West Virginia’s Senate moved Wednesday to tackle one of the state’s biggest funding shortfalls, a $5 billion liability stemming from public retiree health care costs, unanimously passing a proposal from Gov. Earl Ray Tomblin.

The measure sent to the House of Delegates would dedicate $35 million annually toward these other post-employment benefits, also known as OPEB, until the funding gap is closed in 2037.

The legislation also would make permanent the decision by the Public Employees Insurance Agency to stop subsidizing retiree premiums starting with employees hired after June 2010. But the bill stops short of taking that step with the more recent vote by the agency’s finance board to limit the annual growth of those subsidy payments.

That December vote cut the projected OPEB liability in half, from $10 billion. The agency’s two decisions together are expected to resolve OPEB liability in about 40 years. Tomblin’s bill would allow the state to cure the shortfall sooner.

“This is monumental,” Sen. Herb Snyder, D-Jefferson, told colleagues before Wednesday’s vote.

In a major victory for county school boards, the bill would no longer require them to account for these costs that come from teachers and other personnel who are paid through the state’s share of school funding. An estimated 90 percent of their OPEB costs reflect school aid formula employees.

“That will be also retroactive, so that will pull all those old debts off the county boards of education,” agency Director Ted Cheatham told the House Pensions and Retirement Committee on Wednesday

This provision would change a 2006 law that requires all public employers, including county schools, to pay toward their retiree health obligations annually. Amounts left unpaid end up on their books as debt. Fearing the impact on financing bonds and classroom funding, most of the 55 county school boards sued without success to challenge this law.

“Anything that’s not in the school aid formula, they’ll still be responsible for and still be billed for,” Cheatham told the House committee, during a discussion of the Senate legislation.

Delegate Walter Duke, R-Berkeley and a retired educator, said that at least 14 county school systems have diverted funds from classrooms into special accounts because of the OPEB accounting law. Cheatham said those counties can restore those funds to their schools or tap them to cover costs from personnel not paid with state dollars.

“I just want to make sure and clarify that the state wasn’t going to claw back that money,” Duke said.

The $35 million would come from personal income tax revenues starting in 2016, once the state pays off a debt from the shuttered workers’ compensation system. Cheatham said $5 million of that would fund a new reserve account to handle costs from the post-June 2010 hires.

By gradually erasing the OPEB liability, the state is following the same path that is resolving a $4.3 billion shortfall in the main fund for teacher pensions. By budgeting general revenue funds toward it annually, the state remains on track to close that gap in 2034. At least one Wall Street agency has praised West Virginia’s efforts to tackle its pension debts when upgrading the state’s credit rating. State leaders hope the steps taken to address OPEB yield similar results.

A 2004 national accounting standard called on government employers to begin calculating the gap between on-hand assets and non-pension benefits promised to workers once they retire. These costs mostly reflect health coverage, and can also include life insurance.

State and local governments that offer these benefits had been handling their costs on a pay-as-you-go basis. Many continue do so in the wake of the accounting standard. West Virginia decided to go above and beyond the standard with the 2006 law. Besides billing public employers, it also created a special trust fund for these annual required contributions. That trust fund will have around $500 million by the June 30 end of the current budget year, Cheatham said.

“We’re in the forefront of dealing with this massive liability,” Snyder said while urging Senate passed Wednesday.

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