February 16, 2009

Benefits Neglected for Civil Retirees

By Dennis Cauchon
February 16, 2009

State and local governments have set aside virtually no money to pay $1 trillion or more in medical benefits for retired civil servants, a USA TODAY survey found. With bills coming due as Baby Boomers start to retire, states, cities, school districts and other governments may be forced to raise taxes, cut benefits or both — a task made especially difficult in an economic downturn.

IN NEBRASKA: Retiree health care issue ‘goes nowhere’ State governments have unfunded obligations worth $445 billion to subsidize health insurance for teachers, judges and other civil servants after they retire, according to a USA TODAY survey of state financial reports.

Cities, school systems, park districts, water authorities and other local governments have even bigger obligations, in excess of $500 billion, although the exact number isn’t known.

States will receive a large chunk of the $787 billion stimulus bill Congress approved last week, but that money is aimed at immediate spending, not long-term costs.

Medical benefits for retirees became common in the 1980s, sometimes in exchange for reduced pay raises. “What seemed inexpensive will become a crippling cost for some governments in the future,” says Kenneth Rust, finance chief for Portland, Ore.

These medical costs are part of a larger burden taxpayers face in providing health care for an aging population. The federal government has a $1.2 trillion unfunded obligation to pay medical costs for retired federal workers and military personnel. Medicare and Social Security push the nation’s unfunded promises above $50 trillion.

States and big cities were required for the first time last year to report the value of medical benefits promised to current and future retirees. State and local governments employ 20 million. An additional 7 million are retired.

Unlike private companies, most governments subsidize health insurance for retired employees. Soaring medical costs have made the benefit valuable to workers, especially those who retire early, and costly to governments.

Dover, N.H., a town of 26,000, will see its retiree health care costs triple to $3 million annually in the next 10 yearsas the number of retirees grows, according to its actuary. What states are doing:

  • Cutting health benefits. Most governments have the legal authority to reduce or end retiree health coverage — unlike pensions, which cannot be cut under most states’ laws. When Rhode Island trimmed retiree medical benefits in October, 1,291 workers — 9% of the state’s workforce — retired to keep the more generous old health plan.
  • Saving money. Alaska, Minnesota, Pennsylvania and Utah are among states that set aside some money last year to prepare for future medical costs.