Fiscal Time Bomb

by E.J. McMahon |  | New York Sun

New York’s state and local governments provide their retired employees with continuing health insurance coverage on the same basis as active workers, at benefit levels far more generous than those available to taxpayers employed in the private sector.

Until now, the true cost of this largesse has been obscured by government accounting methods that treat employee and retiree health insurance as a current operating expense. Starting next year, however, states and localities throughout the country will be required to recognize the long-term liabilities associated with these benefits. The initial estimates are enough to induce sticker shock in the most hardened New York budget-watchers.

In a little-noticed financial plan update issued last week, Governor Pataki’s Division of the Budget reported the state’s unfunded liability for retiree health benefits could range between $47 billion and $54 billion – enough to “nearly eliminate the State’s net positive asset condition,” the Division of the Budget noted.

The move to more transparent accounting comes not a moment too soon. Health insurance premiums for current and retired state employees have risen 29% in the last three years and are projected to rise another 23% in the next two years. In fiscal 2007-08 alone – the first year of the next governor’s tenure – health insurance costs are projected at $1.6 billion for current workers and $1 billion for retirees.

Mind you, this only represents Albany’s direct share of the problem. New York City faces its own unfunded long-term liability for retiree health benefits, which has been informally pegged in the neighborhood of $50 billion. Counting all of New York’s counties, cities, towns and school districts, the discounted present value of the implicit retiree health insurance promises made by every level of government in the Empire State could range between $130 billion and $150 billion.

To be sure, the newly disclosed unfunded liabilities for health insurance do not have to be paid off immediately. But as an accounting matter, if nothing further is done, they will be phased into state and local balance sheets at a steady rate over the next 30 years. The longer a government puts off dealing with the problem, the more its financial condition will deteriorate.

Mayor Bloomberg has taken one step in the right direction by planning to deposit $2 billion in surplus cash into a separate trust fund limited to financing retiree health benefits. But this is hardly the locked box it appears to be; the fund could effectively serve to free up more money for employee pay raises in the future. Moreover, it doesn’t address the root problem: a health benefits structure that is needlessly expensive for taxpayers.

For example, both state and city workers alike can qualify for continuing health insurance in retirement after as few as 10 years on the job. Enrollees in the state health insurance plan contribute only 10% of the premium for individual coverage and 25% for family coverage. New York City retirees need contribute nothing at all. Retirees of state and city government are even reimbursed for minimal Medicare Part B premiums – which, as the Citizens Budget Commission noted, “is out of line with benefits provided by other large employers and contradicts the philosophical and cost-saving goals behind the premium requirements established by Congress as part of Medicare’s design.”

Fortunately, now that New Yorkers are finally getting a better idea of the long-term expense associated with retiree benefits, something can be done about it. Unlike the public pension structure, which is constitutionally fixed in concrete for all current employees, health insurance coverage for both current and future retirees can be altered. Retired workers can be required to contribute more to their premiums, for example. Benefit levels and premium contributions could be tied to longevity, providing more coverage to long-time workers than to those who join (or rejoin) the government workforce later in their careers expressly to take advantage of the health insurance benefits.

Governor Pataki has administratively tweaked the state government’s health plan to effectively require at least small contributions by state retirees to their Part B premiums. That step will save $20 million a year. But state legislators keep working hard to make matters worse. This year, the Assembly and Senate unanimously passed a bill that would effectively give all state and local public employee unions the ability to block any employer attempt to “diminish” health benefits for retired workers. Mr. Pataki vetoed the measure, but his credibility has been compromised by his past willingness to sign repeated extensions of a 1994 law that allows teacher unions to prevent changes in health benefits for their retired members.

The next governor of New York must exert stronger leadership in curbing post-retirement benefits for government employees. After all, do the state and its municipalities exist to provide important public services such as education, policing, and transportation, or to provide members of public-sector unions with more generous compensation than the people who pay their salaries?

- E.J. McMahon is the Research Director at the Empire Center for Public Policy.