Retiree Health Care: Rhode Island’s Other Time Bomb
Friday, October 28, 2011
With the pension reform debate raging through the state’s coffee shops, newspapers, airwaves, and the halls of the statehouse, it’s been lost in the shuffle that the state’s major cities face unfunded health care liabilities that, in many cases, dwarf their pension liabilities. Information gleaned from reports suggests that Rhode Island municipalities face unfunded health care liabilities of $2.5 billion, with less than $20 million put away to cover those costs.
Referred to as Other Post-Employment Benefits (OPEB)—for the most part, retiree health care—these benefits were agreed to by politicians with public sector union workers during contract negotiations over the last several decades. The benefits, which are rare in the private sector, were defended as being necessary to attract workers into public service—similar to the rationale behind pensions.
But unlike the pension benefits, very few records were kept on these liabilities up until 2008—when the Government Accounting Standards Board changed its rules and forced municipalities to begin accounting for the liabilities. And also unlike the pension liabilities, the municipalities have done little to prepare for those costs. The communities with the largest unfunded liabilities—Providence, Warwick, Cranston, and Pawtucket—have put away either nothing, or very close to it to pay these benefits.
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Computing a municipality’s unfunded retirement liabilities is always a guessing game—because it relies on series of assumptions. For instance, nobody knows for sure how long people can be expected to live, what the actual return on investment from the investment fund will be, or what the medical rate of inflation will actually be. Ask five different actuaries what the unfunded liability of a given pension fund or OPEB is, and you’ll get give different answers.
A recent report compiled earlier this summer by Buck Consultants cautioned that the city of Providence’s unfunded retiree health care liability is a breathtaking $1.22 billion. That number is based on a 4-percent rate of return on the city’s investment. The consultants based their estimate on a 4-percent rate of return on the city’s general asset fund, because the benefits are not pre-funded.
“According to GASB principles, if the benefits are not pre-funded, the rate earned by the General Asset Account must be used,” the report states. “It was determined that a 4% discount rate is reasonable for this purpose.
Curbing the Costs
But the General Asset Account is not put in place to cover the cost of retiree health benefits, and Providence has just $1 million in assets to cover retiree health benefits.
Under the current pay-as-you-go system, city taxpayers will be forced to spend $36 million on retiree health care this year. If the city continues down the current path, taxpayers will be forced to spend $54 million on health care for retired workers.
Through a spokesman, City Council President Michael Solomon pointed out that the city is working on curbing the daunting costs.
"The City's OPEB liability is another challenge that we have worked to address in our first year. This past session the General Assembly ratified enabling legislation so the City could move eligible retirees from the City paid BlueCross plan to MediCare. This will decrease our unfunded liability, as the city will no longer be expected to pay for medical expenses covered by Medicare. While there are some short-term costs associated with transferring employees to Medicare we expect to see significant savings in out years,” said Solomon in a statement.
No Easy Solutions
Outside of convincing the federal government to bail out the fund, there are no easy solutions to the problem. If the cities and towns were to amortize the current unfunded liabilities over a 30-year period -which would put the city on a schedule to pay off these costs over a 30-year period by borrowing money, and pay off the costs over a 30-year period- the city would pay more in the short term, but nothing after 30 years.
In a confidential report by Standard and Poor’s issued earlier this March, the ratings agency pointed out that some municipalities across the country have issued obligation bonds to help soften the cost of their OPEB liabilities. But that too has its own repercussions. For instance, in Wisconsin, some school boards invested in OPEB trust funds and took losses on their investments. That made their unfunded liabilities larger instead of smaller, as the money invested and lost could have gone to paying down their liabilities.
The Standard and Poor’s report found several obstacle in reducing unfunded OPEB liabilities including: “sizable unfunded liabilities”, “high unemployment rates” in the state, “a constrained revenue environment: flat local revenues, flat to declining state aid, and a decreasing tax cap”, “lack of transparency between local governments and respective school boards”, and “strong union presence and difficulty implementing benefit changes.”
Pawtucket’s Liability
While Providence has the largest OPEB liabilities in the state, they’re certainly not alone. According to a city of Pawtucket spokesman, the city of Pawtucket has an unfunded liability of $378.2 million. Of that gargantuan cost, 77 percent of the benefits are owed to public safety workers—police and fire. Those retirees are able to collect health care benefits for life, and they’re able to attain those benefits after 20-years on the job, at any particular age.
That means a guy who gets a job as a firefighter in the city of Pawtucket at age 20 can retire at 40, and get health care from the city for the rest of their life. All of these agreements were already in place prior to Mayor Don Grebien taking office. Non police and fire employees receive health benefits until they reach 65.
Through a spokesman, Grebien suggested that the city needs to win concessions from its labor unions in order to bring the costs down.
“There is no realistic way the city can immediately come up with the approximately $378 million needed to remedy the OPEB liability or the current annual required contribution. That solution must come in extended phases over time but the main areas to be addressed are clear. We must reduce costs and revise the terms contained in our fire and police contracts because those contracts, which both expire in June 2012, are the primary contributors to our OPEB liability. We must also work with our other labor unions to find any available cost savings there as well,” said Grebien.
He also hinted that what’s being billed as “Comprehensive Pension Reform” on the state level, isn’t going to do enough to help municipalities.
“Along with many other mayors and municipalities around the state, as “pension reform” is now on the table at the state level, I am urging that more be done by the state to provide local communities like Pawtucket the tools we need to make a real difference in reducing and better managing the high costs of our pension obligations,” said Grebien.
Massive Costs
The City of Cranston has an unfunded retiree health care liability of $85 million, with just $400,000 put aside to cover those costs, according to the Auditor General’s Report.
The state Auditor General’s report says the City of Warwick has an unfunded liability of $258 million. Yet a conflicting report compiled by Jefferson Solutions, Inc., compiled earlier this year suggests that Warwick taxpayers are on the hook for $313.4 million in retiree health care. Whatever the liability is, the city has no money set aside to cover those costs.
The state government’s unfunded retiree health care liability is $679.5 million—a significant liability, but not in the same ballpark as the state’s $9 billion pension liability—or the $2.5 billion the municipalities owe.
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