Wednesday, October 13, 2010

New York's $200 Billion Retiree Health Care Funding Shortfall

The New York Times is reporting that New York State is short $200 billion in covering retiree health care obligations for its state employees. That's $200 billion - with a capital B.
The total cost appears in a report to be issued on Wednesday by the Empire Center for New York State Policy, a research organization that studies fiscal policy.

It does not suggest that New York must somehow come up with $200 billion right away.

But the report casts serious doubt over whether medical benefits for New York’s retirees will be sustainable, given the sputtering economy and today’s climate of hostility toward new taxes and taxpayer bailouts.

The daunting size of the health care obligation raises the possibility that localities will be forced at some point to choose between paying their retirees’ medical costs and paying the investors who hold their bonds. Government officials aim to satisfy both groups, and have even made painful cuts in local services when necessary to keep up with both sets of payments.

Only a few places have tried to rein in their costs, by billing retirees for a portion of the premiums, for example. Retirees have responded with lawsuits, but ratings agencies and municipal bond buyers have shrugged off these warning signs.

“So far, the market doesn’t care,” said Edmund J. McMahon, the director of the Empire Center. “The market seems to assume, on the basis of nothing, that at some point all of these places are simply going to stop paying retiree health benefits.”

The health benefits are entirely separate from the pensions that New York’s public workers have earned. Governments have reported their pension obligations for years, but their retiree medical obligations have been building up unseen, because governments were not required to account for them. The information is starting to come to light because of a new accounting requirement.

One city, Schenectady, found the cost too overwhelming to calculate, warning that it “will be astronomical, with the potential of bankrupting municipalities.”

The city even said in a document accompanying a recent debt offering that it did not know whether it was really required to comply with the new accounting rule.
No one seems to have a clue how to fund this, and everyone in Albany appears to be doing little more than paying lip service to fiscal responsibility.

How can the state afford these obligations? They can't - unless they want to impose a massive tax hike on taxpayers that are already among the highest taxed in the nation (and don't think for a moment that other states aren't in better shape - they aren't). What will end up happening is that the state will attempt to shift the burden on to those retirees, rather than assuming the costs.

It wont come without lawsuits by those retirees who will claim that the state has violated its contractual obligations to pay those costs, but the states can no longer afford these benefits. It will mean that new hires will not see these kinds of benefits, and that existing employees will see their retirement benefits altered to eliminate these kinds of coverages.

That will help years down the road, but existing obligations will saddle the state with costs it cannot afford.

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