MuniLand

The winnowing of retiree healthcare costs

By Cate Long
March 18, 2014

Many state and local governments have promised to provide healthcare benefits for their retirees. These benefits cover retirees before they reach the eligibility age for Medicare and those who are Medicare ineligible. The promises include additional Cadillac benefits to retirees who are eligible for Medicare and provided supplemental coverage. These promises are known by their accounting moniker, OPEBs (other post employment benefits).

Few governments have set aside funds to pay for these promises, leaving an enormous unfunded liability that will burden future municipal budgets. Every government is responsible to meet their promises. Moody’s analyst Marcia Van Wagner wrote about the size of the OPEB juggernaut:

States listed a total of more than $530 billion in unfunded OPEB liabilities in their fiscal 2012 financial reports, although the liabilities are highly variable and concentrated within a subset of states.

Moody’s says the unfunded liability is about equivalent to state tax-supported debt. Unlike bonded debt though, OPEBs are being reduced and in some cases have been eliminated by bankruptcy in cities like Stockton, California. Detroit replaced retiree healthcare coverage with a small monthly check. Moody’s writes about other, less onerous steps that governments have taken to rein in costs and benefits:

Surveys indicate that state and local governments have widely pursued initiatives to contain retiree health costs. About two-thirds of governments responding to surveys cited by the Center for State and Local Government Excellence indicated that they had made changes to retiree health care in recent years, with the most common changes being increases to retiree premium contributions, co-payments and deductibles.

Increasing co-pays and deductibles is the first line of healthcare savings. State and local governments are also tightening the eligibility requirements for OPEB coverage. From the GAO:

Officials from some of the governments we selected reported changing the requirements that determine eligibility for retiree health benefits, such as increasing the number of years an employee must work for the government before being eligible for health benefits upon retirement. Results from a survey of state officials published in December 2008 indicate that more states have changed their eligibility requirements by increasing the years of service required for eligibility for retiree health benefits than by increasing the age at which employees become eligible to receive these benefits.

Some state and local governments are working to pre-fund some of the future liability. The California controller John Chiang recently announced a plan to tackle the state’s unfunded $67 billion OPEB liability at the macro level. This would be done by the state gradually starting to pre-fund retiree health care. This would allow assets in the trust fund to earn investment earnings and increase assets available to fund future costs. From Chiang’s release:

Recognizing that fully pre-funding this obligation would be challenging, Controller Chiang proposes that the initial objective should be to fully pre-fund the costs of retiree benefits in the same year as they are earned by active employees.

‘While it is not reasonable to expect that a liability that has been built-up over many decades can be erased in a year, we have to resolve ourselves to meaningful progress,’ said Chiang. ‘Let that first step be a commitment that any liabilities created by one generation of Californians be fully paid by that generation and not transferred to their children.’

The Controller proposes a five-year implementation plan, at the end of which retiree medical and dental costs earned annually by its active workforce (often referred to as ‘normal costs’) will be fully pre-funded, reducing the unfunded liability by $17.7 billion.

Chaing says California should take a small portion of the state’s projected surplus and make additional payments to the OPEB trust:

The California legislature is trying to figure out how to fund the $80 billion unfunded liability of the state teacher pension system, CalSTRS.

There are professionals out scouring muniland to help municipal governments get control of their OPEB liabilities. Kudos to these pros as they help governments untangle Medicare law and their labor contracts. Every taxpayer benefits as the nation’s runaway health costs are brought under control. Especially unfunded healthcare costs.

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