Over the next 25 years, the cost of health benefits for public retirees in Washington could reach more than $12 billion. According to a report...
Over the next 25 years, the cost of health benefits for public retirees in Washington could reach more than $12 billion. According to a report released by the state actuary, even if the state immediately stops promising benefits to future employees, the cost of paying out subsidies to current employees will exceed $7.4 billion in the same period.
This massive liability was measured for the first time because of a new rule known as GASB 45, issued by the Governmental Accounting Standards Board, which sets accounting standards for the public sector. The rule changes accounting procedures for retiree health benefits from pay as you go to an accrual basis.
The current pay-as-you-go funding method used by the state recognizes cash going out the door for benefits paid to current retirees who have long since performed their service. The problem is that this method ignores promised benefits for current employees. As new obligations are accrued, the cost of deferred compensation is not reported anywhere in a government’s financial statements, so the true liability is vastly underreported.
The old rules made it very easy for governments to promise employees benefits during retirement, since doing so had no effect on their balance sheets. Costs were not reflected in the budget until benefits were paid to retirees years later, long after the politicians who made the promises left office.
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Currently, Washington is setting aside only about 20 percent of the $600 million needed annually to eliminate the unfunded liability in 25 years.
The good news for taxpayers is that GASB 45 shines a bright light on these heretofore unacknowledged liabilities and may slow down governments’ tendency to engage in runaway promise-making to employees. Now that legislators are aware of the problem, they can begin working toward solutions.
Some costs might be passed off to retirees in the form of higher premiums, higher copayments, or higher deductibles. Governments may also put caps on the plans, or close them to new employees. Some may try to fund the bill with higher taxes or by selling or leasing certain infrastructure assets.
Unfortunately, Washington’s initial response has been dismissive of the state actuary’s report. The Office of Financial Management says retiree health benefits, unlike pensions, are not contractual obligations but appropriations “provided at the discretion of each Legislature.” In other words, the state can get rid of them any time it wants. Because of that, OFM says any measurement of long-term liability is irrelevant.
Don’t be fooled — it is highly unrealistic that any legislature will repeal these benefits. The last thing lawmakers want is to provoke a senior-citizen rally outside the Capitol. The Legislature has no intention of changing anything because it does, in fact, view employee benefits as an obligation.
Even if legislators wanted to eliminate them, the effort would likely set unions on the warpath and pull the state into a legal battle, as occurred after the Legislature removed gain-sharing pension benefits earlier this year. State-employee unions filed a lawsuit immediately to get those benefits restored even though gain-sharing is not a contractual obligation, either.
Rather than seeking solutions, the state is advocating a steady course of “more of the same.” OFM claims pre-funding retiree health benefits could “unintentionally create an obligation where none now exists.” But, at the same time, the state recommends maintaining current benefit levels.
In all likelihood, the only reason the state bothered to calculate the liabilities at all is because of the negative impact outright refusal to comply with GASB standards would have had on the state’s credit rating. Agencies such as Standard & Poors will compare the size of the unfunded liabilities with payroll, budget, and tax base to determine bond ratings. Ignoring the requirement would have put the state in Wall Street’s dog house and doubtless increased the cost of capital.
The pay-as-you-go funding method is unfair to public employees and taxpayers alike. Employees deserve to know whether or not they can count on promised benefits. Taxpayers deserve to know exactly how much those benefits will cost.
If lawmakers refuse to face the music, the problem will eventually catch up to state and local governments in the form of ever-higher benefit payments, particularly as the population ages and health-care costs inflate faster than revenues.
If employees are to receive their promised benefits, the state needs to work toward a solution now so that in 25 years our children aren’t slapped with a multi-billion-dollar tab for benefits promised by lawmakers long gone.
Amber Gunn is a policy analyst with the Evergreen Freedom Foundation, a public policy research organization focused on individual liberty, free enterprise and accountable government. www.effwa.org