New York Post Sept. 7, 2012
New York’s health-care time bomb
Last Updated: 2:27 AM, September 7, 2012
Posted: 12:24 AM, September 7, 2012
It’s no secret that skyrocketing public pension costs are putting tremendous pressure on state and local budgets — in New York and across the country. But taxpayers also face another enormous liability: retiree health-care costs.
Here in the Empire State, the number is staggering: an unfunded liability of nearly $250 billion for future health costs of government retirees.
Under current laws and contracts, most of New York’s 1.3 million state and local government employees will receive taxpayer-subsidized health coverage for the rest of their lives. The true cost of this long-term entitlement is only now emerging from the murky depths of state and local finances, thanks to a fairly new government-accounting rule.
This week’s report from the Manhattan Institute’s Empire Center for New York State Policy puts the total unfunded retiree health-care liability for all New York state and local government employers at almost $250 billion — $84 billion for New York City alone.
That’s the difference between what those governments have promised and what they’ve set aside (in current assets and future revenue streams) to pay for those promises.
The city’s $84 billion unfunded liability is exceeded nationally only by the state of California. The rest of the statewide total includes $74 billion for other cities, counties, towns, villages and school districts; $73 billion for the state government, and $19 billion for public authorities, including the Metropolitan Transportation Authority.
And the size of this liability is growing — it’s up $45 billion in the two years since we first gathered estimates.
The unfunded liability is so vast because (unlike with pensions) governments treat retiree health coverage as a “pay as you go” expense — laying out money in current budgets to cover premiums for workers who retired years or even decades ago.
Nothing gets set aside in any trust fund while the benificiaries are actually working. It’s really sort of a Ponzi scheme, with each generation funding a benefit promised by past ones.
Yet these health costs typically grow by 8 percent to 10 percent a year — so that each generation gets hit with a much higher bill than the one before.
Most public employees in New York contribute far less to their health premiums than private-sector workers. In fact, in New York City and its largest suburban counties, government employees can get coverage free of charge — even after they retire.
By comparison, retiree health coverage is increasingly rare in the private sector. As of 2010, just 28 percent of firms with more than 200 employees (and 3 percent of smaller firms) offered health benefits to any retirees.
Even among larger private firms offering such coverage, retired employees are asked to share more of the cost burden than their government counterparts.
The burden of retiree care is clearly unsustainable and unaffordable. The legal boilerplate in countless government financial statements sums it up this way: “These costs may be expected to rise substantially in the future.”
New York needs to act sooner rather than later to chart a new course for retiree benefits that will avoid potential fiscal shipwrecks in the future. The Empire Center report outlines four steps for accomplishing this:
1) Preserve health benefits for current retirees, but require them to pay a larger share of their own premiums.
2) Reserve the greatest benefit for those who’ve worked the longest.
3) Establish trust funds to cover adjusted liabilities — and calculate required contributions using conservative private-sector accounting standards, to avoid the underfunding problem that plagues our public pensions.
4) End retiree health coverage for all new hires and for employees who’ve been on the payroll for less than 10 years, and shift these workers into a retirement medical trust. Government workers would make tax-free contributions to accounts managed by their unions, which would pool and invest the money to cover future medical expenses.
The good news is that, unlike pensions, retiree health benefits aren’t guaranteed by New York’s Constitution. The state and its local governments can steer a new, more affordable path for taxpayers and workers alike.
But elected officials must act soon. If left unaddressed, the situation will cause fiscal chaos, drive taxes higher and dampen governments’ ability to invest in such core areas as education, health care, infrastructure and economic development.
Russell Sykes is a senior fellow at the Manhattan Institute’s Empire Center for New York State Policy.