The Long-Term Cost of Short-Term Thinking: Why Prefunding OPEB Liabilities Matters

By: Blake Orth and Shana Neeson, Gabriel, Roeder, Smith & Company (GRS)

Although Other Post-Employment Benefits (OPEB) are often financed on a Pay-As-You-Go (PayGo)
basis, an increasing number of public plan sponsors are choosing to prefund these obligations with
dedicated trusts, similar to pensions. This article compares the two approaches and examines their
long-term effects on employer costs and liabilities.

This is an excerpt from NCPERS Fall 2025 issue of PERSist.

As public pension systems gradually strengthen their funded status, some plan sponsors are beginning to focus more on another major challenge: Other Post-Employment Benefits (OPEB), primarily retiree healthcare. The decision about whether to finance benefit obligations with a Pay-As-You-Go (PayGo) approach, or to prefund with a dedicated trust, can directly impact long-term costs, liabilities, and financial sustainability. 

“The Long-Term Cost of Short-Term Thinking” explores the characteristics and trade-offs of PayGo versus prefunding through a practical lens, and includes a detailed case study of a mid-sized local government. In addition, an evaluation of how prefunding can reduce liabilities immediately and alleviate long-term costs is presented. The consideration of certain situations where PayGo may be more appropriate is discussed as well.

Click here to read the full article on the GRS website.

Bios: Blake Orth, Consultant, and Shana Neeson, Senior Consultant, support public sector plan sponsors at GRS with valuation reporting, liability and cost analysis, and studies on prefunding and plan design.