States Aim Ax at Health Cost of Retirement
Governors and mayors facing large deficits have set their sights on a relatively new target — the soaring expense of health benefits for millions of retired state and local workers.
As they contend with growing budget deficits and higher pension costs, some mayors are complaining that their outlays for retiree health benefits are rising by 20 percent a year — a result of the wave of retirements of baby boomers and longer life expectancies on top of the double-digit rate of health care inflation.
The nation's governors face a daunting $555 billion in unfunded liabilities to finance retiree health coverage. The Pew Center on the States calculated those long-term obligations last year, saying New Jersey had the largest amount, $68.9 billion, with California second, at $62.5 billion.
"Up to now, the action taken to deal with this problem has been gradual, but it's begun to explode," said John Thomasian, director of the National Governors Association Center for Best Practices. "In 14 states, the state pays 100 percent of the health benefits for retirees. That's very generous."
Michigan officials are stunned by the looming challenges of paying retirees' health benefits, along with pension costs. "It's pretty astronomical," said John Nixon, the state's budget director. "What's happening with post-retirement health care is the biggest piece and biggest surprise."
"The issue isn't to attack these folks or go after them," he continued. "The main issue is how do we deal with this liability."
In state after state, the changes are occurring rapidly. For example, New Hampshire has stopped financing health insurance for many future retirees, while North Carolina has begun requiring state employees to work 20 years, up from five years, to qualify for full retiree health benefits. Michigan officials complain that retiree health obligations consume one-seventh of the state's payroll costs, and New York City is slated to pay $2 billion toward retiree health next year.
Over all, the Center for State and Local Government Excellence found that 68 percent of city and county officials surveyed said they were pushing to have retirees assume more of their health costs, while 39 percent said they had eliminated or planned to eliminate retiree health benefits for new hires.