The city of Duluth, Minn., population 90,000, calculates that the cost of its pledge to provide free lifetime health benefits to its retirees is $178 million–more than double the city’s current budget.
Maryland computes its unfunded liability at $23 billion. To cover the costs, the state would have to cut into current programs and services to increase its annual payments for retiree health care from $300 million to $1.9 billion.
On an even larger scale, the Los Angeles Unified School District, the second largest school district in the United States, estimates that its unfunded liability for retiree health care is $5 billion–a figure that is roughly 80% of its entire annual budget.
The promises made to retirees are about to go under a very powerful microscope, and city and county managers will not like what they see.
In December 2006, GASB 45, promulgated by the Government Accounting Standards Board, Norwalk, Conn., began requiring most large public employers to reflect the future cost of health care for retirees on their current balance sheets.
A combination of issues–retirees living longer, late-in-life health care rates increasing and the fact that the vast baby boomer population is closing in on retirement age–is running up those costs even as local and state governments are being urged to lay them on the table.
One expert made a dire prediction in a 2006 Rockefeller Institute Report on State and Local Government Finances: The total bill for public employers’ retiree health care could approach an astounding $1 trillion.
As public employers struggle to cope with their already considerable fiscal challenges, a myriad of available solutions appear attractive on the surface but carry hidden dangers that complicate their decision-making. The decision about how to handle Medicare Part D is a good place to start.
Under Medicare Part D, the federal government covers one of the largest rising health care costs: prescription drugs. The federal government provides a 28% retiree drug subsidy to encourage those that already offer this benefit to retirees to continue their coverage under this plan.
Many businesses in the corporate world quickly took the subsidy in the program’s first year. But now they are discovering that the subsidy comes with expensive strings attached, including the cost of annual actuarial studies, administrative burdens and federal audit compliance.