U.S. Cities have $12.7 Billion in Retiree Health Costs
Study: Cities have $12.7B in retiree health costs
March 15, 2013AP - Michigan cities and townships that provide health care for retired public workers face nearly $13 billion in unfunded costs, according to a report released Thursday, with half setting aside no money to cope with a bill gobbling up more of their budgets.
The sobering study, released the same day an emergency financial manager was assigned to Detroit, shows the city is not alone in grappling with how to pay promised health benefits
to retirees. More than 300 cities, townships and villages — home to
two-thirds of state residents — face a combined $12.7 billion in
unfunded liabilities in the next 30 years.
Detailing his findings to a state legislative committee on Thursday, he warned that higher taxes, budget cuts or broken promises to retirees are inevitable, and called on lawmakers to step in and help find solutions."It's a crisis now and it's only going to get worse," said Eric Scorsone, an economist at Michigan State University and expert on government finances.
"For Michigan, as a state, for our local governments, this is the biggest long-term financial challenge we have right now," said Scorsone, lead author of the report.
Unlike pension benefits, retiree
health care is often not pre-funded, where money is put aside so it can
generate investment income used to help pay future costs. About half of
the municipalities that offer health insurance
to retirees pay as they go, relying mostly on tax revenue to foot the
bill each year despite longer lifespans and rapidly rising health care
costs, according to the report.
Detroit's $5 billion tab accounts for nearly 40 percent of the $12.7 billion liability. But Scorsone said larger cities such as Grand Rapids, Flint — which has an emergency manager — Lansing and Saginaw also face large health care bills for retirees.
Nearly $11 billion is attributable to municipalities in a 10-county region in southeast Michigan.
"Many Michigan municipalities have taken incremental steps to reduce the (non-pension) liability, but the local governments with the greatest amount of fiscal stress will need more drastic measures," the report said.
Scorsone stopped short of
recommending specific actions, but said other cities and states have
considered pooling resources, cutting retirees' benefits or making them
pay more — depending on what union contracts allow — and moving retirees
under 65 into the new health insurance
exchanges required under the federal health care overhaul. He also
mentioned that new laws make current public employees and teachers pay
more of their health costs but said there could be barriers to trying
the same thing with unionized retirees, depending on how past labor
contracts were written.
Rep. Earl Poleski, R-Jackson, chairman of the House Financial Liability Reform Committee, said the question is how to fix the problem.
"Frankly, we've made promises to people that it appears are going to be very difficult to fulfill. It's the job of our committee to try and mitigate those exposures on the behalf of taxpayers while respecting the obligations that have been made to employees and others," he said.Poleski said lawmakers may give local governments some tools to make appropriate changes, but ultimately "they have to summon the political ability to deal with their unfunded obligations."
Scorsone said cities and townships historically offered retiree benefits to compete with the Detroit Three automakers and other private employers. Health benefits in particular help workers such as police and firefighters who retire in their 50s before Medicare kicks in at age 65.
