A big trip line for states and cities is the host of promises they have made to provide health benefits to retirees (Other Post Employment Benefits (OPEB)). Almost universally, cities and states are shouldering these OPEB costs as they come due. Pay as you go, if you will. From a recent Bloomberg presentation:
These so-called OPEB promises made by the 15 biggest cities alone total $115 billion, with an average burden of $2,300 for every man, woman and child, according to data compiled by Bloomberg. How will local governments manage to make good on their pledges without becoming insolvent? Will we see governments reduce benefits and raise their cost for current workers, as has been the case in several cities and states?
Cities and states cannot unilaterally end these benefits, outside of Chapter 9 bankruptcy, because they are contractual promises. As Stockton, California was entering the bankruptcy process, it eliminated lifetime unlimited health care benefits for former employees and their dependents. Stockton had awarded these OPEBs to former employees who had worked for the city for as little as a month, and the expense helped push the city into bankruptcy. Retirees and former employees took Stockton to court and a judge ruled that, given the city’s fiscal distress, it could cease these benefits.
Now there seems to be another way for cities to get out from under their OPEBs. Chicago’s Mayor Rahm Emanuel is leading the way. Emanuel’s plan is to essentially shift the cost of retiree health benefits from the city budget to the federal budget via President Obama’s Affordable Care Act. From the Chicago Sun Times:
More than 35,000 government retirees have been on pins and needles waiting to find out whether Mayor Rahm Emanuel will continue their city-subsidized health insurance after June 30, when a 10-year settlement agreement that calls for the city to share costs with retirees is due to expire.