CLT
UPDATE
Sunday April 24, 2005
The secret ticking time bomb:
"public service" pensions, health insurance giveaways
There is a time bomb quietly ticking away in the
netherlands of state and local government, and it is set to blow up in
the next few years. When it detonates, the damage will easily run into
the hundreds of billions of dollars—forcing tax hikes and public service
cuts that will affect the lives of millions of Americans unless dramatic
action is taken soon. Why? Because, unlike the private sector, the
majority of government employers — 48 out of 50 states and more than
half of all municipalities — still provide health-care benefits for
their workers after retirement. The problem is, lawmakers haven't
bothered to set aside nearly enough money to pay for these contractually
guaranteed benefits. With health-care costs soaring and the rolls of
public workers at retirement age growing fast, the tab for these
obligations is expanding exponentially. And the bill is now coming
due....
Compounding the problem is the fact that public-sector workers are
typically eligible to retire with full pension and health benefits at a
much younger age (often in their mid-50s) than their private-sector
counterparts. That puts the government employer on the hook for even
more years of retiree health care. And all this is happening against a
backdrop of health costs escalating at a far greater pace than the tax
base....
That's proving to be a tough sell with union officials.... For starters,
government employees are far more likely to be unionized — a mere 9% of
all private-sector workers are now represented by a union, compared with
about 43% of all state and local workers.
Fortune
Tuesday, April 19, 2005
The Great State Health-Care Giveaway
Taxpayers get the bill,
and it’s easily hundreds of billions of dollars
While these health insurance costs may seem high for
part-time elected officials, the really high cost to the town comes when
and if the official opts for town insurance when he "retires." State law
defines this as age 55 whether or not the person continues to be
employed.
In a 2003 draft memo put together by Finance Committee Chairman Jack
Watkins, he shows how outrageously expensive this can be. Mr. Watkins
set up a hypothetical example of a selectman or School Committee member,
49 years old, married, who serves only two terms or six years on a
board. Assuming a modest -- some might say low -- health insurance
inflation of 6 percent per year, that one elected official would cost
the town over $74,000 during his six-year term of office under the
town's HMO Blue family plan. However, if that individual then signs up
at age 55 for the town's retirement health benefits plan and lives to
the ripe old age of 84, it may cost the town an additional $418,000. The
total for this one person serving only six years in a part-time capacity
comes close to half a million dollars. Is this what we want to pay, or
should be paying, for what we euphemistically call a "public servant"?
The North Andover Citizen
Friday, April 22, 2005
Time to Wean Elected Officials Off
Subsidized Town Health Benefits
By Ted Tripp / Just thinking
As the debate grows over the future of Social Security,
officials in most of the states are struggling with a $260 billion gap in
another frayed retirement safety net: public pension programs....
Nine out of 10 state retirement plans provide a benefit defined up front for the
retiree, based on years of service and preretirement salary levels. But several
states are exploring a switch to a defined contribution plan.
Defined contribution plans require workers and the state, as the employer, to
each contribute a set amount. Workers invest these contributions, and walk away
with whatever is in their account when they retire.
Associated Press
Saturday, April 23, 2005
States work to close $260B pension gap
Under an agreement reached last year between the Romney
administration and the Legislature, the state will spend $1.27 billion on public
employee pensions in fiscal 2006. That's a 4.7 percent increase in one of the
single biggest line items in the state budget....
The decision to take pension funding "off budget," as Beacon Hill insiders say,
was made after the Legislature spent several years slashing the line item to
make fiscal ends meet during tougher fiscal times. One effect of that strategy
was to exacerbate the state's already massive unfunded pension liability...
State House News Service
Advances - Week of January 10, 2005
Big pieces of spending pie spoken for
Pension funding set
Chip Ford's CLT Commentary
As if the impending crash of Social Security and
Medicare isn't overwhelming enough for taxpayers, now comes news of
perhaps an even bigger threat to our financial survival -- and
especially that of younger workers and taxpayers and those not yet born. The "public
service" gravy train is soon to utterly bury us, especially the
younger generations coming up who'll have to pay the staggering bill for government
first and foremost taking care of itself as usual.
This begins to explain why one of the largest line
items in the state budget has recently been taken "off-budget" where
it's less visible. This "whistling-past-the-graveyard" tactic makes it
no less a bill payable down the road, and we know who's going to do the
paying -- and who'll be doing the getting.
Is it any surprise that, as Ted Tripp
reported in his column, "during the latter 1990s, the Legislature
changed Massachusetts General Laws to require towns to offer those
elected officials receiving stipends the same benefits as other town
employees"? Those were the boom years for revenue at both the state
and
municipal levels, when the Legislature still "couldn't afford" to
roll back the "temporary" income tax rate. That a two-term part-time
selectman is eligible for taxpayer-funded health insurance which can
cost upwards to half a million taxpayer-bucks during his lifetime is
ridiculous. How many two-term selectmen and countless other elected and
appointed local officials are there in our lifetime who will eventually
take advantage of this giveaway at our expense?
On Mar. 7, the Boston Globe ["State
sees burden in Bush funding idea; President mulls tax on public workers"]
reported:
"There are 106 public retirement plans in
Massachusetts. Most of the public school teachers in Massachusetts,
for example, contribute to a pension plan that pays an average annual
benefit of about $27,000. State workers get an average pension payment
of $20,513. By comparison, Social Security pays an annual average
benefit of $11,400.... The state is now helping to make up for those
lower contributions, with much of the $1.2 billion from general
revenues going annually to support the fund that pays benefits to
teachers and most state workers."
In
my commentary the following day, I noted:
"Taking advantage of us, their taxpaying employers,
is nothing new -- but attempting to keep our retirements inferior to
theirs is an obscene travesty we should not tolerate."
That day's CLT Update, "Taxpayers' employees, a class
of their own," covered the curious resistance, the hostile
opposition by public employee unions, to President Bush's proposal to
allow mere taxpayers to begin allocating a small portion of their Social
Security withholding to a private account of their own. Their
reason for such resistance is becoming clear.
When Social Security hits the wall, as increasing
Medicare and state Medicaid costs continue plodding uphill like a
juggernaut while the Legislature keeps expanding and creating new ways
to spend our money -- when inevitable "tough choices" are finally
unavoidable -- you can bet your last dollar, literally, that the last
thing to go will be the platinum entitlements of public employees and
their union hangers-on, paid for by taxpayers.
They are covered by bargained contracts. We are
covered by only vague political "promises."
And we all know how politicians feel about promises
-- especially when the "tough choice" comes down to them or us.
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Chip Ford |
Fortune
Tuesday, April 19, 2005
HEALTH-CARE CRISIS
The Great State Health-Care Giveaway
Taxpayers get the bill, and it’s easily hundreds of billions of dollars
By Janice Revell
It's easy to imagine that the retiree health-care crunch doesn't really
apply to you. That your pocketbook is somehow impervious to the
demographic reality of millions of prescription-pill-popping, arthritic
baby-boomers deluging the medical system. Let's say you've never had
your retirement health benefits dropped, and you don't own stock in a
cash-strapped company struggling with its obligations to retired union
workers. Let's go further and assume that you're among the precious,
perfect few who are diligently salting away enough money now to cover
your future medical costs, just in case your employer isn't there for
you. But even if all those things are true, you're still in grave
danger.
There is a time bomb quietly ticking away in the netherlands of state
and local government, and it is set to blow up in the next few years.
When it detonates, the damage will easily run into the hundreds of
billions of dollars—forcing tax hikes and public service cuts that will
affect the lives of millions of Americans unless dramatic action is
taken soon. Why? Because, unlike the private sector, the majority of
government employers — 48 out of 50 states and more than half of all
municipalities — still provide health-care benefits for their workers
after retirement. The problem is, lawmakers haven't bothered to set
aside nearly enough money to pay for these contractually guaranteed
benefits. With health-care costs soaring and the rolls of public workers
at retirement age growing fast, the tab for these obligations is
expanding exponentially. And the bill is now coming due.
This phenomenon is already weighing on state and local governments.
Consider the estimated $17 billion in unfunded retiree health benefits
that California's largest school districts have now racked up — money
that must eventually come out of school budgets. Or the $26 million a
year that the city of Buffalo now shells out on health care for its
retirees (more than it spends on health care for active workers and
equivalent to about 20% of the city's annual haul from property taxes).
Even tiny hamlets are starting to feel the pain: In Crosby, Minn., high
school teachers have just returned to the classroom after an eight-week
strike that centered on health benefits in retirement.
So why, you're wondering, haven't you heard much — perhaps not anything
— about this impending crisis? The reason is simple: State and local
governments don't have to disclose the extent of their health-care
liability for retirees, so they don't. And what's worse, they habitually
foist the cost onto the next generation of legislators.
That's about to change. The Governmental Accounting Standards Board,
which sets the accounting rules for state and local governments, will
soon force public-sector employers to show on their financial statements
the total dollar value of the retiree health-care promises they have
made to each worker and retiree. They'll also have to book an expense in
their annual budgets for the dollars that will be required to fully fund
those retiree health-care liabilities over a 30-year period. (The rules
don't technically require governments to come up with that amount of
cash each year — but if they don't, the squeeze that hits when the
boomers retire en masse will be even more severe.) The rules kick in for
budgets in fiscal years closing after December 2006. But as we have seen
above, the effects are already being felt.
Under the current system, municipal and state governments make room in
their budgets every year for the amount of money they need to cover
retiree health care over the next 12 months only. The problem with that
pay-as-you-go accounting system is that it ignores the value of the
health-care benefits that retirees and active workers alike have already
earned but not yet received. It isn't simply an accounting issue: We're
talking about real health-care benefits that must eventually be paid
with real cash. There's a precedent in the private sector for this kind
of shift in accounting standards — and it's not pretty. Back in 1990,
the same rules that are about to take effect for state and local
governments were forced on U.S. corporations. Companies suddenly began
disclosing huge retiree health-care liabilities on their balance sheets
and dramatically increased health-care expenses on their income
statements. And Wall Street promptly threatened to punish the stocks of
companies offering retiree health care to workers. Executives responded,
of course, by taking an ax to the plans. From 1993 to 2003 the number of
large companies offering medical coverage to retirees dropped by half,
from 40% to 21%. And experts say the decline in the private sector will
continue. "Companies just can't afford it," says Dale Yamamoto, a
health-care actuary with benefits consulting firm Hewitt Associates.
Nor, he asserts, can governments. "They're 20 years behind in the
public-sector world," says Yamamoto.
Since governments aren't yet required to disclose their anticipated
liabilities, no one knows what the scope of the damage will be. But
Richard Johnson, an actuary who heads the public-sector health-care
practice at benefits consulting firm Segal Co., says he has already
begun crunching the numbers for some of his clients. The result? They
are "shocked, simply shocked."
To get a feeling for how quickly the costs add up, let's look at a
specific example. In North Carolina any state employee who puts in just
five years of service becomes eligible to receive free retiree health
insurance for life. (That's at the low end of the spectrum; many
public-sector employers require ten years of service to be eligible for
benefits.) So a 35-year-old state worker with five years on the job, for
instance, can then head off to the private sector for the rest of his
career. When he retires from that private-sector job, he'll receive free
health insurance from the state of North Carolina for the rest of his
life — a benefit that could easily be worth over $100,000. But under
current accounting rules, North Carolina doesn't have to tell the public
how much the package they just handed that 35-year-old will ultimately
cost them.
And that kind of generosity will soon come back to haunt both taxpayers
and state workers. According to recent estimates, the new accounting
rule would create an instant liability of about $13 billion on North
Carolina's balance sheet — that's about 40 times the amount the state
currently spends on retiree health care each year. "This is really going
to shake things up," says Sherry Melton of the State Employees
Association of North Carolina, which represents about 55,000 workers.
"Our health plan is in a death spiral, and the lawmakers are
underfunding it."
It's not just North Carolina that will be shaken up. In many public
systems, half of the active workers are now eligible for retirement.
Compounding the problem is the fact that public-sector workers are
typically eligible to retire with full pension and health benefits at a
much younger age (often in their mid-50s) than their private-sector
counterparts. That puts the government employer on the hook for even
more years of retiree health care. And all this is happening against a
backdrop of health costs escalating at a far greater pace than the tax
base. "How many politicians will have gone on to higher office telling
taxpayers what a wonderful job they have done keeping taxes down, all
the while deceiving them — either intentionally or ignorantly?" asks
Frederick Faerber, a CPA who until recently served as the vice chairman
of the Trusts and Investments Commission for the city of Newport, R.I.
A few politicians have taken an early stand. In Duluth, Minn., Mayor
Herb Bergson says he's already decided to cut services in order to get a
leg up on funding the city's estimated $150 million retiree health
liability. "The city will be bankrupt in ten years if we continue to go
down the path we're going," warns Bergson. He's put a freeze on hiring
additional workers, which has resulted in about 80 positions not being
filled during the past couple of years. "We're at a point now where our
level of personnel in police and fire is getting dangerously low," says
Bergson. But the only real solution, he says, is to get rid of the
retiree health benefit altogether for newly hired employees. "The cost
is just too high now, and we can't afford to give it out in the future,"
he says.
That's proving to be a tough sell with union officials. "We have traded
wage increases and other benefits for this," says Ken Loeffler-Kemp, a
Duluth-based representative with the American Federation of State,
County, and Municipal Employees. Indeed, don't expect the public sector
to follow the lead of many corporations, which have simply eliminated
retiree health care for active workers and retirees alike. For starters,
government employees are far more likely to be unionized — a mere 9% of
all private-sector workers are now represented by a union, compared with
about 43% of all state and local workers. And elected officials are
often loath to take on those powerful unions, whose members can both
vote and strike. "When you look at the union strikes over the last few
years, most were over health benefits," notes Paul Fronstin, a
researcher at the Employee Benefit Research Institute, based in
Washington, D.C. And even if they wanted to eliminate the retiree
benefits of existing employees, lawmakers would probably run into a
brick wall, since courts have almost uniformly enforced public employee
retirement benefits once they've been granted.
So what's the solution? There's certainly the possibility of offloading
more state and local health-care spending to the federal government. In
fact, that has already begun. Last year's prescription-drug bill
provides that government employers offering drug benefits to retirees
that are at least equal to those provided by Medicare will get a subsidy
from the federal government. Some lawmakers at the state and local
levels will no doubt attempt to fill the retiree health-care gap by,
say, issuing bonds. But of course that doesn't get rid of the obligation
— it simply postpones it.
While eliminating retiree health care may not be possible, cutting back
on the generosity of the benefit is. Melton, of the North Carolina
workers association, says that state workers have seen their retiree
health-care benefits cut continually during the past five years, mostly
in the form of increased premiums and co-payments for prescription
drugs. She also says that in an effort to drive down the plan's costs,
her organization has proposed an increase in the eligibility requirement
for full retiree health care from the current five years of service to
20 years. But the idea hasn't taken hold with legislators. "Lawmakers
are in the same health plan," notes Melton. "And it's a lot easier to
win three two-year terms of office in order to get that five years than
it is to meet a 20-year vesting requirement."
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The North Andover Citizen
Friday, April 22, 2005
Time to Wean Elected Officials Off Subsidized Town Health Benefits
By Ted Tripp /
Just thinking
In 1946 the town of North Andover set up a group health insurance plan
for its employees. It agreed to subsidize part of the premiums for those
employees working more than 20 hours a week, but the plan was also
available to others affiliated with the town as long as they paid the
full premium.
The move provided two benefits to the community: It provided a healthier
workforce and helped to retain employees by supplementing wages that
were typically less than those earned in the private sector. Health
insurance was also quite inexpensive at the time.
Up until the early 1990s, part-time elected officials were also eligible
for the town's insurance as long as they paid 100 percent of the
premium, and some officials took advantage of the group rates. Sometime
during the latter 1990s, the Legislature changed Massachusetts General
Laws to require towns to offer those elected officials receiving
stipends the same benefits as other town employees. Thus, they became
eligible for subsidized health insurance benefits, a small pension and,
for most, retired employee health insurance benefits. The selectmen and
moderator had been paid stipends for many years, and the School
Committee was included by Town Meeting in 1995. They all immediately
became eligible for the subsidized benefits. Three selectmen are
currently receiving the benefits and a fourth is considering it. One
School Committee member and the moderator also take advantage of the
town's health plan.
The problem we are faced with today is the very high cost of these
health benefits competing with the limited tax dollars available for
public safety and education. Although the town offers several
health-care plans, on the most popular family plan it pays 87 percent of
the premium, or an average of $11,856 per year for each employee. For
the most popular individual plan, the town pays 90 percent of the
premium, or about $4,788 annually. Keep in mind that these costs to the
town are on top of the $2,000 stipend paid to most of our elected
officials who choose to sign up for the benefits.
While these health insurance costs may seem high for part-time elected
officials, the really high cost to the town comes when and if the
official opts for town insurance when he "retires." State law defines
this as age 55 whether or not the person continues to be employed.
In a 2003 draft memo put together by Finance Committee Chairman Jack
Watkins, he shows how outrageously expensive this can be. Mr. Watkins
set up a hypothetical example of a selectman or School Committee member,
49 years old, married, who serves only two terms or six years on a
board. Assuming a modest -- some might say low -- health insurance
inflation of 6 percent per year, that one elected official would cost
the town over $74,000 during his six-year term of office under the
town's HMO Blue family plan. However, if that individual then signs up
at age 55 for the town's retirement health benefits plan and lives to
the ripe old age of 84, it may cost the town an additional $418,000. The
total for this one person serving only six years in a part-time capacity
comes close to half a million dollars. Is this what we want to pay, or
should be paying, for what we euphemistically call a "public servant"?
So what do we do? Up through last year's annual Town Meeting, the
Finance Committee believed that the only way to deny health benefits to
elected officials was to eliminate the stipends. There was some talk of
this at the meeting, but after several heated exchanges by attendees and
town officials, the voters agreed to maintain the status quo. This year,
FinCom Chairman Jack Watkins has new information and believes the
selectmen can unilaterally vote to withdraw town health benefits from
elected officials receiving stipends. In the Town Meeting warrant
enclosed with this paper, he and the FinCom urge the selectmen to take
this action as their right and authority under MGL 32B, Sec. 2. The
mechanics of this are a little unclear and might require a home rule
petition to the Legislature, such as the town of Boxborough has been
pursuing.
Another option would be for the Board of Selectmen to establish an
internal policy removing themselves from eligibility for town health
benefits. This is what the selectmen in Stoneham did in the early 1990s
during a difficult financial period. They continue to get paid a stipend
of $1,000 per year but do not receive any health benefits. They did,
however, grandfather in those officials already covered by insurance as
a measure of fairness.
There is apparently no reason our selectmen can't do this immediately
here in North Andover. And if the Board of Selectmen can do it, so can
our School Committee. Even though such a policy may be changed at any
time, public pressure should easily keep a no-health-care rule from
being overturned any time soon. It's also important to grandfather in
those current officials who have relied on the insurance as a benefit in
the past. If a grandfathered official decides to continue using town
insurance at the next election cycle, he will be subject to the
displeasure of the voting public.
With regards to stipends, the town should continue the practice of
compensating elected officials for some of the time and effort they
spend on town affairs. Selectmen and, to a lesser extent, School
Committee members incur out-of-pocket expenses and should expect
reimbursement. One could even make a good argument that if we are going
to remove health care benefits, we should increase stipends as an
offset. Anybody who thinks our elected officials don't deserve some kind
of monetary compensation is being unrealistic in today's society.
Whichever course our elected boards decide to pursue, they should act
now and act decisively to permanently change a policy that is simply
just too expensive to continue in our tight revenue environment.
Ted Tripp, a CLT member, is a co-founder of the North Andover
Taxpayers Association. His weekly columns appear in the
North Andover Citizen.
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Associated Press
Saturday, April 23, 2005
States work to close $260B pension gap
By Lawrence Messina
CHARLESTON, W.Va.— As the debate grows over the future of Social
Security, officials in most of the states are struggling with a $260
billion gap in another frayed retirement safety net: public pension
programs.
More than 5.1 million retired teachers, judges, law enforcement and
other public employees now rely on public pensions, with another 15
million workers expecting benefits when they retire.
But a period of poor investment returns, rising benefits and states’
failures to properly fund their plans have created a gap between assets
and benefits in 45 states, according to the National Association of
State Retirement Administrators.
In 13 states, the unfunded liabilities exceed their annual general
revenue budgets. For half the states, pension fund shortfalls top $3
billion, NASRA said.
The worst-funded plan: the older of West Virginia’s two retirement
programs for its teachers. For every dollar it has on hand, it owes
$3.50 in promised benefits.
Garry Lynn Shearer is among the 45,363 active and retired state teachers
enrolled in that plan. Shearer taught English and social studies to
several generations of ninth-graders before retiring in 1994. Though the
cost of living has increased in the past decade, her pension check
hasn’t because of the funding shortfall.
"I sure do live hand to mouth,” the 66-year-old great-grandmother said.
Public pension funds like West Virginia’s Teachers Retirement System
will be strained even further as baby boomers begin to reach retirement
age. That generation is expected to double the 65 and older segment of
the nation’s population to more than 67 million by 2030. By that time,
and for several decades afterward, one in five Americans will be of that
age group.
The stock market’s rebound following its 2000-02 slump has helped
somewhat. In its most recent annual report on state retirement systems,
California-based Wilshire Associates found that the 64 plans it tracks
closed their funding gaps by $75 million. These plans had only 77 cents
on hand for every dollar in promised benefits in 2003; they now have 83
cents on hand.
But states need to protect their budgets, and so they’re reviewing
different strategies to address pension funds. For example, Rhode
Island’s governor has proposed a minimum retirement age of 60 and would
have state employees work two years longer, for a minimum of 30 years,
before they could receive pensions. Plans there face $3.1 billion in
shortfalls, and the proposal estimates savings of $256 million over the
next five years.
Proposals advanced in Rhode Island would limit some cost-of-living
raises. State General Treasurer Paul Tavares has introduced a pension
plan that competes with Gov. Don Carcieri’s plan. Both want to tie
cost-of-living increases to the rate of inflation, instead of the
current fixed 3 percent increase.
Another strategy is to change benefits from defined benefit plans to
defined contribution, an idea that has grown in popularity at
corporations thanks to the 401(k) plan.
Nine out of 10 state retirement plans provide a benefit defined up front
for the retiree, based on years of service and preretirement salary
levels. But several states are exploring a switch to a defined
contribution plan.
Defined contribution plans require workers and the state, as the
employer, to each contribute a set amount. Workers invest these
contributions, and walk away with whatever is in their account when they
retire.
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State House News Service
Advances - Week of January 10, 2005 [Excerpt]
Big pieces of spending pie spoken for
Pension funding set
While spring budget debates will determine the fate of scores of line
items and policy initiatives, increasingly large chunks of state revenue
have already been taken off the table for the most part. Under an
agreement reached last year between the Romney administration and the
Legislature, the state will spend $1.27 billion on public employee
pensions in fiscal 2006. That's a 4.7 percent increase in one of the
single biggest line items in the state budget....
The decision to take pension funding "off budget," as Beacon Hill
insiders say, was made after the Legislature spent several years
slashing the line item to make fiscal ends meet during tougher fiscal
times. One effect of that strategy was to exacerbate the state's already
massive unfunded pension liability, which Wall Street credit analysts
say is a blemish on Massachusetts state government's record.
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U.S.C. section 107, this material is distributed without profit or
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