Last week, the Los Angeles Unified School District kicked off a week of budget negotiations by introducing a “fiscal stabilization plan” for a variety of vague-sounding budget cuts the district would commit to making over the next three years. The problem at hand, according to the district, was that by the end of the 2027-28 school year LAUSD would be forced to spend $1.5 billion with money it would not have.  

What the district failed to mention in that opening discussion, however, was that $1.1 billion of that $1.5 billion was the result of completely optional (and unprecedented in size) contribution into the “Retiree Health Benefits Fund”—an irrevocable trust where the district can park money, invest it, and possibly one day pay for retiree health benefits (often referred to as “other post-employment benefits” or OPEB). At present, LAUSD pays the entirety of its retiree health benefits on a pay-as-you-go basis from the general fund, not the trust.  Any contributions into the trust are an entirely separate expense from the actual cost of the benefits year to year. 

Manufactured Crisis 

Despite media headlines implying retirees were sacrificed to preserve social programs, any decrease in future contributions to the OPEB trust would have no effect on benefits received by retirees in this budget. It’s not benefit payments that are hurting the budget, it is these optional payments to the OPEB trust fund. The benefits are not paid out of the trust. The trust is not designed to pay the benefits; it is an investment account and reserve.   

So, while the district was claiming a structural deficit mainly because of declining enrollment,¹ over-staffing, and the expiration of COVID funds, the real driver of this paper deficit were completely optional expenses. In the fine print of the budget, the district admits that the OPEB trust (an optional cost), not the cost of benefits, is part of the “structural deficit”:

In response to this deception, eight of LAUSD’s labor unions sent a letter to the school board in advance of Tuesday’s budget vote decrying this fiscal lunacy. Meanwhile, student, labor and community organizations demanded increased funding for programs that serve black, immigrant, and LGBTQ students in our highest need schools. 

Caught in the act, Carvalho dropped the contributions to the OPEB trust down to $455 million over the three-year period—which is still $455 million too much in a time when today’s students and educators are in dire need of investment. For context, as part of the 2018-19 LAUSD budget and accompanying fiscal stabilization plan, LAUSD suspended payments to the OPEB trust for the next 5 years, only resuming them in 2023: 

At the bottom of this drama lies an insidious accounting assumption: that retiree health benefits need to be fully pre-funded. It has been used to beat up on California school districts since 2013. It’s modeled after the notorious right-wing attack on the post office which gave us the 2006 “Postal Accountability and Enhancement Act.”  

The Plot to Kill the Post Office   

The Post Office, which is older than the country itself, has been in the crosshairs of privatizers and business competition since at least the early 19^th century. The Postal Accountability and Enhancement Act (PAEA) was the culmination of this centuries long effort to dismantle one the United States’ most valuable public services. The PAEA created a budget crisis at the post office, still ongoing today, via two key policy interventions: (1) Requiring the post office to prepay its retiree health fund to cover 75 years of future retiree health benefit costs and (2) prohibiting the post office from offering any new products which could generate the revenue that might pay for this new financial obligation by virtue of the fact that it might offer the USPS an “unfair or otherwise inappropriate advantage for the Postal Service.” 

When the law passed, the postal service was expected to cover this new liability by making annual payments of $5 billion into the retiree health fund over the next decade. This payment requirement happened with the Great Recession in the background, and a subsequent fall in mail volume and revenue. The USPS made four payments worth $17.9 billion before defaulting on the rest. 

To no one’s surprise, the USPS has been operating at a loss since 2006. This has provided particularly useful rhetorical ammo to President Donald Trump who blamed the post office mishandling mail-in ballots in the 2020 presidential election and has mused on privatizing the USPS in his second administration. As described by journalist David Sirota, the contemporary republic approach to the Post Office as the “standard government version of the Goodfellas Scheme: Delibrately make life impossible for an agency while using it to enrich big campaign donors, ‘and then finally, when there’s nothing left, when you can’t borrow another buck from the bank or buy another case of booze, you bust the joint out—you light a match.” 

GASB Rule 75: No Contributions Required  

The good news is that public school districts do not have it as bad at the post office. For public sector actors like LAUSD, the whole notion of prefunding retiree health benefits mainly derives from a mid-2010s change in governmental accounting standards. Government Accounting Standards Board (GASB) Rule 75, published in 2015, requires any governmental entities which provide some form of OPEB to publish their total OPEB liability in the main body of their financial statements. GASB Rule 75 was itself an extension of GASB Rule 45, which first stated in 2004 that OPEB liability had to be calculated from when the labor that the benefits provide compensation is first received. In layman’s terms, this means that total OPEB liability was equal to the entire cost of retiree benefits if everyone currently working was to retire the next day. 

This is where the scary $8.9 billion in unfunded OPEB liabilities number that the LA Times told us was still hanging over LAUSD on Tuesday comes from. It’s a made-up accounting figure that doesn’t have anything to do with the real annual cost of retiree health benefits, just an actuarial estimation of how much benefits might cost over many years in the future. This liability figure has gone down by 33% since 2017, and yet the district just tried to increase trust contributions by 1000%. 

It is critical to understand that neither Rule 75 nor Rule 45 require public entities to make any contributions towards those liabilities or even set up separate trust funds to pay for them. All the accounting standards say is that public entities must calculate and report the liability amount, it doesn’t say they have to do anything about it.  

So why contribute anything?  

If LAUSD isn’t required by anyone to make any contributions to the OPEB trust—as the LAUSD CFO remarked at Tuesday’s budget meeting, there is no “trust police”—then why are they doing it? Moreover, why are they contributing so much as to create a budget crisis for themselves?  

One reason, which the superintendent himself spoke to on Tuesday, is to please investors and credit rating agencies. As Carvalho explained, lowering the annual contribution to the OPEB trust would possibly “invite a reaction from the financial markets that then could imperil our ability to sell judgment bonds.” With a wave of judgement payments stemming from sexual assault cases coming the district’s way, Carvalho wants to preserve the district’s ability to pay for those claims over many years by issuing bonds, a necessary solution to lessen the impact on today’s students.  

What Carvalho doesn’t seem to understand is that investors will continue to buy LAUSD bonds whether they make OPEB contributions or not. LAUSD bonds have routinely been given top or near top ratings based on the health of the district’s property tax base and its general fund reserves. The district still has a long way to go in spending down its reserves before it would be eligible for a downgrade. According to estimates in the 2025-26 budget, the district is set to end the 2024-25 school year with 33.44% of total spending held in unrestricted reserves, significantly higher than any other large district. Fitch’s downgrade threshold is 17.5%.  

It is a laudable goal, in theory, to set up an investment account that could one day pay for all retiree health benefits, thereby leaving more general fund money to spend on other things. The only districts that have been able to fully pre-fund their OPEB liabilities are the very smallest ones, representing just 7% of all CA school districts that offer other post-employment benefits. Approximately a third of districts don’t even prefund benefits at all:  

At the end of the day, it’s not OPEB liabilities that are driving the district off a fiscal cliff. Siphoning off funds into the trust is like putting a brick on the gas pedal so they can throw themselves off the cliff even faster to justify cuts. After all, credit rating agencies like cuts, particularly cuts that can be made while a couple billion dollars sit in an investment account, untouchable.  Retirees won’t see any benefit from the district spending more money in their name, their benefit payments get paid out regardless. The only people who really benefit from the district chipping away at that imaginary $8.9 billion “unfunded” liability sit in offices on Wall Street.