Bottom Line Up Front

• Tight municipal budgets and rising pension costs have led some towns to consider Pension Obligation Bonds (POBs) as a funding strategy.
• POBs can improve a plan’s funded status and offer temporary budget relief if investment returns exceed borrowing costs, but that outcome depends heavily on market performance and timing.
• Significant risks remain: poor investment returns, added debt, and shifting costs to future taxpayers can leave municipalities in a worse financial position than before issuance

Many towns and cities today are operating under increasing fiscal pressure. Rising costs, slow revenue growth, and competing demands on limited resources have made it harder than ever to balance municipal budgets. At the same time, long-term obligations such as pension liabilities continue to grow, placing additional strain on financial stability. In response, some municipalities have turned to Pension Obligation Bonds (POBs) as a strategy to address these challenges.

What is a Pension Obligation Bond?

A Pension Obligation Bond is a taxable bond issued by a municipal entity to help fund the unfunded portion of its pension liability. The municipality issues the bond and invests the proceeds alongside the pension plan’s existing assets, typically in higher-yielding investments.

The goal is to earn a rate of return on those invested proceeds that exceeds the interest rate owed on the bond over its term. If that occurs, the municipality can improve its pension funding status and potentially reduce its long-term costs. However, the strategy also introduces additional financial risk.

The Government Finance Officers Association (GFOA) has cautioned municipalities against using POBs in most circumstances. In its official advisory, the GFOA cites the inherent risks of market volatility, timing uncertainty, and added debt burden. While POBs can appear beneficial on paper, they often increase overall financial risk if investment returns fall short of expectations.

Why Consider Pension Obligation Bonds?

Municipalities typically explore POBs for two primary reasons: budget stabilization and potential financial upside.

1. Budgetary Relief

Many local governments are operating under tight budgets and are forced to prioritize limited resources. Issuing debt to fund part or all of the pension liability can temporarily relieve pressure on annual budgets. This may stabilize required pension contributions and free up funds to support other essential public services.

2. Potential Financial Advantage

In theory, municipalities can borrow at a relatively low, fixed interest rate and invest the proceeds in assets expected to earn a higher return over time. If the pension investments outperform the bond’s interest rate, the municipality may realize a net gain.

However, these benefits depend on favorable market conditions and long-term investment performance. If those assumptions don’t hold, the financial outcome can quickly turn negative, leaving the municipality in a worse position than before the bonds were issued.

The Risks

While POBs can offer short-term relief and potential long-term benefits, they are not a cure-all. These transactions carry several significant risks that municipalities should thoroughly consider before proceeding.

1. Investment Risk

The greatest risk is that investment returns fail to exceed the bond’s interest rate.

For example, if a city issues bonds at a 5% interest rate and expects its pension assets to earn 7%, the 2% spread seems advantageous. But market performance is unpredictable, and a few years of underperformance can quickly erase those gains.

It is also important to remember that POBs are taxable instruments. This means issuers pay taxable market interest rates which increases the hurdle rate for the pension fund’s investment returns to exceed the taxable bond’s interest rate to achieve the desired advantage. Because POB proceeds are typically invested immediately, issuing bonds during an overvalued market can magnify the downside if asset values decline soon after.

2. Timing Risk

Timing is critical as POBs tend to be most effective when interest rates are low and market conditions are favorable. However, predicting either is challenging.

Municipalities are often drawn to POBs after periods of strong market performance, when the potential for future underperformance is higher. Conversely, when interest rates are high, borrowing costs increase and the “spread” between the bond rate and expected investment returns narrows. This can undermine the core financial logic behind the transaction.

3. Credit Rating Risk

Credit rating agencies typically view POBs with caution. While a POB may improve a plan’s funded status on paper, it also adds a fixed debt obligation to the municipality’s balance sheet.

This can be seen as a sign of fiscal stress or an attempt to leverage future resources, which may result in a credit rating downgrade. Such a downgrade increases borrowing costs for future projects, offsetting much of the anticipated savings.

4. Shifting Costs to Future Tax Payers

A key concern from a public policy perspective is intergenerational equity. This means the fair distribution of costs between current and future taxpayers.

Issuing POBs can transfer risk to future residents if investment performance falls short of expectations. While today’s taxpayers may experience short-term relief, future taxpayers could be left paying off the debt for assets that failed to meet return assumptions.

This outcome is particularly troubling when POBs are issued primarily as a short-term budget solution rather than as a part of a comprehensive, disciplined pension funding strategy. In such cases, the municipality is effectively kicking the can down the road and betting that future market conditions will deliver enough return to bail it out.

Conclusion

On the surface, Pension Obligation Bonds can seem like an attractive shortcut to improve pension funding and ease budget pressures. LIke any investment tool, there is a place for them when used appropriately. However, the GFOA generally advises against POBs unless paired with structural reforms and strict funding discipline.

If your municipality is considering a POB, it’s essential to:

• Use realistic actuarial and investment assumptions
• Conduct robust scenario and stress testing
• Commit to long-term funding discipline to avoid repeating past shortfalls

It is also important to consider whether your municipality may require State approval or changes in local ordinances to allow for the issuance of a POB. To improve the odds of success on your POB issuance, it’s recommended that you obtain the required permissions so that you can “strike while the iron is hot” to take advantage of that period of low interest rate or equity market declines.

If you have questions about Pension Obligation Bonds or your community’s retirement benefit liabilities, please reach out to one of our team members. We’re here to help municipalities make informed, sustainable decisions for the future.

The post What is a Pension Obligation Bond? appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• Rising inflation drives up healthcare costs, increasing your OPEB liability.
• Inflation-driven interest rate changes may partially offset liability increases, depending on your plan’s funding status.
• You can better manage inflation risk by pre-funding OPEB obligations.

Other Post-Employment Benefits (OPEB) liabilities represent the projected future costs of benefits promised to your retired employees, with retiree healthcare expenses typically making up the largest share. Because these obligations often span decades, it’s critical to understand how inflation influences them.

Inflation affects OPEB liabilities in two main ways:

1. Healthcare costs – higher inflation often means faster growth in medical expenses.
2. Discount rates – rising rates can temporarily offset liabilities, depending on your funding status.

In this article, I’ll walk you through how inflation impacts these two key assumptions and what that means for your OPEB liabilities.

Medical Cost Trends

Medical care cost inflation is the assumption used to project the future growth of healthcare expenses (physician fees, prescriptions, medical services). Since retiree medical costs are often the largest component of OPEB, higher premiums directly lead to higher liabilities.

Real-World Example: Post-COVID Surge

After the COVID-19 pandemic, we saw a spike in healthcare costs as people returned for procedures that they deferred, as well as healthcare providers looking to make up for lost earnings during a period of higher inflation. As a result, many actuaries (including myself) updated our assumptions to better reflect short-term spikes before projecting smaller, steadier increases later.

As of 2021, actuaries now rely on the Getzen Healthcare Cost Trend Model, which links medical costs to long-term economic growth while accounting for short-term shocks like COVID.

This Getzen Model incorporates assumptions about economic growth (GDP per capita), long-term healthcare cost growth, and a gradually declining “excess cost growth” factor that reflects how much faster healthcare costs are expected to rise compared to the overall economy. 

By applying this framework and adjusting short-term assumptions to account for elevated cost pressures in the early 2020s, most actuaries developed annual trend rates that started higher but eventually settled back into more sustainable, economically aligned growth. 

The Unique Drives of Medical Cost Growth

As you can see in the graph above, general inflation and medical care inflation are not perfectly correlated because a variety of additional factors drive healthcare cost growth beyond overall price changes in the economy, including but not limited to:

1. Cost shifting plays a significant role: when government programs reimburse providers at lower rates, a greater share of costs is often shifted to private insurers. Similarly, employers often pass on rising healthcare expenses to employees through higher premiums, deductibles, and out-of-pocket maximums, often in exchange for more affordable plans or Health Savings Accounts. 
2. Certain government mandates, including required coverage of certain benefits and regulatory changes, can increase the cost of providing care and insurance. 
3. Uncompensated care from uninsured or underinsured patients also further raises costs, as providers often offset these losses by charging higher prices to insured populations. 
4. Advances in medical technology and the introduction of new treatments, while improving outcomes, often come with a premium, especially with costly specialty drugs and procedures. 
5. Demographic changes, such as an aging population and rising rates of chronic conditions, also contribute to increased demand for healthcare services. 

Together, these factors place sustained upward pressure on healthcare costs, often outpacing general inflation over the long term.

How Inflation Affects Discount Rates

The two key rates used in the discount rate calculation are the 20-year municipal bond index rate and the long-term rate of return on plan assets. Your plan’s funding status determines how these rates are applied: 

• Fully funded plans – the discount rate equals the expected long-term rate of return (inflation plus the long-term return). 
• Partially funded plans – the discount rate will be a blended rate equivalent to discounting all expected future benefit payments that may be funded by assets held in the OPEB Trust at the expected long-term rate of return, with all other payments discounted using the 20-year index of yields on high-grade municipal bonds. (Most plans fall into this category.)
• Unfunded plans – the discount rate will be the 20-year index of yields on high-grade municipal bonds.

When inflation rises, municipal bond yields usually rise as well. For underfunded plans, this may lead to a reduction in your disclosed Total OPEB Liability (TOL) due to a higher discount rate being applied. But keep in mind: historically, elevated inflation in the U.S. has been short-lived. So while your liabilities may temporarily decline, that effect could reverse as inflation and rates settle back down. 

Inflation rates also influence financial markets. During high-inflation periods, certain sectors may see declining equity prices, which can negatively impact overall portfolio performance. Depending on the composition of the investments in your OPEB Trust, you may realize lower returns during these periods of high inflation. For fully funded plans, those reduced returns could lead to a downward adjustment in the discount rate, which may increase your TOL.

For partially funded plans, higher inflation may boost the municipal bond rate, which can raise the blended discount rate and reduce liabilities. However, if inflation depresses asset returns or shortens the period during which assets can cover benefits, that benefit could be offset or even erased.

The discount rate for a funded OPEB plan is generally less volatile compared to that of an unfunded plan, which relies solely on the municipal bond rate. That’s why establishing and maintaining funding remains the most effective strategy for you to manage long-term OPEB obligations.

Read more: Selecting the Best Funding Strategy for Your OPEB Trust

Key Takeaways

Inflation impacts your OPEB liability, mainly through its effect on two assumptions: 

• Medical cost trend rates – periods of high inflation often result in short-term spikes in healthcare costs.
• Discount rates – rising bond rates may temporarily reduce liabilities in unfunded plans, while funded plans could see liabilities rise if investment returns suffer. 

Although there is no way to completely shield your plan from the effects of inflation, staying informed about economic trends will allow you to anticipate potential changes. Regularly updating actuarial assumptions and implementing sound funding strategies can help mitigate inflation’s impact and help prepare you for any financial challenges that come your way. 

At Odyssey Advisors, we’re here to support you in navigating these complex challenges. Please don’t hesitate to contact us if you have questions or want guidance tailored to your needs.

The post Understanding the Impact of Inflation on OPEB Liabilities appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• Medicare costs are climbing – Part B premiums are projected to rise over 11%, and Medigap plans could see an 8-12% increase.
• Social Security COLA will be modest – Expect a 2.6% to 2.8% adjustment, adding around $50/month on average, which will be largely offset by increased Medicare premiums.
• High-income retirees may pay more – IRMAA surcharges are expected to rise slightly, so income planning now could help avoid higher costs later.

It’s almost August, which means fall, the holidays, and the new year are just around the corner. Time really does fly. As 2025 winds down, many retirees and soon-to-be retirees are already looking ahead to 2026, especially when it comes to Medicare costs and Social Security benefits.

While official numbers won’t be finalized until later this year, current projections and historical trends give us a pretty good idea of what’s coming.

Here’s a breakdown of what to expect in 2026, and a few planning tips to keep in mind.

Medicare Part B Premiums – 2026 Outlook

The standard Medicare Part B premium is projected to increase from $185.00 in 2025 to approximately $206.00 – a jump of $21.50 or about 11.6%.

For beneficiaries with higher incomes, IRMAA (Income-Related Monthly Adjustment Amount) surcharges are also expected to rise slightly, by an estimated 1.04% on average, according to the latest Medicare Trustees’ Report.

What this means:

• Standard Part B enrollees could pay significantly more in 2026.
• Higher-income individuals may face even greater increases due to rising IRMAA backets.

Medigap (Medicare Supplement) Premium Trends

While 2026 Medigap premiums haven’t been set yet, they typically increase annually in response to changes in Part B premiums, medical inflation, and other cost drivers.

With a projected 11-12% increase in Part B, expect Medigap plans (like Plan G or Plan N) to rise by 8-12% on average. Factors like age, gender, state, and insurer all influence final rates.

Pro tip: If you’ve had the same Medigap policy for several years, it’s worth comparing current rates with other providers or considering a different plan letter. For a look at your local Medigap plan rates, visit Medicare.gov.

Social Security Benefits & COLA – 2026 Projections

In 2025, Social Security recipients received a 2.5% cost-of-living adjustment (COLA), increasing the average monthly benefit to $1,976 for retired workers.

For 2026, most projections place the COLA between 2.6% and 2.8%, depending on inflation trends:

• 2.6% COLA: Benefit increases to ~ $2,027/month
• 2.8% COLA (optimistic): Benefit increases to ~ $2,031/month

That’s roughly a $50/month increase, on average. You can also follow updates from the Senior Citizens League as they track expected COLA changes.

But here’s the catch:

With Part B premiums also rising, many retirees may see little or no net increase in their Social Security check after deductions. In some cases, the higher premiums could completely offset the COLA increase.

A Decade of Medigap Rate Increases (2015 – 2025)

Looking back can help us see where we’re headed. Here’s how monthly Medigap premiums for Plan G (for a 65-year-old male) have trended:

• 2015: $120 – $175
• 2020: $160 – $220
• 2025: $200 – $260

Plans F and G, the most popular options, have historically increased 5-10% per year, and the graphic (shown above) confirms a steady upward trend, particularly after 2020.

2026 at a Glance: Key Numbers

Key Takeaways for 2026

In 2026, Medicare Part B premiums are expected to rise sharply (over 11%), marking one of the most significant annual increases in recent years. Medigap plan premiums are likely to follow, with projected increases in the 8-12% range depending on plan type and location. Meanwhile, the Social Security cost-of-living adjustment (COLA) is estimated to come in around 2.6% – 2.8%, offering retirees a modest monthly benefit increase of about $50.

Unfortunately, that boost may be entirely offset by the higher Medicare premiums, leaving many beneficiaries with little to no net gain. For higher-income retirees, income-related surcharges (IRMAA) will also tick upward, making careful income planning all the more important.

What You Can Do Now

• Review your Medigap coverage. Shop around if your insurer raises rates significantly.
• Understand IRMAA thresholds. Remember, IRMAA surcharges are based on your modified adjusted gross income (MAGI) from two years prior, meaning 2024 tax returns will impact your 2026 Medicare premiums.
• Track COLA updates. The official 2026 COLA announcement comes in October 2025; stay tuned.

If you’d like approximate state-specific costs or comparisons between Medigap plans (e.g., Plan G vs. Plan N), you can reach out to us. We’re happy to help you break it all down.

The post What to Expect for Medicare and Social Security in 2026 appeared first on Odyssey Advisors, Inc.

KEY POINTS

• OPEB plans offer benefits other than pensions for former or retired employees such as healthcare, dental insurance, life insurance, and other ancillary benefits.
• Many states and municipalities are moving away from a pay-as-you-go model and addressing their growing unfunded OPEB liabilities by establishing a trust.  
• For a trust account to be considered an OPEB Trust, it must meet GASB 74 requirements. 

In 2018, according to a study conducted by S&P Global Ratings, the combined OPEB liabilities across all 50 states totaled over $600 billion. In order to lower the staggering mountain of unfunded OPEB liabilities under GASB 74 and GASB 75, many states chose to establish a Trust to fund these promised benefits. But to establish an OPEB Trust, it must meet three key requirements set by GASB 74. 

Before we jump into that, let’s cover the basics. 

What is an OPEB Plan?

OPEB plans offer benefits other than pensions for former or retired employees. The benefits may include healthcare, dental insurance, life insurance, and other ancillary benefits.  

One of the main reasons why municipalities face increasing deficits is these plans have historically been funded using a pay-as-you-go model. Under GASB 74 and GASB 75, the establishment of a Trust provides a better solution to address the growing unfunded benefits. 

What is GASB 74?

GASB 74 is a statement released by the Governmental Accounting Standards Board that relates to the financial reporting of the OPEB plan itself rather than the governmental entity, employer, or plan sponsor. 

What is an OPEB Trust?

It is a savings vehicle that allows a governmental entity to fund all or part of its OPEB liability. The funds set aside in an OPEB Trust are then invested to further decrease the liability. 

Creating a Trust isn’t without challenges. There are pros and cons you should consider. Most government budgets are under pressure, even more so today. While building a new school, buying a fire truck, or fixing roads may seem more important today, continuing the pay-as-you-go funding model will continue to increase the amount of your OPEB obligation. This can create a red flag for credit raters. 

The Trust allows you to decrease your current & future OPEB liability and ensure funds will be available to pay for future promised benefits. 

So, what are the GASB 74 requirements to establish an OPEB Trust?

GASB 74 states that an OPEB Trust must have the following three (3) features: 

1. Contributions to the Trust and earnings thereon must be irrevocable. 
2. Trust assets may only provide the funds for other post-employment benefits per plan terms. Therefore, assets accrued may not revert to the plan sponsors until all obligations have been satisfied. 
3. OPEB Trust assets must be legally protected from the creditors of employers, contributing entities, and plan members. 

Conclusion

The biggest issue or concern that we hear relates to the irrevocability of the contributions. While we don’t dismiss the concern, the reality is that the plan sponsor can pay benefits from the OPEB Trust at any time so that they have access to one year’s worth of benefit payments for any fiscal year in the event of budgetary pressures. 

Please note that we do not recommend this approach as the OPEB Trust is meant to be a long-term funding vehicle to address your long-term liabilities. Keep in mind that the end goal is that it will bring your municipal organization financial stability and predictability. 

Whenever you’re ready, there are 3 ways we can help you:

1. Minimize your liabilities with a comprehensive OPEB valuation here.
2. Build a better pension and OPEB plan here.
3. Get a free review of your last valuation here.

The post Three GASB 74 Requirements to Remember When Establishing an OPEB Trust appeared first on Odyssey Advisors, Inc.

Covered Employee Payroll is the total gross amount paid to all employees who are eligible for and accruing OPEB benefits during the measurement period or fiscal year. This amount will include base pay, overtime, vacation, step & merit increases and all other types of pay that would appear on a Form W-2.

To learn more about OPEB and GASB 75, feel free to check out our resources at http://gasb75.com/ & https://odysseyadvisors.com/public-sector/gasb-75/.

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