 
inflation rates from 2002 to 2005 ranged from 16 percent to 10.3 
percent, respectively.[Footnote 32] 

Some State and Local Governments Have Taken Actions to Address Retiree 
Health Liabilities through Prefunding and Making Benefit Changes: 

Some state and local governments have taken actions to address their 
liabilities associated with retiree health benefits by setting aside 
assets in order to prefund the liabilities and reducing these 
liabilities by changing the structure of retiree health benefits. 

Some State and Local Governments Have Taken Steps to Prefund Their 
Retiree Health Liabilities and Have Done So to Varying Degrees: 

Prefunding at least a portion of OPEB costs is one action that some 
state and local governments have taken to address their retiree health 
liabilities. As noted earlier, approximately 35 percent of the 89 
governments for which we reviewed CAFRs reported having set aside some 
assets for OPEB liabilities for one or more entities in the government 
as of the time of their actuarial valuations. Setting aside assets for 
OPEB indicates that a government may have prefunded at least a portion 
of its liability associated with retiree health benefits.[Footnote 33] 
The CAFRs that we reviewed also showed that the percentage of the OPEB 
liability funded--the funded ratio--varied. 

Among the 10 selected governments whose actions we reviewed in more 
detail, officials from the governments that were prefunding at least a 
portion of their retiree health liability reported using irrevocable 
trusts. As noted earlier, under GASB accounting standards, only assets 
held in a trust or equivalent arrangement count toward reducing a 
government's unfunded liability. Furthermore, officials from some of 
these governments reported using a section 115 governmental trust, 
which is a trust established by a governmental employer to fund 
essential government functions. Similarly, according to results from a 
survey of state officials published in December 2008, more states 
reported having adopted, or being likely to adopt, a section 115 
governmental trust than a section 401(h) health benefits subaccount or 
a VEBA, two other funding vehicles available to state and local 
governments under the federal tax code.[Footnote 34] Some of the 
officials we spoke with, as well as the literature, indicated that 
section 115 trusts are simpler and more flexible than the other options 
available to governments.[Footnote 35] For example, officials from New 
York City told us that they chose a section 115 trust because it was 
simple to establish and operate, satisfied GASB Statement 45 standards 
for assets, and is exempt from taxation. According to officials from 
some of the selected governments, the governments' trusts were 
administered by the same board or individuals that administered the 
governments' pension fund. Government officials told us that the 
pension boards were chosen to manage the retiree health funds because 
they had the necessary experience, expertise, and resources to 
effectively manage the trusts. For example, the City of Thousand Oaks 
chose to invest its assets in a trust established and administered by 
the California Public Employees' Retirement System. The trust, called 
the California Employers' Retiree Benefit Trust, is available to all 
public employers in the state to prefund retiree health costs. A city 
official told us that the city chose to use this pooled trust because 
the pension system had a successful track record investing local 
governments' pension funds and because of the trust's low 
administrative costs. 

The governments we selected varied with regard to the source of funds 
used to prefund their retiree health liabilities. Officials from some 
of the governments reported utilizing funds from multiple sources. 
Among the selected governments, some officials reported that sources of 
money for prefunding retiree health liabilities were contributions from 
government employers such as agencies--generally, obtained as a 
specified percentage of an employer's payroll--and general revenue. For 
example, officials from the City of Thousand Oaks reported that in 
fiscal year 2010, city agencies are contributing 4.15 percent of their 
payroll to prefund the government's retiree health liability. Officials 
from some governments reported prefunding at least a portion of their 
retiree health liabilities by borrowing money, for example, through the 
issuance of bonds.[Footnote 36] However, results from a survey of state 
officials published in December 2008 indicated that at the time of the 
survey few states had reported issuing, or reported being likely to 
issue, bonds to finance their OPEB liabilities, including retiree 
health benefits.[Footnote 37],[Footnote 38] 

The governments we selected also varied in how they determine the level 
or amount to commit to prefunding their retiree health liabilities each 
year. While officials from some of the selected governments indicated 
that they rely on formulas or plans to help them determine these 
prefunding levels, some officials from the selected governments noted 
that actual amounts depend on appropriations. For example, officials 
from New York City specified that any funding above the government's 
pay-as-you-go costs--that is, the costs for benefits provided at the 
given time--is provided if and when sufficient resources exist, as 
determined through the government's budgetary process. Although often 
dependent on appropriations, officials from some of the governments 
reported that their levels of prefunding were determined based on the 
ARC--an estimate of the amount that if paid in full each year would be 
expected to fund currently accruing costs as well as a portion of any 
unfunded liability. For example, officials from some of the governments 
we selected indicated that their governments have prefunded the full ARC, 
while officials from another government indicated that a specified portion 
of the ARC has been funded each year. Some of the selected governments 
do not base the level of prefunding on the ARC. For example, officials 
from South Carolina reported that the amount of prefunding is determined 
by a combination of factors, including a formula linked to the health 
insurance plan's cash reserves and any annual appropriation the legislature 
chooses to make for retiree health benefits. 

Officials from the selected governments reported some challenges with 
prefunding their liability. Budgetary or fiscal constraints were the 
most commonly reported challenge. Officials from one government 
indicated that budgetary constraints led the government to stop 
prefunding its retiree health liability, while officials from another 
government reported scaling back prefunding efforts.[Footnote 39] Other 
government officials explained that declining revenue, resulting from 
both tax reforms and the poor economy, created challenges to 
prefunding. These same officials also commented that prefunding was 
challenging because of increasing health care costs and changes in the 
demographics of their workforces, namely changes to the ratio of 
retirees to active workers. Other challenges noted by officials from 
the governments we selected included the need to educate stakeholders 
about prefunding and the need to establish the legal authority to 
create irrevocable trusts. 

Some State and Local Governments Have Worked to Address Retiree Health 
Liabilities through Three Types of Benefit Changes: 

Another action some state and local governments have taken to address 
their retiree health liabilities has been to change the structure of 
the health benefits they offer retirees. While governments also make 
relatively routine changes to the health benefits they offer retirees 
(such as changing co-payments, deductibles, or covered benefits) that 
could affect their liability, we identified three key types of changes 
our selected governments have made to the structure of retiree health 
benefits: changing the type of retiree health benefit plan, changing 
the level of the government's contribution toward retirees' health 
insurance premiums, and changing the eligibility requirements employees 
need to meet to qualify for retiree health benefits. 

* Type of health benefit plan: Officials from some of the governments 
we selected indicated that since 2004 their governments changed the 
type of health benefit plan for retirees as a way of reducing the 
liability associated with these benefits. Specifically, officials 
reported a shift from a defined benefit retiree health plan to a 
defined contribution plan. As the term implies, a defined benefit plan 
specifies the amount of benefits to be provided during retirement. The 
benefits may be specified in dollars, such as a flat dollar amount, or 
as a type or level of coverage, such as a percentage of health 
insurance premiums paid. In contrast, defined contribution plans 
stipulate only the amounts to be contributed by a government to an 
employee's account each year of active employment. Defined contribution 
plans do not specify the amount of benefits employees will receive upon 
retirement; rather, the amount of benefits a retiree receives will depend 
on the value of that individual's account. Since a government's payment 
under a defined contribution plan is limited to the amount it contributes 
to an individual's retiree health account, the government's cost, and hence 
its liability, is no longer affected by increases in health care costs. 

* Level of government contribution: Some of the governments we selected 
have changed the level of the contribution they provide toward retiree 
health insurance premiums by reducing the amount or proportion of 
health insurance premiums paid for by the government or by changing how 
the level of contribution is calculated. For example, according to 
government officials, some of the selected governments changed the 
calculation of the contribution so that it was no longer affected by 
changes in premium costs, thereby shifting the risk of rising health 
care premiums onto the retiree. Changes to the level of government 
contribution were the most common benefit change reported by the 
governments we selected. Additionally, results from a survey of state 
officials published in December 2008 indicate that many states 
increased retirees' premium contributions in the past 5 years--an 
indication that the states may have changed the level of government 
contribution for those retirees.[Footnote 40] 

* Eligibility requirements: Officials from some of the governments we 
selected reported changing the requirements that determine eligibility 
for retiree health benefits, such as increasing the number of 

years an employee must work for the government before being eligible 
for health benefits upon retirement. Results from a survey of state 
officials published in December 2008 indicate that more states have 
changed their eligibility requirements by increasing the 

years of service required for eligibility for retiree health benefits 
than by increasing the age at which employees become eligible to 
receive these benefits.[Footnote 41] 

Table 2 provides examples of some of the retiree health benefit changes 
made since 2004 by the governments we selected. As seen in table 2, in 
some cases the selected governments made more than one change to their 
retiree health benefit structures. The changes were most often applied 
to newly hired employees or currently active employees. As a 
consequence, the selected governments may not realize cost saving 
associated with these changes for many years. However, they may see some 
effect on the amounts of their projected liability within a shorter period 
of time. 

Table 2: Examples of Retiree Health Benefits Changes Made by Selected 
Governments since 2004: 

Government: Gainesville, Florida; 
Type of benefit change: 
* Government contribution; 
Description of retiree health benefit change: In 2009, the city began 
determining the amount of government contribution as a fixed dollar 
amount based on the retiree's 

years of service and age at the time of benefit commencement. Before 
the change, the contribution was a specified percentage of a retiree's 
health insurance premium, which meant that the amount of contribution 
changed with changes in premium costs. 

Government: Harris County, Texas; 
Type of benefit change: 
* Government contribution; 
* Eligibility; 
Description of retiree health benefit change: In 2007, the county 
increased the number of years of service needed for an individual 
to receive a government contribution for the cost of his or her 
retiree health benefits and reduced the amount of that contribution. 
As a result of the changes, the county now has the following three-tiered 
system: 
* Individuals employed by the county as of March 1, 2007, and eligible 
to retire by February 2011 are eligible to receive retiree health 
benefits if the sum of their age and years of service equals 75 and 
they have a minimum of 10 years of service. The county provides a 100 
percent contribution for these individuals; 
* Individuals employed by the county as of March 1, 2007, and eligible 
to retire after February 2011 are eligible to receive retiree health 
benefits if the sum of their age and years of service equals 80 and 
they have a minimum of 10 years of service, or if they are at least 
age 65 (or Medicare eligible) and have a minimum of 10 years of service. 
Individuals who retire before age 65 will have to pay a portion of their 
premium until reaching age 65; * Individuals hired by the county after 
March 1, 2007, are eligible to receive retiree health benefits if the 
sum of their age and years of service equals 80 and they have a minimum 
of 20 years of service, or if they are at least age 65 (or Medicare eligible) 
and have a minimum of 15 years of service. However, according to a government 
official, the county may not provide any contribution for these individuals. 

Government: New Jersey; 
Type of benefit change: 
* Government contribution; 
Description of retiree health benefit change: In 2007, the state began 
requiring some retirees to contribute toward the cost of their health 
insurance premiums, thus reducing the amount of government 
contribution. Specifically, employees who reach 25 years of state 
government service, the length of service required to be eligible for 
retiree health benefits, on or after July 1, 2007, must contribute an 
amount equal to 1.5 percent of their pension benefit toward the cost 
of their health insurance premiums. The retiree's contribution is 
waived for individuals who participate in a government-sponsored wellness 
program. 

Government: Oakland County, Michigan; 
Type of benefit change: 
* Benefit design; 
* Government contribution; 
Description of retiree health benefit change: In 2005, in response to a 
large increase in the county's costs for retiree health benefits, the 
county adopted a new defined contribution retiree health benefit plan 
for eligible individuals hired on or after January 1, 2006. The defined 
contribution plan replaced the county's defined benefit plan, under 
which the county paid for from 60 to 100 percent of the premium for 
eligible individuals hired before 2006. Under the defined contribution 
plan, the county contributes $1,300 per year to a retirement health 
savings plan for each eligible employee. Upon retirement, employees with 15 
years of county service can access 60 percent of the funds the county 
contributed to their health savings plans for eligible medical 
expenses. With each additional year of service, the employee has access 
to another 4 percent of the contributed amount. As such, employees with 
25 or more years of service have access to the full amount of funds in 
their health savings plans when they retire. 

Government: South Carolina; 
Type of benefit change: 
* Government contribution; 
Description of retiree health benefit change: The state reduced the 
level of government contribution for employees hired after May 1, 2008, 
who become eligible for retiree health benefits. Employees hired before 
that date, who become eligible for retiree health benefits, qualified 
for the full amount of government contribution (which officials said 
was approximately 71 percent of the premium) if they retired with at 
least 10 years of service. Under the new requirements, in order to qualify 
for the full government contribution, such employees hired on or after May 
1, 2008, must have 25 years of service. Individuals with from 15 to 25 
years of service qualify for half of the government contribution, while 
no contribution is provided to employees with less than 15 years of service. 

Source: Information obtained through communications with, and documents 
provided by, officials from selected governments. 

[End of table] 

Some of the governments we selected assessed the effect of their health 
benefit changes on the amount of their retiree health liability. 
Specifically, according to government officials, Gainesville's change 
to its government contribution reduced the city's liability by $6 
million, or 12 percent. According to state officials, South Carolina's 
retiree health benefit changes are projected to save the state $3.5 
billion over 50 years. Additionally, officials from Oakland County, 
Michigan, indicated that the county's actuary estimated that the change 
from a defined benefit to a defined contribution plan would result in 
decreases to the county's ARC beginning in 2017, as the number of 
retirees receiving benefits through the defined benefit health plan 
decreases.[Footnote 42] 

Officials from the governments we selected reported some challenges in 
determining and implementing changes to their retiree health benefits. 
The most commonly reported challenge was reaching agreement with the 
various parties involved in the decision-making process, most notably 
the collective bargaining units representing affected personnel. For 
example, officials from one government indicated that the government 
was currently in arbitration with a collective bargaining unit over its 
health benefit changes, while officials from another government 
indicated that an unfair labor practice claim had been filed against 
the government as a result of its benefit changes. Officials from a 
third government noted that given the fiscal environment, it was 
difficult to make cuts to retiree health benefits since the government 
was already negotiating other compensation changes with collective 
bargaining units, such as eliminating pay raises for active employees. 
Finally, officials from one government noted that the state's 
constitution would prohibit the state from reducing the retiree health 
benefits for existing employees or retirees, thereby limiting the 
state's ability to change retiree health benefits for anyone except 
newly hired employees. 

Health-Related Spending, Including OPEB Liabilities, Is Increasing 
State and Local Governments' Fiscal Pressures: 

Unfunded OPEB liabilities on their own are large enough to represent a 
fiscal pressure for state and local governments but are also likely to 
be considered part of the broader fiscal challenge of managing 
increasing health care costs. State and local governments faced 
increasing fiscal pressures in 2008, in part because of recession- 
induced revenue shortfalls. Since the start of the recession in the 
fourth quarter of 2007 to the same quarter in 2008, state and local 
government revenues declined by 3 percent, after adjusting for 
inflation. During the same period, spending in the state and local 
government sector increased by about 1 percent, also adjusted for 
inflation.[Footnote 43] 

Our model of state and local government revenues and spending projects 
that state and local governments' fiscal pressures will increase in the 
future and will largely be driven by increases in health care spending. 
[Footnote 44] We constructed a model of aggregate spending and revenues 
for all state and local governments in the United States in order to 
provide a general picture of fiscal pressures facing many state and 
local governments in the future.[Footnote 45] Our model reflects the 
fiscal implications assuming current policies remain unchanged. The 
model's results are not a prediction of future decisions on government 
policies; in the face of growing fiscal pressure, changes in policies 
are likely. According to this model, over an extended period of time 
the difference between the growth of spending and revenues could 
compound to a large overall operating budget imbalance. As our 
simulation suggests (see figure 2), under current policies the 
operating budget balance for these governments as a whole could 
deteriorate steadily, from surpluses in 2006 to a deficit of 4.7 
percent of gross domestic product (GDP) by 2050. 

Figure 2: State and Local Government Operating Budget Balance, as a 
Percentage of GDP: 

[Refer to PDF for image: line graph] 

Year: 1980: 
Percentage of GDP: 0.36. 

Year: 1981: 
Percentage of GDP: 0.35. 

Year: 1982:
Percentage of GDP: 0.36. 

Year: 1983: 
Percentage of GDP: 0.77. 

Year: 1984: 
Percentage of GDP: 0.82. 

Year: 1985: 
Percentage of GDP: 0.81. 

Year: 1986: 
Percentage of GDP: 0.82. 

Year: 1987: 
Percentage of GDP: 0.35. 

Year: 1988: 
Percentage of GDP: 0.42. 

Year: 1989: 
Percentage of GDP: 0.46. 

Year: 1990: 
Percentage of GDP: 0.12. 

Year: 1991: 
Percentage of GDP: 0. 

Year: 1992: 
Percentage of GDP: 0.11. 

Year: 1993: 
Percentage of GDP: 0.18. 

Year: 1994: 
Percentage of GDP: 0.15. 

Year: 1995: 
Percentage of GDP: 0.23. 

Year: 1996: 
Percentage of GDP: 0.38. 

Year: 1997: 
Percentage of GDP: 0.54. 

Year: 1998: 
Percentage of GDP: 0.71. 

Year: 1999: 
Percentage of GDP: 0.53. 

Year: 2000: 
Percentage of GDP: 0.52. 

Year: 2001: 
Percentage of GDP: 0.21. 

Year: 2002: 
Percentage of GDP: -0.21. 

Year: 2003: 
Percentage of GDP: -0.03. 

Year: 2004; 
Percentage of GDP: 0.15. 

Year: 2005: 
Percentage of GDP: 0.51. 

Year: 2006: 
Percentage of GDP: 0.56. 

Year: 2007: 
Percentage of GDP: 0.28. 

Year: 2008: 
Percentage of GDP: -0.32. 

Year: 2009: 
Percentage of GDP: -0.92. 

Year: 2010: 
Percentage of GDP: -1.24. 

Year: 2011: 
Percentage of GDP: -1.31. 

Year: 2012: 
Percentage of GDP: -1.25. 

Year: 2013: 
Percentage of GDP: -1.14. 

Year: 2014: 
Percentage of GDP: -1.04. 

Year: 2015: 
Percentage of GDP: -1.07. 

Year: 2016: 
Percentage of GDP: -1.14. 

Year: 2017: 
Percentage of GDP: -1.22. 

Year: 2018: 
Percentage of GDP: -1.28. 

Year: 2019: 
Percentage of GDP: -1.38. 

Year: 2020: 
Percentage of GDP: -1.44. 

Year: 2021: 
Percentage of GDP: -1.51. 

Year: 2022: 
Percentage of GDP: -1.58. 

Year: 2023: 
Percentage of GDP: -1.67. 

Year: 2024: 
Percentage of GDP: -1.75. 

Year: 2025: 
Percentage of GDP: -1.85. 

Year: 2026: 
Percentage of GDP: -1.94. 

Year: 2027: 
Percentage of GDP: -2.04. 

Year: 2028: 
Percentage of GDP: -2.15. 

Year: 2029: 
Percentage of GDP: -2.25. 

Year: 2030: 
Percentage of GDP: -2.36. 

Year: 2031: 
Percentage of GDP: -2.48. 

Year: 2032: 
Percentage of GDP: -2.59. 

Year: 2033: 
Percentage of GDP: -2.7. 

Year: 2034: 
Percentage of GDP: -2.81. 

Year: 2035: 
Percentage of GDP: -2.92. 

Year: 2036: 
Percentage of GDP: -3.04. 

Year: 2037: 
Percentage of GDP: -3.15. 

Year: 2038: 
Percentage of GDP: -3.27. 

Year: 2039: 
Percentage of GDP: -3.38. 

Year: 2040: 
Percentage of GDP: -3.5. 

Year: 2041: 
Percentage of GDP: -3.62. 

Year: 2042: 
Percentage of GDP: -3.73. 

Year: 2043: 
Percentage of GDP: -3.85. 

Year: 2044: 
Percentage of GDP: -3.96. 

Year: 2045: 
Percentage of GDP: -4.08. 

Year: 2046: 
Percentage of GDP: -4.2. 

Year: 2047: 
Percentage of GDP: -4.32. 

Year: 2048: 
Percentage of GDP: -4.45. 

Year: 2049: 
Percentage of GDP: -4.58. 

Year: 2050: 
Percentage of GDP: -4.7. 

Source: Historical data from National Income and Product Accounts and 
GAO simulations updated January 2009. 

[End of figure] 

Health-related spending represents the fastest growing component common 
in government budgets at all levels in the United States.[Footnote 46] 
For state and local governments, the largest spending item for this 
category is Medicaid. Although retiree health benefits require a much 
smaller share of total spending than Medicaid, health benefits for 
state and local government retirees also have projected rapid cost 
growth.[Footnote 47] In 2007, at $324 billion, Medicaid expenditures 
represented 17 percent of total state and local government spending. 
State and local government spending on health benefits for nearly 3 
million retirees was $15.8 billion in 2008. As shown in figure 3, our 
model indicates that future spending for purposes other than health 
care will fall as a percentage of GDP, but health-related spending will 
more than make up for the decline.[Footnote 48] 

Figure 3: Health and Nonhealth Expenditures for the State and Local 
Government Sector, as a Percentage of GDP: 

[Refer to PDF for image: line graph] 

Year: 2000; 
Nonhealth expenditure: 10.72%; 
Heath expenditures: 2.67%. 

Year: 2001; 
Nonhealth expenditure: 11.03%; 
Heath expenditures: 2.96%. 

Year: 2002; 
Nonhealth expenditure: 11.21%; 
Heath expenditures: 3.14%. 

Year: 2003; 
Nonhealth expenditure: 11.12%; 
Heath expenditures: 3.22%. 

Year: 2004; 
Nonhealth expenditure: 10.80%; 
Heath expenditures: 3.32%. 

Year: 2005; 
Nonhealth expenditure: 10.69%; 
Heath expenditures: 3.32%. 

Year: 2006; 
Nonhealth expenditure: 10.69%; 
Heath expenditures: 3.15%. 

Year: 2007v
Nonhealth expenditure: 11.00%; 	
Heath expenditures: 3.25%. 

Year: 2008; 
Nonhealth expenditure: 11.27%; 
Heath expenditures: 3.31%. 

Year: 2009; 
Nonhealth expenditure: 11.68%; 
Heath expenditures: 3.58%. 

Year: 2010; 
Nonhealth expenditure: 11.7%; 
Heath expenditures: 3.75%. 

Year: 2011; 
Nonhealth expenditure: 11.46%; 
Heath expenditures: 3.82%. 

Year: 2012; 
Nonhealth expenditure: 11.17%; 
Heath expenditures: 3.85%. 

Year: 2013; 
Nonhealth expenditure: 10.90%; 
Heath expenditures: 3.89%. 

Year: 2014; 
Nonhealth expenditure: 10.71%; 
Heath expenditures: 3.95%. 

Year: 2015; 
Nonhealth expenditure: 10.58%; 
Heath expenditures: 4.04%. 

Year: 2016; 
Nonhealth expenditure: 10.49%; 
Heath expenditures: 4.14%. 

Year: 2017; 
Nonhealth expenditure: 10.42%; 
Heath expenditures: 4.26%. 

Year: 2018; 
Nonhealth expenditure: 10.36%; 
Heath expenditures: 4.36%. 

Year: 2019; 
Nonhealth expenditure: 10.30%; 
Heath expenditures: 4.45%. 

Year: 2020; 
Nonhealth expenditure: 10.23%; 
Heath expenditures: 4.55%. 

Year: 2021; 
Nonhealth expenditure: 10.16%; 
Heath expenditures: 4.64%. 

Year: 2022; 
Nonhealth expenditure: 10.09%; 
Heath expenditures: 4.74%. 

Year: 2023; 
Nonhealth expenditure: 10.03%; 
Heath expenditures: 4.85%. 

Year: 2024; 
Nonhealth expenditure: 9.97%; 
Heath expenditures: 4.96%. 

Year: 2025; 
Nonhealth expenditure: 9.91%; 
Heath expenditures: 5.08%. 

Year: 2026; 
Nonhealth expenditure: 9.85%; 
Heath expenditures: 5.20%. 

Year: 2027; 
Nonhealth expenditure: 9.79%; 
Heath expenditures: 5.32%. 

Year: 2028; 
Nonhealth expenditure: 9.73%; 
Heath expenditures: 5.44%. 

Year: 2029; 
Nonhealth expenditure: 9.68%; 
Heath expenditures: 5.57%. 

Year: 2030; 
Nonhealth expenditure: 9.62%; 
Heath expenditures: 5.69%. 

Year: 2031; 
Nonhealth expenditure: 9.56%; 
Heath expenditures: 5.82%. 

Year: 2032; 
Nonhealth expenditure: 9.50%; 
Heath expenditures: 5.95%. 

Year: 2033; 
Nonhealth expenditure: 9.44%; 
Heath expenditures: 6.08%. 

Year: 2034; 
Nonhealth expenditure: 9.37%; 
Heath expenditures: 6.21v 

Year: 2035; 
Nonhealth expenditure: 9.31%; 
Heath expenditures: 6.34%. 

Year: 2036; 
Nonhealth expenditure: 9.24%; 
Heath expenditures: 6.47%. 

Year: 2037; 
Nonhealth expenditure: 9.18%; 
Heath expenditures: 6.60%. 

Year: 2038; 
Nonhealth expenditure: 9.12%; 
Heath expenditures: 6.73%. 

Year: 2039; 
Nonhealth expenditure: 9.05%; 
Heath expenditures: 6.85%. 

Year: 2040; 
Nonhealth expenditure: 8.99%; 
Heath expenditures: 6.97%. 

Year: 2041; 
Nonhealth expenditure: 8.93%; 
Heath expenditures: 7.09%. 

Year: 2042; 
Nonhealth expenditure: 8.86%; 
Heath expenditures: 7.21%. 

Year: 2043; 
Nonhealth expenditure: 8.80%; 
Heath expenditures: 7.32%. 

Year: 2044; 
Nonhealth expenditure: 8.74%; 
Heath expenditures: 7.44%. 

Year: 2045; 
Nonhealth expenditure: 8.68%; 
Heath expenditures: 7.55%. 

Year: 2046; 
Nonhealth expenditure: 8.62%; 
Heath expenditures: 7.66%. 

Year: 2047; 
Nonhealth expenditure: 8.56%; 
Heath expenditures: 7.77%. 

Year: 2048; 
Nonhealth expenditure: 8.50%; 
Heath expenditures: 7.88%. 

Year: 2049; 
Nonhealth expenditure: 8.45%; 
Heath expenditures: 7.98%. 

Year: 2050; 
Nonhealth expenditure: 8.40%; 
Heath expenditures: 8.08%. 

Source: Historical data from National Income and Product Accounts and 
GAO simulations updated January 2009. 

[End of figure] 

The increased share of operating revenues consumed by state and local 
governments' spending on retiree health benefits projected under 
current policies indicates the fiscal pressure associated with those 
benefits. According to our model, by 2050 the number of state and local 
government retirees is likely to grow by about 70 percent from the 
current level of 3 million to 5.1 million retirees. This implies that 
the number of retirees grows at an average annual rate of about 1.3 
percent. However, the cost of retiree health benefits is projected to 
grow more quickly, at an annual rate of 6.7 percent over that same 
period.[Footnote 49] According to our model, this means that current 
spending of $15.8 billion on retiree health benefits will grow to 
$237.3 billion by 2050, in current dollars. As a share of total state 
and local government operating revenues, the projected spending for state 
and local government retirees' health benefits might not be viewed with 
great concern. However, spending on state and local government 
retirees' health benefits is projected to more than double as a share 
of total operating revenues by 2050, from 0.9 percent to 2.1 percent. 
State budget officials have told us that they face challenges financing 
future health benefits in general, including Medicaid benefits and 
health benefits for active government employees, not just for their 
retirees. The rapid increase projected for retiree health liabilities 
is just one effect of the escalating health care costs under ongoing 
debate by policymakers and others. Future possible changes in policies 
could cause actual budget outcomes to diverge from what our model 
projects. Such changes could include reductions in health care 
benefits, reductions in the number of retirees receiving benefits, 
increases in state and local taxes, or a combination of these. 

External Comments: 

We provided a draft of this report to GASB and the National Association 
of State Auditors, Comptrollers and Treasurers, which provided 
technical comments that we incorporated as appropriate. 

As agreed with your office, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies of this report 
to interested parties. In addition, the report also is available at no 
charge on the GAO Web site at [hyperlink, http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact John E. Dicken at (202) 512-7114 or dickenj@gao.gov or Barbara 
D. Bovbjerg at (202) 512-7215 or bovbjergb@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff who made major contributions 
to this report are listed in appendix V. 

Sincerely yours, 

Signed by: 

John E. Dicken: 
Director, Health Care: 

Signed by: 
Barbara D. Bovbjerg: 
Director, Education, Workforce, and Income Security: 

[End of section] 

Appendix I: Supplemental Scope and Methodology for State and Local 
Government CAFR Review: 

To describe what is reported about state and local governments' 
unfunded other postemployment benefits (OPEB) liabilities, we reviewed 
the most recent governmentwide comprehensive annual financial reports 
(CAFR), as of June 30, 2009, for the states and selected local 
governments.[Footnote 50] We contacted representatives from individual 
state and local governments to discuss the reporting of OPEB data in 
the CAFRs, as necessary. Specifically, we reviewed the fiscal year 2008 
CAFRs for 48 states and the fiscal year 2007 CAFRs for 2 states that 
had not released their fiscal year 2008 CAFRs by June 30, 
2009.[Footnote 51] We also reviewed the most recent CAFRs for the 39 
largest local governments (i.e., cities and counties with total revenue 
of $2 billion or more, according to U.S. Census Bureau data). Of those, 
we reviewed fiscal year 2008 CAFRs for 34 local governments and fiscal 
year 2007 CAFRs for the 5 that had not released their fiscal year 2008 
CAFRs by June 30, 2009.[Footnote 52] We based our selection of local 
governments on the most recent U.S. Census Bureau data from the 2002 
Census of Governments, "Finances of County Governments" and "Finances 
of Municipal and Township Governments," which includes local 
governments with populations of at least 25,000.[Footnote 53] The 39 
local governments for which we reviewed CAFRs are listed in appendix 
III, table 4. 

We determined that the state and local government CAFR data were 
sufficiently reliable for our purposes, which were to describe the 
total unfunded OPEB liability reported; the total OPEB liability, 
assets, and unfunded liability for each of the individual governments 
for which we reviewed CAFRs; as well as the ranges of unfunded OPEB 
liabilities, assets, and funded ratios reported.[Footnote 54] Although 
we reviewed the most recent CAFRs, typically fiscal year 2008 CAFRs, 
the body of OPEB data on which we report reflects many different 
actuarial valuation dates.[Footnote 55] Because the universe of local 
governments is estimated at about 88,000 governments, we limited our 
review of local government CAFRs to those for the 39 largest local 
governments, as described above, thus leaving out of our review the 
majority of local government CAFRs. We did not analyze the CAFR data 
governments reported or review the reasonableness of the actuarial 
assumptions used to estimate the OPEB and related unfunded liabilities. 
To complement our CAFR review, we contacted experts on state and local 
government retiree health benefits, such as national organizations, 
including the National Governors Association, the Association of Local 
Government Auditors, the National Conference of State Legislators, the 
National Association of Counties, and the Government Finance Officers 
Association. Other organizations we contacted include the State and 
Local Government Benefits Association, the National Conference of 
Public Employees Retirement Systems, and Standard and Poor's. We also 
reviewed actuarial literature and different studies and data sets 
related to the unfunded OPEB liabilities across states and local 
governments. Those sources include Workplace Economics, State 
Government Retiree Health Benefits: Current Status and Potential Impact 
of New Accounting Standards, 2004; Cato Institute, Unfunded State and 
Local Health Costs: $1.4 Trillion, 2006; Standard and Poor's, U.S. 
State and Quantifying OPEB Liabilities and Developing Funding 
Strategies as the GASB Deadline Nears, 2007; National Association of 
State Comptrollers, Annual OPEB Survey, 2006, 2007, and 2008; PEW 
Center on the States, Promises with a Price: Public Sector Retirement 
Benefits, 2007; Credit Suisse, You Dropped a Bomb on Me, GASB, 2007; 
the Center for State and Local Government Excellence, At a Crossroads: 
The Financing and Future of Health Benefits for State and Local 
Government Retirees, 2009; and Robert Clark and Melinda Sandler 
Morrill, Health Plans for Retired State Employees: Is There a Funding 
Crisis? 2009. 

[End of section] 

Appendix II: Supplemental Scope and Methodology for Description of 
State and Local Governments' Fiscal Pressures: 

To describe the fiscal pressures facing state and local governments, we 
used our model that simulates fiscal outcomes of the state and local 
sector in the aggregate for several decades into the future. The model 
is not designed to project the fiscal position of individual states; 
rather, it simulates the potential level of aggregate receipts and 
expenditures of the state and local sector in future years based on 
current and historical spending and revenue patterns. A January 2008 
report provided a detailed description of how we constructed the model, 
and sections of that methodology directly relevant to data in this 
report are provided below.[Footnote 56] 

As an organizing framework and basic data source, our state and local 
government model relies on the National Income and Product Accounts 
(NIPA), prepared by the Department of Commerce's Bureau of Economic 
Analysis. We project the growth in each category of receipts and 
expenditures using the Congressional Budget Office's economic 
assumptions whenever possible. In several cases, we were not able to 
obtain existing projections and needed to develop our own assumptions 
about the likely future growth path of certain receipts or 
expenditures. We also developed detailed models to project items such 
as necessary pension fund contributions, the costs of health insurance 
for employees and retirees, and several tax receipt categories. Our 
base-case model assumes current policies remain in place. Below, we 
describe how that basic assumption is realized. Once all receipts and 
expenditures of the sector are simulated forward through 2050, we 
develop summary indicators of the state and local government sector's 
fiscal status. Because the model covers the state and local government 
sector in the aggregate, the fiscal outcome of individual states and 
localities cannot be captured. Also, the model does not identify 
whether it is the states or the local governments that face greater 
fiscal challenges. The following describes (1) the receipts and 
expenditures for the state and local government sector; (2) the measure 
of fiscal imbalance; (3) how we developed factors for employment, 
retirement, and benefits; and (4) how we projected the costs of health 
care. 

Projection of Receipts and Expenditures of the State and Local 
Government Sector: 

The model provides projections for each type of receipt of state and 
local governments. The Bureau of Economic Analysis assembles the NIPA 
based on data from the quinquennial Census of Governments, annual 
surveys of government finances, and other sources. In the NIPA, 
receipts are divided into five major categories: tax receipts, 
contributions for government social insurance, income receipts on 
assets, transfer receipts, and the current surplus of government 
enterprises. Figure 4 shows these categories as well as the breakdown 
of receipts within each of these classifications. 

Figure 4: Receipt Classifications of State and Local Governments: 

[Refer to PDF for image: illustration] 

1. Taxes: 
* Personal income tax (state personal income tax and local personal 
income tax); 
* Sales tax (general sales tax and selective [excise] sales tax); 
* Corporate income tax; 
* Property tax; 
* Other taxes on production: 
* Estate tax. 

2. Contributions to government insurance. 

3. Income on financial assets owned by state and local governments. 

4. Transfer receipts: 
* Federal Medicaid grants; 
* Non-Medicaid federal grants; 
* Federal investment grants (for long-term investments, such as roads, 
bridges, and other infrastructure); 
* Transfers from businesses and persons (e.g., fines, tobacco 
settlements). 

5. Surplus or deficit on government enterprises (e.g., liquor stores, 
public power, public transit, public housing). 

Source: GAO organization of NIPA classifications. 

Note: Unlike the NIPA, we do not distinguish between current and 
noncurrent receipts. 

[End of figure] 

In the NIPA, expenditures are divided into five categories, some much 
larger than others. Figure 5 shows the five categories. Consumption 
expenditures, the largest category, include such items as the 
compensation of state and local government employees. Transfer payments 
include Medicaid payments. Smaller classifications are interest paid on 
the outstanding debt of these governments, subsidies, and expenditures 
for investments in fixed capital and nonproduced assets. 

Figure 5: Expenditure Classifications of State and Local Governments: 

[Refer to PDF for image: illustration] 

1. Consumption expenditures: 
* Compensation of employees: 
- Wages and salaries; 
- Pension fund contributions; 
- Heath care payments; 
- Other employee benefits (e.g., life insurance); 

* Consumption of fixed capital (i.e., depreciation): 

* Miscellaneous consumption expenditures: 
- Purchases of intermediate goods; 
- Offsets related to tuition, hospitals, and certain other services not 
considered enterprises; 
- Own account investments–offsets related to expenditures classified as 
consumption expenditures in the given year but really related to longer-
term investments. 

2. Transfer payments to citizens: 

* Medicaid and other health payments; 
* Non-Medicaid transfers. 

3. Interest paid on outstanding state and local debt. 

4. Subsidies. 

5. Purchases of fixed assets and purchases of nonproduced assets 
(mostly land). 

Source: GAO organization of NIPA classifications. 

[End of figure] 

Measures of Fiscal Balance: 

In this report, we use the operating budget balance (operating balance) 
as a measure of fiscal balance. Operating balance is a GAO-developed 
measure that we call the operating balance excluding funds for capital 
expenditures. This measure is designed to be roughly akin to the 
operating budgets of subnational governments--budgets that these 
governments are generally required to balance or nearly balance. We 
develop a measure of receipts not available to finance current spending 
as the difference between investment spending and the change in medium- 
and long-term debt. Subtracting this amount from total receipts leaves 
the estimated receipts that are available to finance current 
expenditures. The expenditure component of the balance measure excludes 
both investment spending and depreciation. Our operating balance 
measure includes two further adjustments to NIPA-based totals. First, 
we exclude the current surplus/deficit of government enterprises from 
receipts because state and local government operating budgets exclude 
government enterprises. This adjustment has no effect on our base-case 
simulations because we assume the balance is equal to zero, but its 
incorporation accommodates potential alternative assumptions about the 
current balance of government enterprises. We also exclude a category 
of funds that we call the net balance of social insurance funds. As 
noted earlier, state and local employees as well as employers make 
contributions to social insurance funds to pay for such items as 
temporary disability and workers' compensation insurance. Payments from 
these funds are embedded in transfer payments that governments pay to 
workers when they are disabled or otherwise entitled to payments from 
these insurance funds. In our simulations, the balance is assumed to 
grow with total wage and salary disbursements. While governments hold 
balances in these funds, the funds are not available for operating 
expenses. 

Development of Factors for Employment and Beneficiary Levels: 

Key underlying information for the health care expenditure simulations 
relate to future levels of employment, retirees, and wages. In 
particular, to estimate the expenditure for the postretirement promises 
the sector has and will continue to make as well as expenditures for 
health care for active employees, we need to project the number of 
employees and retirees in each future year. The cost of health care is 
discussed later in this appendix. We project the number of state and 
local government employees and the number of beneficiaries for each 
year during the simulation time frame. To project the level of 
employment in each future year, we assume that state and local 
employment grows at the same rate as total population under the 
intermediate assumptions of the Board of Trustees of the Old-Age and 
Survivors Insurance and Disability Insurance Trust Funds[Footnote 57]--
that is, we assume that the ratio of state and local employment to 
total population remains constant.[Footnote 58] The Trustees assume 
that population growth gradually declines from 0.8 percent during the 
next decade to a steady rate of 0.3 percent per year beginning in 2044. 
Accordingly, state and local government employment growth displays the 
same pattern in our projections. To project the number of 
beneficiaries, we assumed that future growth in the number of state and 
local government retirees--many of whom will be entitled to pension and 
health care benefits--is largely driven by the size of the workforce in 
earlier years. While actuaries use detailed information and assumptions 
regarding the age, earnings, service records, and mortality rate 
applicable to the entities they evaluate, information in such detail is 
not available for the state and local government sector as a whole. 
This lack of detailed data necessitated the development of a method of 
projecting aggregate state and local beneficiary growth that is much 
simpler than the methods that actuaries employ. 

The method we developed reflects the logic that each year's growth in 
the number of beneficiaries is linked to past growth in the number of 
employees. Total state and local government employment from 1929 
through 2005 was obtained from NIPA tables 6.4a, b, c, and d. The U.S. 
Census Bureau provided data on the number of state and local pension 
beneficiaries from 1992 through 2005, during which continuous 
observations were available. Cyclical swings in the employment series 
were removed using a Hodrick-Prescott filter.[Footnote 59] Then both 
the employment and beneficiary series were logged and first- 
differenced, transforming the data from levels to proportionate 
changes. We developed a routine that searched across 45 years of lagged 
employment growth to select a set of weights for the years in which 
past employment growth best explained a given year's growth in 
beneficiaries.[Footnote 60] The routine included the restrictions that 
the weights must be nonnegative and sum to one. 

The method produced a relationship that reflected the contribution of a 
particular past year's employment change in explaining a given year's 
change in retirees. In particular, the estimated relationship suggests 
that beneficiary growth in a given year is largely determined by 
employment growth 21, 22, 23, and 34 years before the given period. 
This pattern appears consistent with the categories of workers that the 
sector employs. Many fire and police positions, for example, offer 
faster pension accrual or early retirement due to the physical demands 
and risks of the work, while many other state and local workers have 
longer careers. 

Projections of Health Care Costs for State and Local Employees and 
Retirees: 

Most state and local governments pay for employee and retiree health 
insurance on a pay-as-you-go basis--that is, these benefits are 
generally not prefunded. We made projections of the pay-as-you-go 
expenditures for health care for the sector, as a percentage of wages, 
in each year until 2050.[Footnote 61] To estimate expenditures for 
employee and retiree health insurance in future years, we used the 
methods described above to develop projections of employment in the 
sector and the number of retirees. An additional assumption for the 
health care analysis is that in future years, the same percentage of 
employees and retirees of state and local governments will be enrolled 
in health insurance through their previous employers as we observe were 
enrolled in 2004--the most recent year for which data were available. 
For retirees, we developed this measure from two data sources. The U.S. 
Census Bureau's State and Local Government Employee-Retirement System 
survey provided data on the total number of state and local retirees, 
and the Department of Health and Human Services' Medical Expenditure 
Panel Survey provided data on state and local government retirees who 
are covered by employer-provided health insurance. Through these data 
sources we found that the share of retirees with health insurance is 44 
percent, and we hold this constant through the simulations. From the 
latter data source we also obtained the most recent year state and 
local government spending data on health care for retirees. For active 
employees we also used the Medical Expenditure Panel Survey data on 
employees covered by health insurance and compared them to the Bureau 
of Economic Analysis data on the total employment in the sector. This 
provided us with a finding that 71 percent of active employees are 
receiving health benefits. Again, we hold this value constant during 
the simulation time frame. 

One of the most central assumptions we must make to estimate the pay- 
as-you-go health care expenditures for employees and retirees in future 
years is the cost growth of health care itself. The cost of health care 
has been increasing faster than gross domestic product (GDP) for many 
years. As such, we developed assumptions about how much faster health 
care costs would grow, relative to the economy, in future years. We 
developed these assumptions based on our own research and discussions 
with experts. In particular, we assume that the excess cost factor 
averages 1.4 percentage points per year through 2035, and then begins 
to decline, reaching 0.6 percentage points by 2050. 

Using these assumptions, we developed projections for the expenditures 
on health care for employees and retirees each year through 2050. We 
found that the projected expenditures for retiree health insurance, 
while not a large component of state budgets, will more than double as 
a percentage of wages over the next several decades. In 2006, these 
expenditures amounted to approximately 2.1 percent of wages, and by 
2050 we project that they will grow to nearly 5.1 percent of wages--a 
150 percent increase. Our estimates of these expenditures are highly 
sensitive to certain of our assumptions. In particular, the assumptions 
regarding health care cost growth are critical. For example, if health 
costs were to only rise at the rate of GDP per capita, expenditures for 
retiree health care would only grow, as a percentage of wages, from 2.1 
percent today to 3.0 percent by 2050. Conversely, if health costs were 
to grow by twice the rate we assume in the base case, these costs would 
constitute 8.7 percent of wages by 2050.[Footnote 62] 

The percentage of an active employee's wage expended on health care 
amounted to 12.8 percent of wages in 2006 and by the end of the 
simulations in 2050 is expected to be 22.2 percent of wages. In the 
case of the optimistic scenario--with lower escalation in the cost of 
health care--we found that expenditures on employee health care will 
only rise slightly to 13 percent of wages by 2050. However, under the 
pessimistic scenario characterized by more rapidly growing health 
costs, expenditures on health care for active employees rise to 37.7 
percent of wages in 2050. 

[End of section] 

Appendix III: Aggregate Other Postemployment Benefits Liability Data 
for States and Local Governments We Reviewed: 

The data for OPEB (which are primarily retiree health benefits) 
presented in tables 3 and 4 are those reported in the most recently 
issued governmentwide CAFRs, as of June 30, 2009, for the 50 states and 
the 39 largest local governments. As described more fully in appendix 
I, in most cases the most recently issued CAFR was for fiscal year 
2008.[Footnote 63] We reviewed only the governmentwide CAFRs and did 
not review separate financial reports for component entities or cost- 
sharing multiple-employer plans that do not report their OPEB data in 
the CAFR. Also, data below reflect the data reported by the governments 
in their CAFRs and not GAO analysis of financial reports.[Footnote 64] 

Table 3: Aggregate OPEB Liability Data for 50 States, Based on the Most 
Recent Governmentwide CAFRs (Dollars in thousands): 

State: Alabama[A]; 
Liability: $2,984,796; 
Value of assets: $0; 
Unfunded liability: $2,984,796. 

State: Alaska[A]; 
Liability: $3,758,699; 
Value of assets: $1,651,729; 
Unfunded liability: $2,106,970. 

State: Arizona[A]; 
Liability: $71,180; 
Value of assets: $0; 
Unfunded liability: $71,180. 

State: Arkansas; 
Liability: $1,748,182; 
Value of assets: $0; 
Unfunded liability: $1,748,182. 

State: California; 
Liability: $62,000,000; 
Value of assets: $0; 
Unfunded liability: $62,000,000. 

State: Colorado[B]; 
Liability: $276,332; 
Value of assets: $0; 
Unfunded liability: $1,326,332. 

State: Connecticut[C]; 
Liability: $2,318,800; 
Value of assets: $0; 
Unfunded liability: $2,318,800. 

State: Delaware[D]; 
Liability: $5,565,100; 
Value of assets: $79,400; 
Unfunded liability: $5,486,100. 

State: Florida; 
Liability: $2,404,323; 
Value of assets: $0; 
Unfunded liability: $2,404,323. 

State: Georgia[E]; 
Liability: $19,100,171; 
Value of assets: $778,048; 
Unfunded liability: $18,457,641. 

State: Hawaii; 
Liability: $8,788,892; 
Value of assets: $0; 
Unfunded liability: $8,788,892. 

State: Idaho; 
Liability: $493,746; 
Value of assets: $4,325; 
Unfunded liability: $489,421. 

State: Illinois[A]; 
Liability: $24,200,000; 
Value of assets: $0; 
Unfunded liability: $24,200,000. 

State: Indiana; 
Liability: 442,268; 
Value of assets: $0; 
Unfunded liability: $442,268. 

State: Iowa; 
Liability: 404,362; 
Value of assets: $0
Unfunded liability: $404,362. 

State: Kansas; 
Liability: 316,640; 
Value of assets: $0
Unfunded liability: $316,640. 

State: Kentucky[F]; 
Liability: $13,008,572; 
Value of assets: $1,348,326; 
Unfunded liability: $11,661,694. 

State: Louisiana; 
Liability: $12,542,953; 
Value of assets: $0
Unfunded liability: $12,542,953. 

State: Maine; 
Liability: $2,422,806; 
Value of assets: $139,000; 
Unfunded liability: $2,283,806. 

State: Maryland; 
Liability: $14,852,304; 
Value of assets: $118,884; 
Unfunded liability: $14,733,420. 

State: Massachusetts; 
Liability: $11,649,000; 
Value of assets: $329,000; 
Unfunded liability: $11,320,000. 

State: Michigan[A]; 
Liability: $14,929,200; 
Value of assets: $14,300; 
Unfunded liability: $14,914,900. 

State: Minnesota; 
Liability: $1,011,444; 
Value of assets: $0
Unfunded liability: $1,011,444. 

State: Mississippi; 
Liability: $570,248; 
Value of assets: $0
Unfunded liability: $570,248. 

State: Missouri; 
Liability: $2,867,472; 
Value of assets: $15,646; 
Unfunded liability: $2,851,826. 

State: Montana[A]; 
Liability: $631,918; 
Value of assets: $0
Unfunded liability: $631,918. 

State: Nebraska; 
The CAFR reports that the implementation of Governmental Accounting 
Standards Board (GASB) Statement 45 had no material effect on the 
financial statements. According to the CAFR, after a retired employee 
reaches age 65, the state has no further obligation for OPEB, except 
for a very small number of employees. 

State: Nevada[A]; 
The CAFR reports that the state's OPEB data are accounted for by a 
multiple employer cost-sharing defined postemployment benefit plan and 
the related OPEB data are reported in a separate stand-alone financial 
report and not in the governmentwide CAFR. 

State: New Hampshire[A]; 
Liability: $2,559,500; 
Value of assets: $0; 
Unfunded liability: $2,559,500. 

State: New Jersey[A]; 
Liability: $50,649,500; 
Value of assets: $0; 
Unfunded liability: $50,649,500. 

State: New Mexico[G]; 
Liability: $3,116,916; 
Value of assets: 170,626; 
Unfunded liability: $2,946,289. 

State: New York; 
Liability: $50,819,000; 
Value of assets: $0; 
Unfunded liability: $50,819,000. 

State: North Carolina; 
Liability: $29,364,734; 
Value of assets: $623,174; 
Unfunded liability: $28,741,560. 

State: North Dakota; 
Liability: $124,046; 
Value of assets: $42,500; 
Unfunded liability: $81,546. 

State: Ohio[A]; 
Liability: $31,594,079; 
Value of assets: 11,204,857; 
Unfunded liability: $20,389,222. 

State: Oklahoma[A]; 
Liability: $359,800; 
Value of assets: $0; 
Unfunded liability: $359,800,000. 

State: Oregon; 
Liability: $868,393; 
Value of assets: $258,600; 
Unfunded liability: $609,793. 

State: Pennsylvania[H]; 
Liability: $11,794,150; 
Value of assets: $108,240; 
Unfunded liability: $11,685,919. 

State: Rhode Island[A]; 
Liability: $788,189; 
Value of assets: $0; 
Unfunded liability: $788,189. 

State: South Carolina; 
Liability: $8,609,121; 
Value of assets: $0
Unfunded liability: $8,609,121. 

State: South Dakota; 
Liability: $76,406; 
Value of assets: $0; 
Unfunded liability: $76,406. 

State: Tennessee; 
Liability: $2,398,673; 
Value of assets: $0; 
Unfunded liability: $2,398,673. 

State: Texas[A]; 
Liability: $7,007,453; 
Value of assets: $0; 
Unfunded liability: $7,007,453. 

State: Utah; 
Liability: $669,617; 
Value of assets: $0; 
Unfunded liability: $669,617. 

State: Vermont[I]; 
Liability: $1,618,245; 
Value of assets: $3,664; 
Unfunded liability: $1,614,582. 

State: Virginia[A]; 
Liability: $4,984,000; 
Value of assets: $1,345,000; 
Unfunded liability: $3,639,000. 

State: Washington; 
Liability: $3,799,530; 
Value of assets: $0; 
Unfunded liability: $3,799,530. 

State: West Virginia[A]; 
The CAFR reports that the state provides OPEB, which are provided under 
a multiemployer cost-sharing plan. According to the CAFR, complete 
financial statements and additional disclosures for the plan are 
available from the plan's administrative offices. 

State: Wisconsin[A]; 
Liability: $1,472,774; 
Value of assets: $0; 
Unfunded liability: $1,472,774. 

State: Wyoming; 
Liability: $174,161; 
Value of assets: $0; 
Unfunded liability: $174,161. 

State: Total[J]; 
Liability: $422,207,695; 
Value of assets: $18,235,319; 
Unfunded liability: $405,159,751. 

Source: GAO calculations based on data reported in states' CAFRs. 

[A] Our review of the government's CAFR indicated that there is or may 
be OPEB information for at least one plan reported outside the CAFR. 

[B] For one entity, Colorado's CAFR reports the unfunded liability but 
not the liability or assets, which is why the state's unfunded 
liability shown above is about $1.05 billion more than liability minus 
assets. 

[C] Connecticut's fiscal 

year 2008 CAFR also reports an additional "estimated accrued liability" 
of $23.7 billion as of June 30, 2008, according to an interim actuarial 
valuation. The CAFR states that because the valuation was "limited in 
scope," the associated funded status and funding progress data are not 
disclosed. The liability and unfunded liability are shown here as they 
were reported in the CAFR. 

[D] Delaware's CAFR reports an unfunded liability for one entity that 
is $400,000 higher than the liability minus assets. The unfunded 
liability is shown here as it was reported in the CAFR. 

[E] Georgia's CAFR reported one entity with a funded ratio of 121 
percent. The unfunded liability shown above does not include the 
"overfunded" unfunded liability because doing so could understate the 
unfunded liability of the remaining two entities, which is why the 
total unfunded liability is $135 million more than liability minus 
assets. 

[F] Kentucky's CAFR reported one entity with a funded ratio of 106 
percent. The unfunded liability shown above does not include the 
"overfunded" unfunded liability because doing so could understate the 
unfunded liability of the remaining entities, which is why the total 
unfunded liability is $1.4 million more than liability minus assets. 

[G] New Mexico's CAFR reports an unfunded liability for one entity that 
is slightly less than the liability minus assets disclosed for that 
entity. The unfunded liability is shown here as it was reported in the 
CAFR. 

[H] Pennsylvania's CAFR reports unfunded liabilities for two entities 
that are slightly more than the liability minus assets for each of 
those entities, and an unfunded liability for one entity that is 
slightly less than the liability minus assets, resulting in an 
aggregate unfunded liability that is slightly higher than the total 
liabilities minus total assets. The unfunded liability is shown here as 
it was reported in the CAFR. 

[I] Vermont's CAFR reports an unfunded liability for one entity that is 
slightly less than the liability minus assets disclosed for that 
entity. The unfunded liability is shown here as it was reported in the 
CAFR. 

[J] The total unfunded liability reported here does not equal the total 
liability minus total assets, for the reasons discussed in the previous 
table notes and also because of rounding. 

[End of table] 

Table 4: Aggregate OPEB Liability Data for the 39 Largest Local 
Governments, Based on the Most Recent Governmentwide CAFRs (Dollars in 
thousands): 

Local governments: Alameda County, Calif.; 
Liability: $639,800; 
Value of assets: $614,800; 
Unfunded liability: $25,000. 

Local governments: Baltimore, Md.; 
Liability: $2,149,800; 
Value of assets: $76,000; 
Unfunded liability: $2,073,800. 

Local governments: Baltimore County, Md.; 
Liability: $1,765,553; 
Value of assets: $0; 
Unfunded liability: $1,765,553. 

Local governments: Boston, Mass.; 
Liability: $5,490,836; 
Value of assets: $0; 
Unfunded liability: $5,490,836. 

Local governments: Chicago, Ill.; 
Liability: $1,786,833; 
Value of assets: $0; 
Unfunded liability: $1,786,833. 

Local governments: Clark County, Nev.; 
Liability: $799,864; 
Value of assets: $4,639; 
Unfunded liability: $795,225. 

Local governments: Cook County, Ill.; 
The most recent CAFR available for our review was the county's fiscal 
year 2007 CAFR, which did not reflect implementation of GASB Statement 
45 and therefore did not report OPEB liability data. The CAFR indicates 
that the fiscal year 2008 CAFR will reflect implementation of GASB 
Statement 45. 

Local governments: Denver, Colo.; 
Liability: $128,607; 
Value of assets: $96,457; 
Unfunded liability: v32,150. 

Local governments: Detroit, Mich.[A]; 
Liability: $6,000,000; 
Value of assets: $0; 
Unfunded liability: $6,000,000. 

Local governments: Harris County, Tex.; 
Liability: $852,351; 
Value of assets: $0; 
Unfunded liability: $852,351. 

Local governments: Houston, Tex.; 
Liability: $326,500; 
Value of assets: $54,500; 
Unfunded liability: $272,000. 

Local governments: Indianapolis, Ind.; 
Liability: $137,738; 
Value of assets: $0; 
Unfunded liability: $137,738. 

Local governments: Jacksonville, Fla.; 
Liability: $175,117; 
Value of assets: $0; 
Unfunded liability: $175,117. 

Local governments: Fairfax County, Va.; 
Liability: $679,524; 
Value of assets: $0; 
Unfunded liability: $679,524. 

Local governments: Los Angeles, Calif.; 
Liability: $5,160,558; 
Value of assets: $2,830,204; 
Unfunded liability: $2,330,354. 

Local governments: Los Angeles County, Calif.; 
Liability: $21,231,100; 
Value of assets: $0; 
Unfunded liability: $21,231,100. 

Local governments: Maricopa County, Ariz.[B,C]; 
Liability: $15,915; 
Value of assets: $0; 
Unfunded liability: $15,915. 

Local governments: Memphis, Tenn.; 
Liability: $1,600,546; 
Value of assets: $0; 
Unfunded liability: $1,600,546. 

Local governments: Miami-Dade County, Fla.; 
Liability: $284,024; 
Value of assets: $0; 
Unfunded liability: $284,024. 

Local governments: Montgomery County, Md.; 
Liability: $1,176,000; 
Value of assets: $0; 
Unfunded liability: $1,176,000. 

Local governments: Nashville-Davidson County, Tenn.; 
Liability: $2,649,279; 
Value of assets: $0; 
Unfunded liability: $2,640,248. 

Local governments: Nassau County, N.Y.; 
Liability: $3,316,121; 
Value of assets: $0; 
Unfunded liability: $3,316,121. 

Local governments: New York City, N.Y.; 
Liability: $62,135,453; 
Value of assets: $2,594,452; 
Unfunded liability: $59,541,001. 

Local governments: Orange County, Calif.; 
Liability: $423,025; 
Value of assets: $79,717; 
Unfunded liability: $343,308. 

Local governments: Philadelphia, Pa.[B]; 
Liability: $1,158,100; 
Value of assets: $0; 
Unfunded liability: $1,158,100. 

Local governments: Phoenix, Ariz.[D]; 
Liability: $405,923; 
Value of assets: $74,072; 
Unfunded liability: $345,579. 

Local governments: Prince George's County, Md.[B]; 
Liability: $762,335; 
Value of assets: $0; 
Unfunded liability: $762,335. 

Local governments: Riverside County, Calif.; 
Liability: $47,828; 
Value of assets: $10,411; 
Unfunded liability: $37,417. 

Local governments: Sacramento County, Calif.; 
Liability: $245,592; 
Value of assets: $0; 
Unfunded liability: $245,592. 

Local governments: San Antonio, Tex.[E]; 
Liability: $1,118,131; 
Value of assets: $464,476; 
Unfunded liability: $670,245. 

Local governments: San Bernardino County, Calif.; 
The CAFR does not report any OPEB information. An official from the 
county's Office of the Auditor/Controller-Recorder said that the county 
does not offer OPEB to retirees and thus has no OPEB liabilities to 
disclose. 

Local governments: San Diego, Calif.; 
Liability: $1,235,707; 
Value of assets: $29,637; 
Unfunded liability: $1,206,070. 

Local governments: San Diego County, Calif.[B]; 
Liability: The CAFR reports that the county provides retiree health 
benefits and participates in a cost-sharing multiple-employer defined 
benefit health plan. According to the CAFR, a separate entity issues 
financial reports that include financial statements for the retiree 
health plan. 

Local governments: San Francisco, Calif.[F](city and county); 
Liability: $4,000,000; 
Value of assets: $0; 
Unfunded liability: $4,014,000. 

Local governments: Santa Clara County, Calif.; 
Liability: $1,432,241; 
Value of assets: $0; 
Unfunded liability: $1,432,241. 

Local governments: Suffolk County, N.Y.; 
Liability: $4,292,950; 
Value of assets: $0; 
Unfunded liability: $4,292,950. 

Local governments: Washington, D.C.; 
Liability: $745,200; 
Value of assets: $219,700; 
Unfunded liability: $525,500. 

Local governments: Wayne County, Mich.; 
Liability: $885,057; 
Value of assets: $0; 
Unfunded liability: $885,057. 

Local governments: Westchester County, N.Y.; 
Liability: $1,334,800; 
Value of assets: $0; 
Unfunded liability: $1,334,800. 

Local governments: Total[G]; 
Liability: $136,588,409; 
Value of assets: $7,149,065; 
Unfunded liability: $129,474,631. 

Source: GAO calculations based on data reported in local governments' 
CAFRs. 

[A] Detroit's fiscal year 2007 CAFR indicates that the city will 
implement GASB Statement 45 in its fiscal year 2008 CAFR, which was not 
yet available as of June 30, 2009. 

[B] Our review of the government's CAFR indicated that there is or may 
be OPEB information for at least one plan reported outside the CAFR. 

[C] Maricopa County's CAFR indicates that the OPEB data reported for 
one plan represent data for the entire plan group and includes all 
participating jurisdictions because only one actuarial report is 
completed for the plan group. The liability, assets, and unfunded 
liability data are shown here as they were reported in the CAFR. 

[D] Phoenix's CAFR reported one entity with a funded ratio of 123 
percent. The unfunded liability shown above does not include the 
"overfunded" unfunded liability for that entity because doing so could 
understate the unfunded liability of the remaining entities, which is 
why the total unfunded liability is about $13.7 million more than 
liability minus assets. 

[E] San Antonio's CAFR reported one entity with a funded ratio of 153 
percent. The unfunded liability shown above does not include the 
"overfunded" unfunded liability for that entity because doing so could 
understate the unfunded liability of the remaining entities, which is 
why the total unfunded liability is about $16.6 million more than 
liability minus assets. 

[F] San Francisco's CAFR reports unfunded liability for three entities 
but liability and assets for one, so the unfunded liability shown above 
is about $14 million more than the liability minus assets. 

[G] The total unfunded liability reported here does not equal the 
liability minus assets, for the reasons discussed in the previous table 
notes and also because of rounding. 

[End of table] 

[End of section] 

Appendix IV: State and Local Governments' CAFR Internet Addresses: 

In conducting our review of the most recent CAFRs for the states and 39 
local governments, we obtained the reports from the government's public 
Web sites, as shown, with hyperlinks in table 5. As of August 2009 the 
Internet addresses were current. However, as Internet sites change the 
Internet addresses may also change. 

Table 5: State and Local Governments' CAFR Internet Addresses and 
Hyperlinks: 

State governments: 

Alabama; [hyperlink: [hyperlink: 
http://comptroller.alabama.gov/pages/cafr.aspx]. 

Alaska; [hyperlink: 
http://fin.admin.state.ak.us/dof/financial_reports/cafr_toc.jsp]. 

Arizona; [hyperlink: http://www.gao.az.gov/financials/default.asp]. 

Arkansas; [hyperlink: 
http://www.arkansas.gov/dfa/accounting/documents/cafr2008.pdf]. 

California; [hyperlink: http://www.sco.ca.gov/ard_state_cafr.html]. 

Colorado; [hyperlink: 
http://www.colorado.gov/dpa/dfp/sco/cafr/cafr.htm]. 

Connecticut; [hyperlink: http://www.osc.state.ct.us/reports/]. 

Delaware; [hyperlink: 
http://accounting.delaware.gov/cafrdefault.shtml]. 

Florida; [hyperlink: 
http://www.myfloridacfo.com/aadir/statewide_financial_reporting/cafr.htm
]. 

Georgia; [hyperlink: 
https://www.audits.state.ga.us/sgd/cafr_main.html]. 

Hawaii; [hyperlink: http://hawaii.gov/dags/accounting-
division/Annual%20Financial%20Report]. 

Idaho; [hyperlink: 
http://www.sco.idaho.gov/web/DSADoc.nsf/financial_reports]. 

Illinois; [hyperlink: http://www.ioc.state.il.us/library/cr.cfm]. 

Indiana; [hyperlink: http://www.in.gov/auditor/2370.htm]. 

Iowa; [hyperlink: 
http://das.sae.iowa.gov/financial_reports/index.html]. 

Kansas; [hyperlink: http://www.da.ks.gov/ar/finrept/]. 

Kentucky; [hyperlink: 
http://finance.ky.gov/ourcabinet/caboff/ooc/ofm/debt/cafr.htm]. 

Louisiana; [hyperlink: http://doa.louisiana.gov/OSRAP/CAFR-2.htm]. 

Maine; [hyperlink: http://www.maine.gov/osc/finanrept/cafr.htm]. 

Maryland; [hyperlink: 
http://www.marylandtaxes.com/finances/revenue/cafr.asp]. 

Massachusetts; [hyperlink: 
http://www.mass.gov/?pageID=oscterminal&L=3&L0=Home&L1=Publications+and+
Reports&L2=Financial+Reports&sid=Aosc&b=terminalcontent&f=reports_audits
_rpt_cafr&csid=Aosc]. 

Michigan; [hyperlink: http://www.michigan.gov/budget/0,1607,7-157-
13406_13419---,00.html]. 

Minnesota; [hyperlink: http://www.finance.state.mn.us/fin/acct]. 

Mississippi; [hyperlink: 
http://www.dfa.state.ms.us/offices/ofm/bfr.htm]. 

Missouri; [hyperlink: http://oa.mo.gov/acct/cafr.htm]. 

Montana; [hyperlink: http://accounting.mt.gov/cafr/default.mcpx]. 

Nebraska; [hyperlink: 
http://www.das.state.ne.us/accounting/cafr/cafrcon.htm]. 

Nevada; [hyperlink: http://controller.nv.gov/CAFR_Download_Page.htm]. 

New Hampshire; [hyperlink: 
http://admin.state.nh.us/accounting/reports.asp#PAFR]. 

New Jersey; [hyperlink: 
http://www.state.nj.us/treasury/omb/publications/08budget/index.shtml#ca
fr]. 

New Mexico; [hyperlink: 
http://www.dfafcd.state.nm.us/html/indexcafr.html]. 

New York; [hyperlink: http://www.osc.state.ny.us/finance/]. 

North Carolina; [hyperlink: http://www.osc.nc.gov/financial/]. 

North Dakota; [hyperlink: http://www.nd.gov/fiscal/cafr/]. 

Ohio; [hyperlink: 
http://obm.ohio.gov/SectionPages/FinancialReporting/]. 

Oklahoma; [hyperlink: 
http://www.ok.gov/OSF/Comptroller/Financial_Reporting.html]. 

Oregon; [hyperlink: 
http://www.oregon.gov/DAS/SCD/SARS/publications.shtml]. 

Pennsylvania; [hyperlink: 
http://www.budget.state.pa.us/portal/server.pt/community/financial_repor
ts/4574]. 

Rhode Island; [hyperlink: 
http://controller.admin.ri.gov/Financial%20Reports/index.php]. 

South Carolina; [hyperlink: 
http://cg.sc.gov/publications/currentcafr.htm]. 

South Dakota; [hyperlink: http://www.state.sd.us/BFM/cafr.htm]. 

Tennessee; [hyperlink: http://tennessee.gov/finance/act/cafr.html]. 

Texas; [hyperlink: https://fmx.cpa.state.tx.us/fm/pubs/cafr/index.php]. 

Utah; [hyperlink: http://finance.utah.gov/reporting/cafr.html]. 

Vermont; [hyperlink: 
http://finance.vermont.gov/reports_and_publications/cafr]. 

Virginia; [hyperlink: 
http://www.doa.virginia.gov/Financial_Reporting/CAFR/CAFR_Main.cfm]. 

Washington; [hyperlink: http://www.ofm.wa.gov/cafr/]. 

West Virginia; [hyperlink: 
http://www.wvfinance.state.wv.us/cafrgap.htm]. 

Wisconsin; [hyperlink: 
http://www.doa.state.wi.us/subcategory.asp?linksubcatid=374&linkcatid=22
5&linkid=69&locid=3]. 

Wyoming; [hyperlink: http://sao.state.wy.us/saopubs.htm]. 

Local governments: 

Alameda County, Calif.; [hyperlink: 
http://www.acgov.org/auditor/cafr.htm]. 

Baltimore, Md. (City); [hyperlink: 
http://www.baltimorecity.gov/government/finance/docs.php]. 

Baltimore County, Md.; [hyperlink: 
http://www.baltimorecountymd.gov/Agencies/budfin/finance/accounting/inde
x.html]. 

Boston, Mass.; [hyperlink: 
http://www.cityofboston.gov/auditing/cafr.asp]. 

Chicago, Ill.; [hyperlink: 
http://egov.cityofchicago.org/webportal/COCWebPortal/COC_EDITORIAL/CAFR2
007.pdf]. 

Clark County, Nev.; [hyperlink: 
http://www.accessclarkcounty.com/depts/comptroller/pages/cafr.aspx]. 

Cook County, Ill.; [hyperlink: 
http://www.cookcountygov.com/ccgovinternet/Portlets/ExistingWebApp/Frame
set_Page.html?http://www.cookcountygov.com/bof4]. 

Denver, Colo.; [hyperlink: 
http://www.denvergov.org/controller/comprehensiveannualfinancialreportca
rd/tabid/430463/default.aspx]. 

Detroit, Mich.; [hyperlink: 
http://www.ci.detroit.mi.us/departments/finance/tabid/86/default.aspx]. 

Harris County, Tex.; [hyperlink: 
http://www.co.harris.tx.us/auditor/statements_reports.aspx]. 

Houston, Tex.; [hyperlink: 
http://www.houstontx.gov/controller/cafr.html]. 

Indianapolis, Ind.; [hyperlink: 
http://www.indy.gov/egov/city/controller/pages/home.aspx]. 

Jacksonville, Fla.; [hyperlink: 
http://www.coj.net/departments/finance/accounting/cafr.htm]. 

Fairfax County, Va.; [hyperlink: 
http://www.fairfaxcounty.gov/finance/cafr.htm]. 

Los Angeles, Calif.; [hyperlink: 
http://www.lacity.org/ctr/financial_reports.htm]. 

Los Angeles County, Calif.; [hyperlink: 
http://file.lacounty.gov/lac/cms1_115472.pdf]. 

Maricopa County, Ariz.; [hyperlink: 
http://www.maricopa.gov/finance/cafr.aspx]. 

Memphis, Tenn.; [hyperlink: 
http://www.cityofmemphis.org/framework.aspx?page=20]. 

Miami-Dade County, Fla.; [hyperlink: 
http://www.miamidade.gov/finance/annual_reports.asp]. 

Montgomery County, Md.; [hyperlink: 
http://www.montgomerycountymd.gov/mcgtmpl.asp?url=/content/finance/finan
cial.asp#2008]. 

Nashville-Davidson County, Tenn.; [hyperlink: 
http://www.nashville.gov/finance/operations/cafr2008.asp]. 

Nassau County, N.Y.; [hyperlink: 
http://www.nassaucountyny.gov/agencies/comptroller/specialreports.html].
 

New York City, N.Y.; [hyperlink: 
http://www.comptroller.nyc.gov/bureaus/acc/cafr2007_ins.shtm]. 

Orange County, Calif.; [hyperlink: http://www.ac.ocgov.com/finrpt.asp]. 

Philadelphia, Pa.; [hyperlink: http://www.phila.gov/finance/cafr.html]. 

Phoenix, Ariz.; [hyperlink: 
http://phoenix.gov/menu/cityfinfinance.html]. 

Prince George's County, Md.; [hyperlink: 
http://www.princegeorgescountymd.gov/Government/AgencyIndex/Finance/acco
unting.asp]. 

Riverside County, Calif.; [hyperlink: 
http://www.auditorcontroller.org/opencms/topics_interest/CAFR.html]. 

Sacramento County, Calif.; [hyperlink: 
http://www.budget.saccounty.net/cafr/default.htm]. 

San Antonio, Tex.; [hyperlink: 
http://www.sanantonio.gov/ir/cafr%20stmts.htm]. 

San Bernardino County, Calif.; [hyperlink: 
http://www.sbcounty.gov/acr/pdf_download.htm#CAFR]. 

San Diego, Calif.; [hyperlink: 
http://www.sandiego.gov/comptroller/reports/index.shtml]. 

San Diego County, Calif.; [hyperlink: 
http://www.sdcounty.ca.gov/auditor/cafr.html]. 

San Francisco, Calif.; (city and county); [hyperlink: 
http://www.sfgov.org/site/controller_page.asp?id=1824]. 

Santa Clara County, Calif.; [hyperlink: 
http://www.scctax.org/portal/site/fin/agencychp?path=%2Fv7%2FFinance%20A
gency%20%28AGY%29%2FController-Treasurer%20Department%2FCAFR%20Report]. 

Suffolk County, N.Y.; [hyperlink: 
http://www.co.suffolk.ny.us/home/departments/comptroller/financial%20rep
orts.aspx]. 

Washington, D.C.; [hyperlink: 
http://cfo.dc.gov/cfo/cwp/view,a,1322,q,590082,cfoNav,%7C33210%7C.asp]. 

Wayne County, Mich.; [hyperlink: 
http://www.waynecounty.com/mygovt/mb/financial_statements.aspx]. 

Westchester County, N.Y.; [hyperlink: 
http://westchestergov.com/finance/]. 

Source: GAO review of public Web sites. 

[End of table] 

[End of section] 

Appendix V: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

John E. Dicken, (202) 512-7114 or dickenj@gao.gov: 

Barbara D. Bovbjerg, (202) 512-7215 or bovbjergb@gao.gov: 

Staff Acknowledgments: 

In addition to the contacts named above, Tamara Cross, Assistant 
Director; Kristi Peterson, Assistant Director; Joseph Applebaum; George 
Bogart; Robert Dacey; Krister Friday; Kenrick Isaac; Angela Jacobs; 
Sarah Prendergast; Michelle Rosenberg; Max Sawicky; and Jacqueline 
Stewart made key contributions to this report. 

[End of section] 

Footnotes: 

[1] For example, see Governmental Accounting Standards Board, "Other 
Postemployment Benefits: A Plain-Language Summary of GASB Statements 
No. 43 and No. 45," and Elizabeth K. Keating and Eric S. Berman, 
"Unfunded Public Employee Health Care Benefits and GASB No. 45," 
Accounting Horizons, vol. 21, no. 3 (2007): 245-263. 

[2] OPEB include benefits such as health insurance, life insurance, and 
legal services. There are separate accounting standards for pension 
benefits. 

[3] While compliance with the standards is necessary for governments to 
receive an unqualified, or "clean," audit opinion under generally 
accepted accounting principles, the standards are not federal laws or 
regulations. 

[4] For example, see The Pew Center on the States, "Promises with a 
Price: Public Sector Retirement Benefits," and David Zion and Amit 
Varshney, You Dropped a Bomb on Me, GASB (Credit Suisse, March 2007). 

[5] The standard required implementation by the largest governments-- 
defined as those with total annual revenues of $100 million or more in 
the first fiscal year ending after June 15, 1999--for periods beginning 
after December 15, 2006. For the largest governments with fiscal years 
beginning in July, the month when most states begin their fiscal year, 
the standard applied for their fiscal year 2008 financial statements. 
Governments with total annual revenues of less than $100 million have 
an additional year or two, depending on their total annual revenues, 
before they are required to begin reporting OPEB liabilities. 

[6] The selected governments include four states--Alaska, Nevada, New 
Jersey, and South Carolina--and six local governments, including three 
cities--Gainesville, Florida; New York City, New York; and Thousand 
Oaks, California--and three counties--Montgomery County, Maryland; 
Harris County, Texas; and Oakland County, Michigan. 

[7] When selecting the governments, we also considered available 
information about the existence of collective bargaining among public 
employees, a factor that individuals told us could affect a 
government's management of its retiree health liability. 

[8] Dennis M. Daley and Jerrell D. Coggburn, Retiree Health Care in the 
American States (Washington, D.C.: Center for State and Local 
Government Excellence, 2008). 

[9] For each state, the survey was sent to five officials potentially 
knowledgeable about retiree health care in their state. In cases where 
multiple officials from a state responded to the survey, their 
responses were averaged, and then rounded to the nearest whole number, 
to determine an overall state response. As such, we determined that the 
data were not precise enough for us to report the number of states with 
a particular response. 

[10] GAO, State and Local Governments: Growing Fiscal Challenges Will 
Emerge during the Next 10 Years, [hyperlink, 
http://www.gao.gov/products/GAO-08-317] (Washington, D.C.: January 
2008). 

[11] GAO, Update of State and Local Government Fiscal Pressures, 
[hyperlink, http://www.gao.gov/products/GAO-09-320R] (Washington, D.C.: 
Jan. 26, 2009). 

[12] GAO, State and Local Government Retiree Benefits: Current Status 
of Benefit Structures, Protections, and Fiscal Outlook for Funding 
Future Costs, [hyperlink, http://www.gao.gov/products/GAO-07-1156] 
(Washington, D.C.: Sept. 24, 2007). 

[13] Changing the benefits offered will likely result in changes to an 
actuary's estimates of the amount that will be needed to pay for future 
benefits. 

[14] The actuarial value of assets is not necessarily the same as the 
current market value of those assets. Rather, it is typically an 
average of the market value of the assets over a period of 3 to 5 
years. 

[15] A discount rate (also called the investment return assumption) is 
the rate used to adjust a series of future payments to reflect the time 
value of money. 

[16] A government's bond rating affects its cost of borrowing money by 
affecting the interest rate it must pay to lenders. 

[17] GASB established minimum requirements for what is considered a 
trust or similar arrangement. Among the requirements are that the 
assets in the trust must be dedicated to benefits for retirees and 
their beneficiaries, cannot be recovered by the government, and must be 
sheltered from claims of creditors of the government. 

[18] State and local government employee pension benefits are often 
defined in state statutes or constitutions and local ordinances or 
charters and, in that sense, are protected from change. Retiree health 
benefits for those employees, however, may not have the same degree of 
protection. To the extent retiree health benefits receive legal 
protection, it is generally because they are defined in labor contracts 
negotiated subject to collective bargaining. 

[19] To determine this total, we reviewed the most recent 
governmentwide CAFRs as of June 30, 2009, for 50 states and the 39 
largest local governments. Of the 89 CAFRs reviewed, 7 were for fiscal 
year 2007 and the rest were for fiscal year 2008. 

[20] GAO, State and Local Government Retiree Benefits: Current Funded 
Status of Pension and Health Benefits, [hyperlink, 
http://www.gao.gov/products/GAO-08-223] (Washington, D.C.: Jan. 29, 
2008). A study issued more recently than those cited in that report 
puts the states' total unfunded OPEB liability at $440 billion. Like 
our total, that study did not estimate the unfunded OPEB liabilities 
for the universe of local governments. Robert L. Clark, Melinda Sandler 
Morrill, Health Plans for Retired State Employees: Is There a Funding 
Crisis?, (July 2009). 

[21] Various actuarial approaches are allowed under GASB and are 
commonly used among governments. OPEB valuations require long-term 
projections and are estimates based on assumptions that vary among 
state and local government entities. Actuarial estimates are sensitive 
to these assumptions. For example, changing the health care inflation 
rate assumption by a small amount can significantly change the 
resulting estimate of liability. 

[22] In the absence of assets set aside for OPEB liabilities, most 
state and local governments are paying for benefits for retired workers 
in a given year as they do for those of their active workers--from 
their current revenues. State and local governments have generally 
managed retiree health benefits together with active employee benefits. 
[hyperlink, http://www.gao.gov/products/GAO-07-1156]. 

[23] Governments typically report OPEB data for separate plans (e.g., 
plans for university employees, public safety workers, and judges). 
CAFRs for three states--Nebraska, Nevada, and West Virginia--did not 
include data about OPEB liabilities and assets. Additionally, three 
local government CAFRs did not include data about OPEB. They were for 
San Bernardino County, California; San Diego County, California; and 
Cook County, Illinois. Therefore, we do not know if these six 
governments have set aside assets for OPEB. However, under GASB 
standards there is no reporting requirement when a government's OPEB 
liability is not material or nonexistent. 

[24] The assets set aside may be for prefunding OPEB liabilities other 
than those associated with retiree health benefits. 

[25] The percentage of the OPEB liability funded--called the funded 
ratio--varied across government entities. Among the minority of 
government entities with assets set aside, about 38 percent had a 
funded ratio of less than 10 percent, while 30 percent had a funded 
ratio of 50 percent or more. There was also variation in the funded 
ratio across the entities reported in individual governments' CAFRs. 
For example, among the six entities reported in Kentucky's CAFR, the 
funded ratios reported ranged from 4 percent to 106 percent. 

[26] The 39 local governments we selected were the largest based on 
Total Revenue, as reported by the most recent U.S. Census Bureau data. 
See U.S. Census Bureau, 2002 Census of Governments, vol. 4, no. 3, 
Finances of County Governments: 2002 GC02(4)-3, U.S. Government 
Printing Office (Washington, D.C., 2002); and U.S. Census Bureau, 2002 
Census of Governments, vol. 4, no. 4, Finances of Municipal and 
Township Governments: 2002 GC02(4)-4, U.S. Government Printing Office 
(Washington, D.C., 2002). 

[27] GASB Statement 45 indicates that employers (e.g., governments) 
that participate in cost-sharing multiple-employer plans that meet 
certain requirements are not required to report the unfunded OPEB 
liability for such plans in their financial statements. Employers are 
required to disclose whether such an OPEB plan issues a stand-alone 
financial report or is included in the report of a public employee 
retirement system or another entity, and, if so, how to obtain the 
report. If the cost-sharing plan in which an employer participates does 
not issue and make publicly available a stand-alone plan financial 
report prepared in accordance with the requirements of GASB Statement 
43, and the plan is not included in the financial report of a public 
employee retirement system or another entity, the cost-sharing employer 
should present certain information as required supplementary 
information in its own financial report. In addition, discrete 
component entities may have unfunded OPEB liabilities, which are not 
included in our total if they are not reported in the CAFR. Discrete 
component entities are related to the government entity, but are not 
part of the government entity, and the governmentwide CAFRs report only 
limited detailed information on them. 

[28] Of the 89 CAFRs reviewed, 7 were fiscal year 2007 CAFRs, and the 
rest were fiscal year 2008 CAFRs. OPEB valuations are estimates based 
on assumptions that vary among state and local government entities. Any 
adjustment to the assumptions used can have a large effect on the size 
of the unfunded OPEB liability, even holding the benefit plan and 
employee population constant. A discount rate (also called the 
investment return assumption) is the rate used to adjust a series of 
future payments to reflect the time value of money. The discount rate 
is applied whether there are assets or not. 

[29] These assumptions vary among state and local governments and even 
the different reporting entities within a government. A health care 
cost trend rate is the rate of change in per capita health claims costs 
over time as a result of factors such as medical inflation, utilization 
of health care services, plan design, and technological developments. 

[30] Richard C. Kearney, Robert L. Clark, Jerrell D. Coggburn, Dennis 
M. Daley, and Christina Robinson, At a Crossroads: the Financing and 
Future of Health Benefits for State and Local Government Retirees, a 
report prepared for the Center for State and Local Government 
Excellence, July 2009. Discount rates for OPEB are based, in part, on 
the amount of assets set aside for OPEB, which may explain some of the 
variation in rates used. 

[31] We did not review the reasonableness of the assumptions state and 
local governments used in calculating their liabilities. 

[32] Kearney et al., At a Crossroads. The health care inflation rate 
for 2002 to 2005 was cited in this report as reported by The Kaiser 
Family Foundation/Hewitt Associates 2005 Retiree Health Benefits 
Survey. Some governments use a combination health care inflation rate, 
which drops from a higher rate in the first few years of the valuation 
to a lower long-term rate. 

[33] The assets set aside may be for prefunding OPEB liabilities other 
than those associated with retiree health benefits. 

[34] See Daley and Coggburn, Retiree Health Care in the American 
States. 

[35] According to an article by a manager at the Government Finance 
Officers Association, section 115 trusts do not have limits or 
restrictions on eligibility, funding, or benefits. In contrast, both 
401(h) subaccounts and VEBAs have funding limits, and VEBAs have 
membership requirements. See John Ruggini, "In an OPEB Trust We Trust?" 
Government Finance Review, vol. 24, no. 1 (2008): 34-40. 

[36] Among the governments we selected, only local governments reported 
borrowing money to fund their retiree health liability. 

[37] See Daley and Coggburn, Retiree Health Care in the American 
States. This report also indicates that few states reported being 
likely to finance their liability by borrowing funds from the state 
pension fund, raising revenue through higher taxes, or using funds 
generated through cuts to other state programs. 

[38] The limited number of governments financing their liabilities 
through the issuance of bonds or similar arrangements may be due, at 
least in part, to the risks associated with such a funding stream. 
According to the literature, such arrangements are only effective if 
the funds collected can be invested and earn a higher rate of return 
than the interest payments required for paying back the loan. 

[39] The government had originally planed to phase in to fully funding 
its ARC over a 5-year period. However, because of the government's 
fiscal situation it shifted to an 8-year phase-in period. 

[40] See Daley and Coggburn, Retiree Health Care in the American 
States. 

[41] See Daley and Coggburn, Retiree Health Care in the American 
States. 

[42] Officials explained that the closing of its defined benefit plan 
actually increased the county's ARC in the short term, as it required 
some changes in actuarial assumptions. 

[43] Our calculations are based on data from the National Income and 
Product Accounts (NIPA). The NIPA, published by the Department of 
Commerce's Bureau of Economic Analysis, is a set of economic accounts 
that provides the framework for presenting detailed measures of U.S. 
output and income. Inflation adjustments are based on the expenditure 
deflator for state and local government expenditures. 

[44] Our model provides projections of the aggregate operating budget 
balance for all state and local governments combined. The operating 
budget balance is the excess of spending over revenues, where the 
spending is limited to paying for the routine functions of governments. 
It excludes capital expenditures for public investment, since such 
spending fluctuates from year to year and is often financed with 
borrowing and paid for in subsequent years. Also, a government can 
defer capital expenditures more easily than operating expenditures. 

[45] Our model projects growth in state and local revenues from the 
present level of $1.8 trillion to $11.3 trillion in 2050. Gross 
domestic product (GDP) in 2050 is projected at $77.2 trillion. State 
and local revenues tend to grow in step with GDP, which is a proxy for 
the country's ability to finance spending. GDP is projected to grow at 
an annual rate of 4.1 percent from 2008 to 2050, while revenues grow at 
4.5 percent annually. Spending is projected to grow more rapidly than 
revenues, at 5.1 percent annually. 

[46] Even an annual growth rate in health-related spending of a few 
percentage points in excess of projected growth in revenues contributes 
to large operating budget imbalances in the long run. 

[47] Medicaid is a joint federal-state program that finances health 
care for certain low-income individuals. 

[48] The fiscal pressure indicated by our model's results could be even 
greater if our estimates for the growth of health-related spending 
prove to be understated. 

[49] The calculations incorporate a long-run inflation rate of 1.9 
percent as measured by the GDP price index. For more information on how 
the model projects the cost of retiree health benefits, see appendix 
II. 

[50] CAFRs are typically audited. 

[51] We reviewed fiscal year 2007 CAFRs for Illinois and Ohio. 

[52] We reviewed fiscal year 2007 CAFRs for Indianapolis, Indiana; 
Westchester County, New York; Chicago, Illinois; Cook County, Illinois; 
and Detroit, Michigan. 

[53] U.S. Census Bureau, 2002 Census of Governments, vol. 4, no. 3, and 
U.S. Census Bureau, 2002 Census of Governments, vol. 4, no. 4. 

[54] As stated earlier, governmentwide CAFRs typically report OPEB data 
for separate plans. However, we report only aggregate state data, 
except for the funded ratio data for individual plans reported by two 
state CAFRs and two local government CAFRs, which we include in order 
to provide illustrative examples. Otherwise, we do not report OPEB data 
for individual plans. 

[55] For an actuarial valuation, an actuary estimates the amount (in 
current dollars) as of the valuation date that will be needed to pay 
for future benefits. 

[56] [hyperlink, http://www.gao.gov/products/GAO-08-317]. 

[57] See The 2007 Annual Report of the Board of Trustees of the Federal 
Old-Age and Survivors Insurance and Disability Insurance Trust Funds 
(Washington, D.C., May 1, 2007), table A2. 

[58] This assumption implies that if there were no growth in the 
productivity of state and local workers, the output of services per 
person served would remain the same. As such, any increased growth in 
services provided per citizen depends on the degree to which 
productivity in public sector services advances. 

[59] The Hodrick-Prescott filter is an algorithm for choosing smoothed 
values for a time series. 

[60] The Excel Solver function was used to find the weights that 
minimized the sum of the squared residuals between actual and fitted 
beneficiaries. 

[61] Implicitly, we assume that the medical coverage continues to pay 
about the same percentage of medical costs for employees and retirees 
that it currently does. 

[62] Because our state and local government retiree health care cost 
estimates are based on data that did not incorporate possible savings 
attributable to the Medicare Part D drug subsidy that began in 2006, 
the estimates may overstate retiree health care costs slightly. 

[63] Of the 89 CAFRs reviewed, 7 were fiscal year 2007 CAFRs, and the 
rest were fiscal year 2008 CAFRs. 

[64] There was one exception. In the few cases where a CAFR reported an 
entity with a funded ratio of more than 100 percent, we did not include 
the "overfunded" unfunded liability in the government's aggregate 
unfunded liability because to do so could understate the aggregate 
unfunded liability of the remaining entities. We did not adjust the 
aggregate liabilities or assets in those cases. In those cases, the 
unfunded liability is more than the liability minus assets, as noted in 
each case. Also, for some governments, the aggregate unfunded OPEB 
liability does not equal the aggregate of the liabilities minus assets, 
because of the data that were reported in the CAFR. 

[End of section] 

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