Article: Huge Rise Looms for Health Care in City's Budget (NYC)

New York Times, December 26, 2005

"But the cost of pensions may look paltry next to that of another benefit soon to hit New York and most other states and cities: the health care promised to retired teachers, judges, firefighters, bus drivers and other former employees, which must be figured under a new accounting formula."

Huge Rise Looms for Health Care in City's Budget

By Mary Williams Walsh and Milt Freudenheim

When the Metropolitan Transportation Authority proposed making new workers chip in more to its pension fund than current workers do, it was enough to send the union out on strike and bring the nation's largest mass-transit system to a halt for three days.

But the cost of pensions may look paltry next to that of another benefit soon to hit New York and most other states and cities: the health care promised to retired teachers, judges, firefighters, bus drivers and other former employees, which must be figured under a new accounting formula.

The city currently provides free health insurance to its retirees, their spouses and dependent children. The state is almost as generous, promising to pay, depending on the date of hire, 90 to 100 percent of the cost for individual retirees, and 82 to 86 percent for retiree families.

Those bills - $911 million this year for city retirees and $859 million for state retirees out of a total city and state budget of $156.6 billion - may seem affordable now. But the New York governments, like most other public agencies across the country, have been calculating the costs in a way that sharply understates their price tag over time.

Although governments will not have to come up with the cash immediately, failure to find a way to finance the yearly total will eventually hurt their ability to borrow money affordably.

When the numbers are added up under new accounting rules scheduled to go into effect at the end of 2006, New York City's annual expense for retiree health care is expected to at least quintuple, experts say, approaching and maybe surpassing $5 billion, for exactly the same benefits the retirees get today. The number will grow because the city must start including the value of all the benefits earned in a given year, even those that will not be paid until future years.

Some actuaries say the new yearly amount could be as high as $10 billion. The increases for the state could be equally startling. Most other states and cities also offer health benefits to retirees, and will also be affected by the accounting change.

"It's not likely that New York City has a way to fund current costs, its pension obligation and fund retiree health care without raising taxes or cutting services," said Jan Lazar, an independent consultant specializing in city retirement finances. "These are huge numbers, not a one-time cost."

The pay-as-you-go accounting method that New York now uses greatly understates the full obligation taxpayers have incurred because it does not include any benefits to be paid in the future. Most other state and local governments that offer significant health benefits to retirees use the same method and will also have to bring newer, larger numbers onto their books in the next two or three years.

The increases will vary from place to place, but New York is expected to be at the high end because it offers richer benefits than many other cities and has many police officers, firefighters and sanitation workers who can retire with full pension at age 50.

At the transit talks, pensions were pulled off the table in the end, and the final settlement is likely to reflect an increased health care payment by current workers, not retirees. But even though New York was pushed to a standstill over proposed changes in transit workers' pensions, virtually no one in government, outside of a tiny group of experts, is talking publicly about the far more daunting bill for citywide retiree health insurance.

The total value of the pensions promised is probably bigger, but money has already been set aside to pay the pensions, to a significant degree. For retiree health care, nothing stands behind those promises except the expectation that taxes will be raised enough in the future to cover them.

At last count, the city's biggest pension fund - the one for about 300,000 workers not covered by police, firefighter, teacher or school workers plans - said it had $42 billion set aside in trust for the $42.2 billion it owed. No money at all has been set aside for that same group of city employees' post-retirement health care.

Determining the correct amount will be "a tremendous undertaking," a city official said, adding that rapid changes in the overall health care environment, including the Medicare and Medicaid programs, make it extremely difficult to see what future costs will be.

No one really knows what the total health care obligation is for the 836,000 people already retired or now working for the city and state, much less who will pay for it. Neither side in the transit dispute, for example, has publicly mentioned retiree health care.

A small group of city officials has been quietly working for months, gathering data on the dozens of city retiree health plans, large and small, but the process is not expected to be complete for months.

Meanwhile, a handful of other states and cities have already done the same calculations. If their results are any guide, New York City and the state could ultimately find that they have each promised their retirees health care worth tens of billions of dollars. The transportation authority, a state entity whose retiree health care costs are partially borne by New York City, could find that it has already promised more than $5 billion worth of benefits to its current and future retirees.

At the moment, the transportation authority is spending about $380 million a year on health care for its unionized workers. That covers both active workers and retirees; while a precise breakdown does not exist, citywide demographics suggest that about $165 million of that may be for retirees.

Once the new accounting rule is in force, the transportation authority may find itself scrounging for 5 to 10 times that amount every year, $825 million to $1.6 billion, if an accounting rule of thumb devised by one of the chief credit rating firms, Fitch Ratings, holds up. By the time anybody knows for sure, the authority will probably be halfway through the union contract it is still struggling to complete.

To find the money, the authority will have to turn to "higher fares, less service, or more pressure on the city government to fork over subsidies," said Robert A. Kurtter, an analyst with Moody's Investors Service who monitors New York's finances. The city's retirement system, meanwhile, will be struggling with the same problem on a much larger scale.

The city has been offering free health care to its retirees for decades. In the private sector, companies that once offered health insurance for retirees began to stop doing so in the 1990's, for a number of reasons, including accounting rule changes like those now coming into effect for states and cities. Today, only 38 percent of companies with more than 200 workers offer retiree health insurance, according to the Citizens Budget Commission, a group that analyzes city and state finances.

An even smaller number of companies, 9 percent, pay any part of the premiums that can be used to buy optional supplements to Medicare for retirees over 65. New York City and the state both pay the full cost of Medicare supplements for their retirees.

"They've stuck with that, although the rest of the world has changed," said Charles M. Brecher, research director of the Citizens Budget Commission and a professor of public and health administration at New York University's Wagner School of Public Service.

While the private sector was curtailing retiree benefits, New York City and the state have been preserving and even expanding benefits in bargaining with their unions. Both sides focused mainly on the current cost of the benefits. No one was paying much attention to the deferred cost of the benefits that would come due once current workers retired. Meanwhile, health costs resumed rising at double-digit rates, and a large share of the public work force began to reach retirement age. Currently, the city administers a big health plan for its workers and retirees and contributes to dozens of smaller retiree health plans that are run by individual unions and supplement the city's coverage.

The calculations are now being done, privately, because of the accounting rule change. In 2004 the Governmental Accounting Standards Board, a nonprofit body that writes accounting rules for governments, issued a new standard for retiree medical plans. It roughly follows a similar standard issued in 1994 for public pension plans.

But rather than requiring local governments to finance their retiree medical plans, the rule simply requires them to lay out a theoretical financing framework, then report how they are dealing with it. Localities that create trust funds will get certain financial rewards. Localities that do not put money behind their promises risk being punished by falling credit ratings. When a city's credit rating falls, it becomes harder and more expensive to issue bonds or otherwise borrow money.

Municipal bond analysts at Moody's and Standard & Poor's said they were taking a wait-and-see stance. "How the city addresses the burden is another question - by reducing the benefit or funding the cost, or allowing this liability to mount," said Mr. Kurtter, of Moody's. If the amount grows, "at some point it will create a credit issue," he said.

Mr. Kurtter said city officials have acknowledged privately that the amounts will be large, "in the billions, they say."

Labor officials say that even though the change is just a new way of accounting, not a price increase in the conventional sense, they fear that putting a number on the city's promises for future retiree health care will lead to sticker shock and renewed calls to cut benefits.

"There's a lot of fear that this kind of disclosure will reignite the whole battle of who assumes retiree health costs," said Randi Weingarten, the president of the United Federation of Teachers and the chairwoman of the Municipal Labor Committee. "Even though it should be a data point, it will be used as a hammer."