Concern Growing Over Retiree Health Costs
State and local governments are studying the commitments they have made on retiree health benefits "because of a new accounting rule that is now requiring them to calculate, for the first time, the total value of the health benefits they have promised to retirees," the New York Times reports (Williams Walsh, New York Times, 11/6).
Most employers currently use a "pay as you go" funding system for retiree health care benefits, contributing on an annual basis the amount of money needed to cover that year's retiree health care benefits. However, an accounting rule that will take effect next year will require employers to disclose the cost of future retiree benefits (California Healthline, 9/27).
Mercer Human Resources estimates that cities and states have promised about $1.4 trillion in retiree health benefits, according to senior consultant Derek Guyton.
Paul Maco, a partner in the law firm Vinson & Elkins who advises municipalities on the disclosure of retiree obligations, said he is concerned that local governments in some areas will find that their tax bases have eroded too much to fully fund the health benefits they have promised. Maco said, "The steel industry can shut down and close its plants, but that's hard for local governments," noting that industries might move out, but retired teachers and other public service workers would remain.
According to the Times, the Chicago Transit Authority and other government agencies have "set up a potentially explosive situation by arranging their retiree health claims to be paid directly out of their pension funds."
Laurence Msall, president of the Chicago-based Civic Federation, said, "The taxpayers need to understand the seriousness of our situation," adding, "It's not a far-off crisis" (Williams Walsh, New York Times, 11/6).