Report Reveals Massive Cost of Government Retiree Health Care

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New York’s public-sector employees have been promised $205 billion in post-retirement health benefits that the state and its local governments have set aside no money to pay for, according to a report released today by the Empire Center for Public Policy.

Like defined-benefit pensions, retiree health coverage is a form of deferred compensation commonly available to government employees — but not to the vast majority of private-sector workers, the report says. Unlike pensions, which are at least partially pre-funded through large investment pools, retiree healthcare is financed out of annual government budgets on a “pay as you go” basis. Benefits differ by employer, with most allowing their retirees to remain in the employee health insurance plan, paying only a fraction of the premium, after just five to 15 years of service. A new government accounting standard, known as GASB 45, is requiring the state and local governments to calculate and disclose the long-term costs of keeping all of their retiree health care promises.

The Empire Center report—entitled “Iceberg Ahead: The Hidden Cost of Public-Sector Retiree Health Benefits in New York”— provides the first statewide survey of unfunded retiree health care liabilities for New York State and its largest counties, cities, towns, villages and school districts. Liabilities detailed in the report include:

$60 billion for New York State, including the State University of New York;

$62 billion for New York City;

$13.8 billion for the state’s 20 largest counties;

$6.5 billion for the 20 largest school districts;

$4.8 billion for the state’s 15 largest cities outside New York City;

$2.8 billion for the state’s 15 largest towns;

$685 million for 11 of the state’s largest villages; and

$14.4 billion for the five largest public authorities.

GASB 45 liabilities for all other New York governments brings the total to $205 billion, the report estimates. “The good news for New York taxpayers is that public-sector retiree health benefits, unlike pensions, are not guaranteed by the state Constitution,” said author E.J. McMahon, a senior fellow with the Empire Center and the Manhattan Institute. “Elected officials can still change course on retiree health care by restructuring benefits for both current retirees and active employees.”

The report concludes with a series of recommendations for curbing costs, including:

Preserve health benefits for employees who have already retired, but require them to pay a larger share of their own premiums.

Reserve the greatest benefit to those who have worked the longest.

Allow trust funds to cover adjusted OPEB liabilities, but calculate required contributions to these funds based on assumed returns from conservative, low-risk investment strategies.

Eliminate retiree health insurance coverage for new hires and for employees who have been on the payroll for less than 10 years, and shift these workers into retirement medical trusts.