Unfunded Public
Employee Healthcare Obligations Will Be an Even Bigger Crisis Than Underfunded Public Pensions (Steven Greenhut
/ Bloomberg)
Bloomberg By
Steven Greenhut Mar 15, 2012
7:03 PM ET
The U.S.
public pension mess, with its $2 trillion to $3
trillion in unfunded liabilities, is such a volcano of gloom that it takes a
potentially bigger problem to turn our eyes away from it.
Turn your attention instead to the size of the taxpayer-
backed health-care obligations for public employees.
“Frankly, if you want to look at a truly scary set of
unfunded liabilities, health care for retirees is a better choice than
pensions,” said California Treasurer Bill Lockyer in
an October speech meant to play down the pension crisis.
Not that Lockyer or his Democratic
and union allies want to reduce any benefits that are at the heart of the
problem. In their view, the real scourge is “pension envy” or perhaps
“health-care envy” -- the failure of the private sector to
keep up with government-benefit levels.
States and localities make their own decisions on how to
finance these health-care policies. Far more government employees than private
workers receive health and dental care -- and those plans cost more, require
lower employee contributions and provide more comprehensive coverage.
Such generosity comes at a cost to taxpayers and municipal
budgets, especially given the “promise now, pay later” approach of officials.
As a recent Bloomberg News article noted, while
most public pension plans are 75 percent funded, the figure for health-care
plans is only 4 percent nationwide. So unlike pensions, governments are setting
aside little money in advance to pay for their future obligations.
Courts Back Unions
Public-sector unions and their allies have foiled even
modest efforts to scale back pensions, and the courts have done the rest. Now
the unions are gearing up to fight changes in health-care plans, as well -- an
issue that has reared its head after Stockton, California,
announced that it was possibly headed toward a Chapter 9 bankruptcy driven by
$417 million in liabilities caused by an absurdly generous lifetime medical
plan.
The unions’ job is considerably easier thanks to a California
Supreme Court decision in November that will make it as hard to change
health-care benefits as it is to deal with pensions.
It’s not that leaders in California, which is in the deepest
public-employee-related fiscal hole, don’t understand the scope of the problem.
Controller John Chiang released a report in February that acknowledges a $62.1
billion unfunded health-care liability.
“California
should pay $4.7 billion in 2011-12 to pay for present and future retiree health
benefits,” according to Chiang’s office. “In the 2011-12 budget act, the
state provided $1.71 billion to only cover current retirees’ health and dental
benefits.”
With pensions, government employers and employees contribute
a percentage of income into retirement funds. The liabilities depend on how
well the funds perform, with higher estimated rates of return leading to a
lower predicted debt and vice versa. But as Bloomberg News reported, “States
haven’t financed almost 96 percent of the $627.4 billion they were projected to
owe for future retiree benefits in 2010.” They try to pay these health-care
costs as they go.
Few governments have the excess cash available to prepay
these already promised benefits. But often there are straightforward ways to
solve the problem. In 2006, Orange
County cut its $1.4
billion health-care liability, in a model effort touted not just by the
Republican board of supervisors but by the union representing county workers.
The union said the deal demonstrated its willingness
to help fix the system.
Reforms Overturned
Retirees had been placed in the same medical pool as current
workers. Because retirees are older, their health-care costs are higher, so the
county was subsidizing the rates for retirees. The county separated the pool,
raised the monthly contributions paid by retirees and reduced the unfunded
liability by $815 million. But the retirees’ group sued the county and took the
case to the state Supreme Court, which ruled in a way that has made
it far easier to challenge cutbacks of these benefits.
Pensions are vested, contractual rights. As such, the California courts have
consistently quashed efforts to change benefits for existing workers, as is
frequently done in the private sector where employers have frozen pension
benefits.
Health care typically is different. It has been viewed as a
non-vested benefit that can be changed at the discretion of the employer. Until now, in California.
“Under California
law, a vested right to health benefits for retired county employees can be
implied under certain circumstances from a county ordinance or resolution,”
according to the state Supreme Court ruling.
The Orange County Register editorial board opined that “much in
the way that federal courts have found penumbras in the Constitution -- i.e.,
meanings between the lines, or in the shading or the shadows -- the state
Supreme Court found that certain benefits are the result of ’implied’
contracts.” Localities now face a high hurdle to change these benefits.
Treasurer Lockyer warned about a
health-care “time bomb,” but threw the problem back to the taxpayer.
“Nothing is more important in providing for retirement
security than preserving the defined-benefit pension for those who have it,” he
said in the October speech. Any changes would need to be “on our terms,” he
added, to preserve “the power of workers and their unions to be a balancing
force to business and the unregulated marketplace in American life.”
Protected Class
To Lockyer and other
representatives of the public sector, the real retirement problem is not
billions of dollars in unfunded liabilities that are leading to slashed services
and higher taxes, but a stingy private sector that isn’t generous enough to its
workers. Instead of proposing reforms that bring government benefits down to
manageable levels, the state’s Democratic leaders are proposing a bizarre new
mini Social Security system that provides a few crumbs to private-sector
workers. But their goal is clear.
“In general,” Voltaire wrote, “the art of government consists
in taking as much money as possible from one party of the citizens to give to
the other.”
In California,
this art form has been perfected. It’s anybody’s guess how the government class
continues to get away with it.
(Steven Greenhut is vice
president of journalism at the Franklin
Center for Government and
Public Integrity. He is based in Sacramento,
California. The opinions expressed are his
own.)
Read more opinion online from Bloomberg View.
To contact the writer of this article: Steven Greenhut in Sacramento
at steven.greenhut@franklincenterhq.org
To contact the editor responsible for this article: Katy
Roberts at kroberts29@bloomberg.net
http://www.bloomberg.com/news/2012-03-15/unions-send-doctor-bills-to-taxpayers-steven-greenhut.html
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Report on States' Pension Crisis Reforms Misses Taxpayers'
Bottom Line (Frank Keegan / State Budget Solutions)
by FRANK KEEGAN | March
15, 2012
The report, released Wednesday by the National Conference
of State Legislatures, is a comprehensive summary of reforms 43 states enacted
from 2009 through 2011 in efforts to control exploding defined benefit pension
costs.
Those costs threaten to destroy citizens and businesses forced to pay taxes for
which they receive no services. That can obliterate careers of politicians who
raise taxes and cut services to fund retirement. Ultimately it puts at risk the
very benefits retired public workers earned.
Report author Ron Snell said Thursday in a telephone interview that overall
pension investments falling short of paying promised benefits is "a fact
of life." Paying off the debt "will be a slog."
He acknowledged recent reforms "will have a big impact on future unfunded
liabilities; help control growth of future liabilities," but the only
reduction in existing debt would be eliminating cost of living increases.
"COLAs; that has a big impact. That cut about 40
percent in Rhode Island, and Oklahoma took 10 to 15 percent off."
However, only 21 states have done anything about COLAs, mainly for new hires.
For current employees and retirees, Snell wrote in the report, "the
legislation faced legal challenges."
But Snell said Thursday, "If you're talking about basic UAAL (Unfunded
Accrued Actuarial Liability,) the changes will reduce growth, but not reduce
it."
So, somebody has to pay off this huge hidden debt over at least the next 30
years.
Certainly his six-page roundup is an excellent point for state, county, city
and town officials staring into the pension abyss to start. Otherwise they put
taxpayers on the hook forever. That ultimately is what must happen without
major reforms.
Snell writes, "By the end of the first decade of this century, state
retirement plans had suffered an enormous reversal from their financial status
in 1999 ... Since then, two recessions have battered their assets. The slow recovery
from the last recession has made it impossible for states to rebuild pension
system assets. Some systems have also suffered from inadequate state
contributions over a long period and from unfunded increases in benefits."
In theory, defined benefit pensions are the best way to prevent poverty in old
age. In practice they are "moral hazards" allowing greedy politicians
and corporate executives -- who make false promises then take the money and run
-- to loot the present at the expense of future generations.
For private business pensioners, it's tough luck. For government pensioners,
the tough luck falls entirely on taxpayers. Under current law, government
pensioners get paid in full first. Everybody else, including bondholders and
current employees, is down on the money list. The only list taxpayers are on is
for asset seizure and ultimately imprisonment.
Nothing in the reforms states enacted significantly reduces the existing debt
to pensioners.
Snell confirms that even closing a defined benefit plan and "Adopting a
new plan which may in itself be less expensive for
employers does not directly address any existing unfunded liability .... Legacy
costs could mean an increased burden of employer contributions for closed plans
as their membership falls over time."
Two years ago in a report on pension reform, he called proposed changes
"Radical and Conservative."
He wrote then, "Reversing this trend is a radical change in direction ...
But the changes are also conservative."
Since then, more states and an unknown number of municipalities have tried to
slow pension fund descent beyond a fiscal event horizon of perpetual debt.
Others are waking up.
"No question, I think there has been an explosion in information and
awareness," Snell said Thursday.
But the big question still on the table - whether a $1 trillion or $4 trillion
question or more - is the bottom line: Who will pay for what we already owe?
Politicians need to answer that one fast and show us the payment plan they must
inflict on taxpayers, workers, bondholders and retirees.
http://www.statebudgetsolutions.org/blog/detail/ncsl-state-pension-crisis-reform-report-missing-taxpayer-bottom-line