$555 Billion

On October 15, 2010, I blogged about the massively unfunded and unsustainable aggregation of state and local pension benefits (A Pension for Failure). Today, I’d like to continue with an analysis of a comparable deficit of unfunded post-retirement health benefits – $555 billion – reported by the Pew Center on States (A Trillion Dollar Gap, February 2011). The big picture, however, remains the pensions – “[A]t the end of 2008, there was a $1 trillion gap between the $2.35 states and participating localities had set aside to pay for employees’ retirement benefits and the $3.35 billion price tag of those promises.” The recession has only amplified the harm as state and local property, sales and income tax revenues plunged.

But the big shocker in this mess has been the almost 20% annualized increase in post-retirement healthcare, benefits which so many local jurisdictions simply can no longer afford. Just as one segment of American politics is pushing to eliminate a more generalized availability of so-called “Obamacare,” a very large group of retired individuals is about to discover that they are either without such benefits or are going to be required to pick up a much greater piece of that cost formula, just at a time in their lives when they can afford it least. The problem with state-provided retiree healthcare is that it is generally a “pay-as-you-go” unfunded liability (only 5% of such programs are funded), and the capacity of states and municipalities to continue along this road has dropped to “impossible.”

The pain is not equally divided among the states (95% of the liability comes from half the states); California (what a surprise) leads the list with an estimate $68.9 billion with New Jersey a close second at $62.5 billion of unfunded healthcare retirement benefits. While 14% of states pick up 100% of such retiree costs, it is no surprise that states are massively moving towards making retirees pay more, and for new workers, to have such benefits (if they are permitted at all) kick in later and after many more years of service: “In state after state, the changes are occurring rapidly. For example, New Hampshire has stopped financing health insurance for many future retirees, while North Carolina has begun requiring state employees to work 20 years, up from five years, to qualify for full retiree health benefits. Michigan officials complain that retiree health obligations consume one-seventh of the state’s payroll costs, and New York City is slated to pay $2 billion toward retiree health next year.

“Overall, the Center for State and Local Government Excellence found that 68 percent of city and county officials surveyed said they were pushing to have retirees assume more of their health costs, while 39 percent said they had eliminated or planned to eliminate retiree health benefits for new hires… In many cases, states and municipalities are not required to negotiate these changes with retirees, and lawsuits challenging the cutbacks as a breach of contractual promises to retirees have resulted in mixed decisions. Many state or local workers retire before age 60, making them too young to turn to Medicare, prompting them to rely heavily on state and local plans for retirees.” New York Times, February 13^th. Last month, I blogged (State of Confusion: the “B” Word) about the growing need for federal bankruptcy law to allow for a new form of state-filed bankruptcy protection, mostly to accommodate these long-term pension and healthcare retirement benefits, many of which have contractually “vested” and cannot be changed without drastic legal measures.

All that said, these numbers are still fighting two very clear trends: (i) a graying population where Baby Boomers are retiring or set to retire in droves over the next few years and (ii) a complete and utter failure to contain rising medical costs. Couple these demands on our safety nets with the growing practice of “hiring” workers on a contract or part-time basis with no retirement or health benefits, and you have a huge looming healthcare debacle. Indeed, if the much-maligned “Obamacare” package doesn’t survive either court or legislative challenge, the very people who are battling to remove this cost from our federal ledger may be the ones struggling to find a way to cover these “out of control” medical costs long before they could possibly expect.

I’m Peter Dekom, and no matter how catchy a slogan might sound, there are no easy buttons in a world of decreasing choices, increasing needs and an economic future that, under any scenario, is unprepared for what is happening.