Retiree health care may overwhelm governments
This staggering burden is coming to light because of new accounting rules issued by the Government Accounting Standards Board. They require public agencies to disclose the future cost of health care and other benefits — such as dental, vision and life insurance — promised alongside traditional pensions to the nation's estimated 24.5 million active and retired state and local public employees.
AGING AMERICA: Should U.S. move toward universal health care? | Innovators win $250KRetiree health care costs have been quietly mounting for decades while public agencies have passed out generous retirement benefits during labor negotiations — often in lieu of salary increases. But government negotiators rarely considered the long-term financial consequences of awarding such perks, according to Brian Whitworth, a retirement benefits specialist with JP Morgan Chase and Co.
"A surprising number of public entities didn't even make informal estimates of long-term costs prior to the new accounting rules," Whitworth said.
Many cities and state agencies already are struggling to fully fund their pension obligations, but experts say those liabilities pale in comparison to the debt accumulated for other retirement benefits.
Last month, JP Morgan released what it considers the most comprehensive preliminary estimate. It projects the present value of unfunded health care and other non-pension benefits at between $600 billion and $1.3 trillion.
By comparison, the debt rating agency Standard and Poors estimates the country's total unfunded public pension debt at around $285 billion.
"There's a good chance some government entities are going to go bankrupt," said California Assemblyman Keith Richman, a Republican from Chatsworth. "But the issue isn't just bankruptcy, it's governments dying of a thousand cuts in services. The costs of promises that have been made are going to be astronomical."
Union officials say it's not their fault municipalities put themselves in a hole by promising more than they can deliver.
"This is a monumental problem and government is going to have to deal with it," said Steve Regenstrief, head of the retirement division at the American Federation of State, County and Municipal Employees.
When the new accounting rules take effect in 2008, taxpayers will be able to see for the first time just how much they're paying to provide benefits to active and retired state and local public employees.
"When the numbers are produced, they're going to be shocking," said Ronald Snell, director of state services for the National Conference of State Legislatures. "They'll be in the hundreds of billions, and it's definitely something that policymakers are going to have to take notice of and act upon. ... There are consequences of decisions made in the past."
The Government Accounting Standards Board is an independent non-profit organization that establishes accounting standards for public agencies. Seeing a need to bring public sector disclosure rules in line with those of the private sector, the board unveiled the rules change in 2004 and gave governments several years to implement them.
The new rules don't require governments to come up with the money right away, just to disclose the present value of these future costs and estimate how much more money is needed to pay for them. To prepare for these disclosures, public officials across the country already are beginning to calculate how much they might owe.
So far, California, New York, and Maryland appear to have the biggest burdens, but that could change when estimates begin trickling in from Florida, Texas, Illinois and Pennsylvania. Of the country's 10 most populous states, none has completed a formal estimate of their liabilities, but those that have completed preliminary assessments are reporting astounding numbers.
•The California Legislative Analyst's Office estimates $40 billion to $70 billion in retiree health care and related liabilities for the state. With cities and counties included, JP Morgan pegs California's debt at $70 billion to $200 billion. The state controller is just now beginning a detailed study.
•New York's preliminary analysis puts state liabilities between $47 billion and $54 billion. In a recent budget report, the state acknowledged "these costs are substantial and would significantly reduce or even potentially eliminate" New York's current $49.1 billion in positive net assets.
•Maryland has initially estimated its liability at $20 billion.
•Other states also have reported significant amounts: Alabama estimates $19.8 billion, Massachusetts $13.2 billion, Alaska at least $7.9 billion, and Nevada between $1.62 billion and $4.1 billion.
Many local governments also are beginning to acknowledge huge liabilities. The City of San Francisco reported its burden at $4.9 billion, and the Los Angeles Unified School District said its liability is $10 billion. New York City has yet to complete its analysis, but is expecting a large shortfall and already has set aside $2 billion to help cover it.
How this will impact citizens depends upon the size of their government's obligation and how it's handled.
At the least, experts say, the public can expect increased taxes and fees or reduced public safety and public works services as governments adjust their budgets to amortize the debt.
They probably can't expect much in the way of concessions from public employee unions, said Suzi Rader, director of district and financial services for the California School Boards Association. Any attempt to limit benefits already granted in future negotiations will be a contentious issue, she said, so employers must instead hold the line on granting additional perks to future retirees.
John Abraham of the American Federation of Teachers said union negotiators have long been aware that future retirement benefits must be paid from shrinking resources.
"If they haven't been looking at the numbers, shame on them," he said. "Do we recognize there is a cost problem? Absolutely. As costs have gone up we've made accommodations."
Lori Moore, spokeswoman for the International Association of Fire Fighters, said nothing is really changing except the need for cities to reveal how much they'll owe in non-pension retirement benefits.
"The liability has always been there," she said. "They had to know in the back of their minds that it was there."
Most governments now fund retiree health care on a pay-as-you-go basis, with annual appropriations from their general funds, focusing most of their attention on current expenses.
Under the new accounting rules, the liability can be paid over 30 years, just like a home mortgage, but it forces public officials to recognize the debt and calculate an annual payment.
If officials choose not to set aside additional money each year to cover the payment, it counts against net assets, potentially putting a city or agency deeper into the red. Because assets are a critical component in the credit ratings that allow governments to borrow money at lower interest rates, governments that don't handle their liability properly could end up insolvent.
Parry Young, director of public finance at Standard and Poors, said few governments are prepared for the annual contributions they'll be expected to make.
"It's been a growing liability that wasn't being addressed. But now the chickens are coming to roost," he said. "For some it's going to be a big credit issue depending upon what resources they have."
Young says one way governments can get a jump on their liabilities is by putting more money into retiree health care plans, something "easier said that done."
Public officials "might also choose to issue bonds, or review benefit costs and maybe make changes in the benefits themselves," he said.
Some states have taken a proactive stance. Ohio sought to address its future liabilities by establishing a Post Employment Health Care Fund containing more than $12 billion, an amount the fund's trustees say will not be enough. In order to cut health care costs, the state has reduced the amount it will pay for employees who retire with less than 30 years of service.
Utah, with a relatively small liability estimated at between $536 and $828 million, has taken a unique approach, earmarking unused sick leave for retiree health care expenses. Under a law passed last year and upheld by the Utah Supreme Court, retirees can no longer cash out unused sick leave earned after January 2006. Instead, 25% must be placed in an employee's 401K and the remainder in a Health Reimbursement Account.
"The law really stopped the out-of-control-escalation of health care costs," said John Reidhead, director of Utah's Division of Finance. "From a financial perspective it's a good deal. From the employee perspective, maybe not."
posted by Kathie Bracy at 1:58 PM
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