States Must Confront Huge Retiree Obligations

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Soaring health care costs and low investment returns in pension funds are forcing state and local governments to make drastic changes to retiree health care benefits and to lengthen vesting periods for new workers. As of December 15, the Government Accounting Standards Board (GASB), requires government entities to record Other Post-employment Benefits (OPEB) as accrued liabilities under statements 43 and 45. The total long-term health care liability of state and local governments is estimated at more than $1 trillion, according to USAToday.

In addition, last week GASB released an exposure draft that would bring pension disclosure requirements for governments into line with OPEB requirements. The proposed amended GASB Statement 25 would be effective for periods beginning after June 15, 2007.

Government entities have incurred the huge unfunded liability through inaction in some cases and from confusion about the rules, the New York Times says. Some have misunderstood actuarial projections and others have spent investment income before it has been earned. Some have used unrealistically low estimates of health care increases.

Like many businesses, governments also failed to estimate the rate of health care cost inflation. Estimates typically assumed a 5 percent rate of inflation, even though health care costs have been rising at almost twice that rate, the Times says.

Medical benefits, unlike pension benefits, are not usually protected by law, USA Today says, and can be modified or eliminated by state legislatures.

In North Carolina, the $23.5 billion unfunded liability for retiree health care is more than three times what the state owes in ordinary debt, USA Today says.

“The numbers make your jaw drop,” North Carolina state Rep. Dale Folwell said.

Shifting health care responsibility to Medicare is one of the steps that states are taking to reduce their liability. West Virginia will shift prescription drug coverage to Medicare, a move that lowers their liability from $8 billion to $5 billion. Should other state and local governments chose this option, Medicare's financial crisis would deepen.

States like South Carolina, Georgia, Vermont and New York City are planning to set up trust funds or have already done so to cover heath care costs for retirees.

New York City will set up a trust fund of $2.2 billion from its current budget surplus to pay for retiree health care, the New York Times reports.

The options available to many governments to pay for health care costs – tax increases, union givebacks, sales or bonds, or increases in the costs of local services – are unwelcome, according to the Times, and some local governments have begun financing health care costs from their pension funds, with serious consequences.

The Chicago Transit Authority (CTA), which has used its pension fund to pay for health care, will run out of money for health care benefits in 2007 and pension benefits in 2012. Battle Creek, Michigan's pension fund for police and firefighters began using pension funds for health care benefits in 1980 and will be out of money this year. It has received an emergency appropriation from the city while it looks for a long-term solution, the Times reports.

Cook County, Illinois, has been paying for retirement benefits from its pension plan since 1990. The County's chief financial officer (CFO), Thomas J. Glaser, said that the County never authorized this diversion - the pension trustees did it unilaterally, the Times reports.

Since the County never agreed to the provision, Glaser said, it was disavowing any obligation for retiree health. “No one can impose a liability on the county without the county's approval,” he said, according to the Times. If the County can get out of its responsibility, current workers will have to assume the burden of retiree benefits in the form of increased payroll deductions.

The Internal Revenue Service (IRS) permits pension money to be spent on health care under certain rules.

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