PUBLIC RETIREE HEALTH CARE COSTS

Starting tab for state retiree health costs: $36.8 billion

The state's estimated bill for retiree health care is being tallied, and as expected, it's a whopper.

The pension funds that cover public educators and state employees face an estimated $37 billion unfunded liability in providing health care and other benefits to current and future retirees.

The estimates — $19.1 billion from the Teacher Retirement System and $17.7 billion from the Employees Retirement System — were disclosed this month in response to a national accounting standard on the long-term costs of public-sector retiree benefits. The employee system includes state workers and higher-education employees except those in the University of Texas and Texas A&M systems.

The rule requires pensions and governmental bodies to disclose the accrued cost of the benefits they have promised to retirees.

The estimated cost in Texas is driven by the size of the public work force, by double-digit percentage increases in the cost of health care and by a rising number of retirees.

The cost-disclosure rule, issued by the nonprofit Governmental Accounting Standards Board, doesn't require the state to set aside money to cover its long-term costs. But it is intended to give policymakers, the public and credit-rating agencies a view into how prepared a government is to meet its obligations.

The sheer size of the cost estimates rolling in have sparked a nationwide debate over the best way to pay for them. California, Massachusetts and some other states have set aside money in an investment trust to defray some costs.

But the costs have also generated anxiety among public employees, who fear that benefits will be reduced or even eliminated over time as a way to trim state budgets. In Texas, retiree health benefits aren't constitutionally guaranteed and can be cut by lawmakers.

As directed by Speaker Tom Craddick on Wednesday, the state House Pensions and Investments Committee will "explore options for funding" retiree benefits before the next regular legislative session convenes in January 2009.

State Sen. Steve Ogden, chairman of the Senate Finance Committee, said he hasn't had a chance to review the pension plans' estimates and it's too soon to tell how budget writers will respond.

"I think it's good we've got the number out there," said Ogden, R-Bryan. "I think it is a good exercise in recognizing we have a possibility for some pretty substantial increases in the amount of money the state is going to have to come up with for basically the state employee and other retiree health care costs."

Texas, like most states, handles retiree benefits on a pay-as-it-goes-basis. An unfunded liability is incurred when a government entity promises to pay benefits but hasn't set aside money to fund all or part of the promised payments.

If Texas were to set aside money for retiree benefits — money in a trust could be invested, with proceeds used to pay the bills — the unfunded liability would decrease.

That would be a costly option. For example, in outlining the cost of advance funding, the Teacher Retirement System said the combined contribution rate — from the state, employee and local (school district) employer — would need to increase to 4.89 percent of payroll from 2.2 percent.

The fiscal year 2008 contribution rate, based on 2.2 percent, is projected to be $574 million. If the contribution rate were 4.89 percent, that total would be $1.3 billion.

Robert Smith, president of Austin-based financial management firm Sage Advisory Services Ltd. Co., said "prefunding these costs is part of the answer" to being able to afford retiree health care.

"In the absence of a plan, a game book, we are facing a massive escalation of these costs," Smith said. If they are allowed to spiral out of control, he said, retiree health care costs become a target for the irrational benefit cuts.

About 40 states have disclosed estimates of what they owe under the new accounting rule, according to a report this month by Standard & Poor's. States have calculated that they are on the hook for more than $400 billion in costs to provide health benefits promised to retired state workers.

The Texas pension funds' reports are the first two big-ticket estimates reported to the state comptroller's office; still to come are the UT and A&M systems' reports, among others.

Under the accounting standard, Texas is to report the combined state costs next year in its annual financial report. But that isn't a given because a new state law allows Texas to ignore the rule. It is the only state to have rejected it.

Accounting experts have warned that Texas risks lower credit ratings and higher costs for borrowing money if it ignores the standard.

relder@statesman.com; 445-3671

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