They may not get the same attention as public pensions, but retiree healthcare obligations are a “material” liability for many U.S. state and local governments, according to a report published Thursday, and represent the single largest liability for one in 10 of them.

The report, from Moody’s Investors Service, estimates unfunded “other post-employment benefits,” or OPEB, which mostly refers to health care, at roughly $1 trillion, and likely to top $1.2 trillion for the fiscal year ended June 30, 2021. That’s less than $3.2 trillion of bonds outstanding for state and local governments and well below $4.3 trillion for pension liabilities, Moody’s analysts note, but it’s still concerning.

That’s in large part because of the way OPEB liabilities are managed. Unlike pension funds which are invested, OPEB liabilities aren’t offset by assets that benefit from strong market returns.

See: U.S. public sector pension funding improved during the pandemic year

More immediately, some success in containing healthcare premium costs has been a positive for governments, but recent budget challenges have led many governments to hold off on pre-funding OPEB liabilities.

What’s more, OPEBs are the biggest long-term liability for some governments, such as the state of Delaware, Moody’s notes, at more than $7.3 billion as of June 30, 2020, and Nassau County, New York, at $5.8 billion as of December 31, 2020.

Among local-government bond issuers rated by Moody’s, many of the biggest unfunded OPEB liabilities are in Michigan or New York, which prohibits its school districts from pre-funding the liabilities. For the fiscal year ending June 30, 2020, for example, New York’s Schuylerville Central School District spent nearly 25% of its operating revenue on OPEBs, “all of which directly funded retiree benefits, as opposed to pre-funding of benefits payable to retirees in future years,” the Moody’s analysts wrote.

To be sure, overall levels of OPEB pre-funding remain low. Among local governments that do any pre-funding, the report says, about two-thirds have funding ratios of less than 10%.

See: These public pension systems used to have too much money. Now they’re in crisis. What happened?

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