Recently, GRS published a GRS Perspectives article on “The Long-Term Cost of Short-Term Thinking: Why Prefunding OPEB Liabilities Matters.” Written by Blake Orth and Shana Neeson from GRS, this article offers governmental plan sponsors with a framework to assess financing options for their Other Post-Employment Benefits (OPEB), mainly retiree healthcare benefits. It compares the characteristics and trade-offs of two different approaches for employers to finance their OPEB programs through either: 1) Pay-As-You-Go (PayGo); or 2) prefunding through a dedicated trust.

The article is intended to increase awareness about the advantages of prefunding OPEB benefits while also balancing current budget priorities with long-term fiscal sustainability. It explores the projected financial impacts of prefunding and provides a detailed case study of a mid-sized local government. The article also shows how prefunding can reduce liabilities immediately and help to alleviate long-term costs. In addition, it presents various circumstances when prefunding benefits may not be optimal.

According to the authors, “Choosing between PayGo and prefunding involves balancing immediate budget realities against securing future financial stability. Although prefunding requires upfront investment costs, it yields significant benefits including: 1) easing long-term taxpayer costs; 2) reducing balance sheet liabilities; and 3) enhancing financial health and governance. Financial decision makers, who are entrusted with protecting the financial interests for many stakeholders, should carefully evaluate prefunding as a proactive measure to responsibly manage growing retiree healthcare obligations and ensure fiscal health for future generations.”

This article is available here.