City Hall Plaza, Boston
Jorge Antonio—Getty Images/iStockphoto
By Dan Kadlec
November 18, 2016

Public employees are rightly fixated on the health of their pensions, which are under attack from revenue-starved states and cities. But there is another benefits bomb set to go off that probably deserves as much attention.

Retiree health care programs for public employees are overall in far worse financial shape than the pension system, recent research from the Hoover Institution at Stanford University says. Only a handful of cities and states have put away as much as 10% of their future health care liabilities. Most have set aside less than 2%, raising the specter of large tax increases on property owners and reduced government services down the road, as taxing authorities come to grips with a massive underfunding. Benefits cuts in the most strapped cities are not out of the question.

Total U.S. unfunded health care liabilities approach $1 trillion, according to the National Bureau of Economic Research. This issue has flown beneath the radar for decades due to lax disclosure rules. But new standards that require governments to report their obligations have forced the liabilities into the open. Next year, even stronger disclosure rules are set to go into effect.

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No longer able to paper over these liabilities, some governments have taken aim at them, such as by raising deductibles and requiring longer employment periods to become eligible.

Public health care liabilities do not measure up to the estimated $1.75 trillion of unfunded liabilities for state public pensions. But pension guarantees are more secure. For one thing, they are about 70% funded. They are also written into some state constitutions and mainly vulnerable in bankruptcy, although a recent California ruling now before the state Supreme Court could pave the way for pension benefits cuts made solely for budget reasons.

Health care benefits are protected to a point by court decisions and collective bargaining agreements. But those bargaining agreements get renegotiated every five to seven years. At risk in the next rounds of talks are the health care benefits promised to public employees from the time they retire—often at 50 or 55—until they are eligible for Medicare at age 65.

Cities in the worst shape with their health care promises include San Francisco and Boston. Expect officials in such places to try to renegotiate their obligations, says Robert Pozen, co-author of the Hoover Institution report and senior lecturer at MIT Sloan School of Management. He believes retiree health care benefits are reasonably safe for now, short of bankruptcy. States have a long history of making good on these promises and are more likely to try to raise revenue before chipping away at benefits. That means the impact on property owners could be significant as taxes rise or services are reduced, or both.

As a resident or property owner, you can get a sense of your vulnerability by finding out how underfunded your city or state’s health care plan is. Governments must publish their unfunded liability for retiree health care in annual financial statements and, next year, on their balance sheet.

If you’re a local-government employee, meanwhile, read the collective bargaining agreement that covers you. “Unless expressly guaranteed for life, health care benefits end at the termination of the collective bargaining agreement and therefore can usually be renegotiated,” Pozen says.

If you’re really worried about losing benefits, speed up your retirement date, he says. The benefits of those already retired are least likely to be changed.

 

 

 

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