Report Shows Retiree Health Care Costs NY Billions

October 15, 2010

Health insurance forms and moneyThough New York's state and local governments have promised their public-sector employees more than $200 billion in post-retirement health care coverage, they haven't set aside the requisite money.

The total cost is estimated at $205 billion by the Empire Center for New York State Policy, a research organization, stated a report issued Wednesday. It determined this amount after reviewing financial reports for the state and its largest local governments, school districts, and public authorities. "This figure represents a mammoth potential transfer of wealth from future taxpayers to current government employees and retirees--for a type of benefits that is not available to the vast majority of private-sector workers," Edmund J. McMahon, director of the Empire Center, writes in the report.

Titled "Iceberg Ahead: The Hidden Cost Of Public-Sector Retiree Health Benefits In New York," the report is the result of a new government accounting standard, GASB 45. It requires that state and local governments calculate and disclose the long-term costs of meeting all of their promised retiree health care debt.

Retiree health coverage is a type of deferred compensation commonly available to only government employees, an Empire Center press release explains. Rather than being pre-funded partially through sizable investment pools, money for it comes out of annual government budgets on a "pay as you go" basis. Most of these benefit plans allow retirees to stay on them their entire lives, paying only part of the premium after five to 15 years of employment. These medical benefits for New York's retirees are unsustainable and unaffordable, the report concludes.

Some places have tried to cut costs, for example, by invoicing retirees for increased premiums, The New York Times reports. While retirees have responded with lawsuits, ratings agencies and municipal bond buyers have ignored the red flags to date. "So far, the market doesn't care," McMahon says. "The market seems to assume, on the basis of nothing, that at some point all of these places are simply going to stop paying retiree health benefits."

The $205 billion that New York State and its localities owe retirees is less than the $264 billion they owe their bondholders. Yet, health costs are increasing, and in some places the debt already has surpassed the value of the government's outstanding bonds. If a government is forced to default on either, it likely will choose the retiree health benefits, credit analysts predict. But this isn't a given.

Should it happen, retirees likely would fight back. "It will be a mess," says Jerry A. Webman, chief economist for OppenheimerFunds. "There will be a lot of disputes, a lot of litigation."

Compiled by CityTownInfo.com Staff


"Iceberg Ahead: The Hidden Cost Of Public-Sector Retiree Health Benefits In New York," empirecenter.org, October 2010, Edmund J. McMahon

"New York Faces $200 Billion In Retiree Health Costs," nytimes.com, October 12, 2010, Mary Williams Walsh

"Report Reveals Massive Cost Of Government Retiree Health Care," empirecenter.org, October 13, 2010

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