Is There a Funding Crisis?
Chapter 5: Explaining the Differences in Financial Status of State Retiree Health Plans
The GASB 45 actuarial statements show dramatic differences across states in the unfunded liabilities associated with retiree health plans for state employees. How can these differences be explained? While our analysis of the GASB 45 statements in Chapter 4 provided some insights into the factors that determine the financial status of these plans, this chapter focuses more directly on trying to explain why certain states have large UAALs in the tens of billions of dollars while the unfunded liabilities of many other states are much smaller.1 As discussed in Chapter 4, in general the consulting actuaries have used the same basic methodology to determine future costs of providing health insurance to retirees. For example, one important assumption is the rate of medical care inflation. While the health care inflation assumptions used in the reports are very optimistic, they are basically the same in the various reports. Thus, this important assumption does not explain differences in UAALs across the states. The analysis in Chapter 4 showed that another important assumption is the choice of a discount rate to determine the present value of the promised health insurance. Our review of the GASB 45 statements did show differences in the discount rate that explain some of the variation in state UAALs; however, most of the states base their actuarial analysis on discount rates between 4.0 and 5.0 percent. This rather narrow band used by most of the states implies that the use of different discount rates is responsible for only a small...
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