In graying West Virginia, a mountain of retiree health bills

One of the perks of being a West Virginia state employee or public school teacher is a monthly subsidy — paid primarily by the state — that helps workers cover the costs of their health insurance premiums upon retirement. The average monthly subsidy is $333 per retiree.

Like similar benefits in other states, West Virginia’s subsidy has been around for decades. It is extremely popular with the 36,000 retirees who receive it now, and with the tens of thousands of current workers who are counting on it in the future.

The state’s newest hires, however, may be in for a shock. As of July 1, West Virginia no longer offers its subsidy to new employees or teachers. Any post-retirement health care costs for these workers will be theirs alone, unless they qualify for the federal government’s Medicare program.

The dramatic change puts West Virginia in the company of just a handful of states — including Florida, Kansas, Minnesota, Mississippi and Wisconsin — that now or in the future will require their retirees to pay the full cost of their health insurance premiums.

“Reprehensible” is how one teachers’ representative described the state’s decision, which was made last year but is only now beginning to be felt. Labor unions are fighting it in court. Teachers and others are warning that the move will drive prospective employees to neighboring states, where salaries are higher and the benefits are better. And they point out that new hires in West Virginia still are required to help pay for the retiree health subsidy of those who came before them, even though they won’t receive it themselves.

State leaders say they understand the frustration, but have few palatable alternatives. West Virginia faces a long-term funding shortfall in its retiree health care system that actuaries have placed at $7.4 billion — one of the biggest in the nation on a per-capita basis. Making matters worse, health care costs keep rising and West Virginia keeps graying: The state is one of the oldest in the nation. Many lawmakers believe that the only prudent approach involves scaling back retirement benefits that employees have counted on for years.

 “This is real personal stuff,” says Brooks McCabe, the state senator who has been at the center of ongoing efforts to narrow West Virginia’s retiree health care shortfall. “You’re talking dollars and cents to people that are already feeling the pinch of a tight economy.”

Things could get a lot more personal soon. The decision to eliminate subsidies for new hires is just a “first step” in a long and contentious process to get the state’s fiscal house in order, says Robert Ferguson, chairman of the finance board of the Public Employees Insurance Agency, the agency that eliminated the subsidy last year. The decision, he notes, does nothing to eliminate the state’s existing shortfall, since it only applies to new hires. Addressing the current shortfall means longtime employees and retirees could also see their benefits reduced. That’s legal to do for health benefits — for pensions it isn’t — but opponents liken such steps to changing the rules in the middle of the game.

Later this year, the PEIA finance board will review further steps to bring benefits for state workers and retirees in line with what the state can pay. Meanwhile, a legislative committee chaired by McCabe is looking at the retiree health care liability over the longer term, and Governor Joe Manchin III, a Democrat, has said he is open to calling a special session if the committee can agree on specific proposals before next year. The options on the table include cutting benefits for current state workers and retirees; raising the retirement age; charging state health plan recipients higher premiums and deductibles; and enacting statewide tax hikes to pump more money into the rapidly ballooning system.

“The bottom line,” says Ferguson, a Republican ex-Marine who works for a Democratic governor and acknowledges that his job often makes him unpopular, “is that the state is not willing to deliver indefinitely and without limits that which it cannot pay today.”

A national problem

The Pew Center on the States, Stateline’s parent organization, has estimated a $1 trillion shortfall between what states have promised their employees and retirees and what they have on hand to pay off those obligations. While that figure is enormous, it also is likely a conservative one, since the center used data that pre-dated the plunge of Wall Street, where state pension and health care funds are invested.

For state policymakers who must wrestle with the numbers, a common analogy surfaces. States’ unfunded pension and retirement promises, many lawmakers believe, are similar to the generous employee perks that eventually helped drive Detroit automakers into bankruptcy. States, however, cannot declare bankruptcy in a legal sense. They must raise taxes or cut programs instead.

Ferguson points to the numbers. In 2006, he notes, West Virginia needed $100 million to cover the costs of its retiree health care subsidies. By 2013, that figure will rise to $182 million; by 2015, it will surge to more than $200 million. Those payments, he says, must come directly from the state’s general fund, meaning that dollars that might have been spent on schools or prisons will have to go to retiree health care instead.

“We’ve got to do our best to balance retirees’ needs with the (possibility) of bankrupting the state of West Virginia,” says Ted Cheatham, director of the Public Employees Insurance Agency and one of Ferguson’s colleagues.

If West Virginia has a serious money problem in its retiree health care system, it is hardly alone. Of the $1 trillion in unfunded pension and other post-retirement promises made to workers by states, $587 billion is for retiree health care, according to Pew. The center found that a majority of the states have set aside “little or no money” for those obligations, which, because of medical inflation and waves of retiring baby boomers, are quickly on the rise.

Difficult steps ahead

West Virginia illustrates both the problems and the potential solutions in the retiree health care equation.

On one hand, the state’s decision to strip new hires of the retiree health care subsidy was — from the state’s point of view — fiscally disciplined. It came despite the noisy opposition of labor unions and the queasiness of lawmakers wary of upsetting a powerful constituency in an election year. Indeed, if anything, the decision was more insulated from politics than it otherwise might have been, since West Virginia grants the PEIA finance board the power to change benefits for state workers without the Legislature’s direct involvement. Ferguson and Cheatham acknowledge that this independence gives lawmakers some political cover; the labor unions who are suing the state, meanwhile, contend that it is illegal.

West Virginia has taken other steps that actuaries see as responsible. In 2006, it raised copayments for retired health insurance recipients and established a trust fund in an effort to build a reserve account for retiree health care.

But other, bolder decisions will have to be made — including some by lawmakers — if the state hopes to substantially reduce its existing retiree health care shortfall. Hiking taxes, for instance, would require legislative approval, and even lawmakers who want to take on the touchy subject of new revenue are skeptical that the political will exists to make that decision now.

“Nobody’s worried about the next generation. Everybody’s worried about the next election,” says Dan Foster, a state legislator and physician who chairs the Senate Pensions and Retirement Committee.

For his part, Foster wants to immediately bolster funding for the retiree health care system by raising the state’s cigarette tax, which, at 55 cents, is one of the lowest in the nation. Besides generating much-needed money, he argues, a higher levy would decrease the smoking rate — which is high in West Virginia — and cut the state’s long-term costs for retiree health care.

But Foster says it is tough enough to raise taxes in West Virginia, let alone in a down economy. In the meantime, he says, the state simply may have to find ways to encourage its employees to work until they are 65, when they can qualify for Medicare and get help paying the health insurance premiums that the state can no longer afford.

For McCabe, the senator who has been the point man in the Legislature on retiree health care, the trick is finding a solution that will force all sides — labor unions, taxpayers, the state itself — to make concessions.

“The key,” McCabe says, “is that West Virginia is sincerely trying to address this issue without rose-colored glasses and a simplistic view that we just cut benefits.” Cutting benefits, he says, “is part of the equation. But it’s not the single answer.”

In some states, pension pain yields budget gains (5/20/2010)
New Hampshire’s new way on retiree health costs (5/12/2010)
Vermont’s pension experiment (3/25/2010)
States tackling public employee retirement benefits in 2010 (2/19/2010)

Contact John Gramlich at jgramlich@stateline.org.