Retiree health benefits: unfunded promises

by Lise Bang-Jensen |  | NY Torch

New York–despite facing a $55 billion liability–is one of 20 states that has set aside absolutely nothing to pay for the growing cost of health insurance for retired public employees, according to a national report.

The report by the Pew Center on the States gives New York’s pension fund better grades, describing it as fully funded in 2008, but Gannett News Service describes the state’s investment assumptions as “rosy”(here).

The New York State Common Retirement Fund was considered 107 percent funded in 2008, well above the 84 percent average for other states and higher than any other state in the nation….To achieve that high level of funding, state officials assumed an 8 percent annual return on their investments. That rosy outlook is common. New York is among 22 states that assume an 8 percent return.

But the Pew report’s principal author, Susan Urahn, said many private-sector pension plans use estimates closer to 6 percent or 7 percent, and billionaire investor Warren Buffett advocates an assumption closer to 4 percent.

A spokesman for State Comptroller Thomas DiNapoli, the state’s sole trustee for retiree pension and health benefits, defended the practice.

“If you look at the performance over 20 years, it has not been an unreasonable assumption,” spokesman Robert Whalen said.

On a national level, the Pew report found a $1 trillion gap between the $2.35 trillion states and participating local governments set aside for retirement benefits and the actual $3.35 cost of those benefits. Pew calls the figure “conservative,” partly because its based on fiscal year 2008 figures that don’t fully reflect the Wall Street meltdown.

To a significant degree, the $1 trillion gap reflects states’ own policy choices and lack of discipline: failing to make annual payments for pension systems at the levels recommended by their own actuaries; expanding benefits and offering cost- of-living increases without fully considering their long-term price tag or determining how to pay for them; and providing retiree health care without adequately funding it.

Originally Published: NY Public Payroll Watch