Local Governments Take Budget Knife to Retiree Health Plans
By REUTERS
Published: October 15, 2012 at 1:43 PM ET - New York Times
(Reuters) - As cash-strapped U.S. cities and states
struggle to address gaping budget holes, a long-honored benefit for
public-sector workers has come into the cross-hairs of budget cutters: retiree
health insurance.
A growing number of states and cities are eliminating
or reducing health coverage for retirees, a benefit that has long fallen by the
wayside for most private-sector workers.
But the coverage, which has meant that most retired
public workers have all their medical bills fully paid, is expensive and hugely
underfunded. And because health coverage does not typically have the strong
legal protections that hamstring changes to public pension benefits, it is
easier for governments to scale back.
The trend could leave millions of public workers with
thousands of dollars in unanticipated healthcare costs.
"In 20 years, very few people will have this benefit,"
said Dennis M. Daley, a public management professor at North Carolina State
University in Raleigh, North Carolina.
Illinois, which has some of the nation's largest
pension liabilities, approved legislation in June that would for the first time
require retirees to pay an increasing amount for previously free retiree health
insurance. The state expects to save $800 million annually.
More than 77 percent of the roughly 19 million
employees of large U.S. state and local governments were eligible in 2012 for
retiree health insurance. That is in sharp contrast with the private sector
where employers pay for retirement healthcare costs of only about a quarter of
workers, according to the most recent Kaiser Family Foundation survey.
But rising healthcare costs, plummeting tax revenues
and unfunded pension liabilities - which have forced some towns into bankruptcy
- have forced states and cities into a rethink.
Many have increased eligibility ages, hiked
out-of-pocket expenses and dropped coverage for family members. In some cases,
they have eliminated insurance altogether. Others are planning similar
scalebacks.
Almost a quarter - 23 percent - of local governments
with at least 250 workers did not offer retiree coverage in 2012, compared with
17 percent in 2011, according to an October report by Cobalt Community Research,
a nonprofit research coalition in Lansing, Michigan. Smaller governments provide
even less help. Only 39 percent of governments with 51 to 100 employees offered
retiree health insurance in 2012 versus 55 percent a year ago.
"I don't think any local government wants to hurt
employees or retirees and reduce coverage, but they are balancing that with the
challenge of lower revenues," said William SaintAmour, executive director of
Cobalt, noting the stark choice between providing core services for citizens and
benefits for employees. "It's been very much a pills or potholes discussion."
HEALTH BENEFITS HAVE LESS LEGAL PROTECTIONS
Consulting firm Aon Hewitt estimates that the average
U.S. health-care cost per employee will climb in 2013 to $11,188, up from $7,874
in 2007. Providing retiree coverage could be a significant savings for
employees.
Fidelity Investments estimates that a healthy couple
retiring in 2012 with only insurance coverage from Medicare,
the government program for the elderly, would spend about $240,000 on
out-of-pocket healthcare costs before they die on average 17 years later for men
and 20 years later for women. The savings for state and local governments could
be much higher because many public employees retire in their 50s, long before
they're eligible at age 65 for Medicare.
In addition, retiree health insurance is relatively
low-hanging fruit for government budget cutters because there is no legal
obligation for coverage, sparing governments from the type of lawsuits filed by
labor unions over cuts to pension benefits for workers such as teachers, police
officers and janitors.
"There is no guarantee for retiree health, there never
has been," said Paul Fronstin, senior research associate at the Employee Benefit
Research Institute in Washington, D.C. "It is not as simple to cut as it is in
the private sector, but it's a target and it's unfunded."
Accounting rules only require governments to report
but not set aside funds in advance for future healthcare obligations. As a
result, most states typically use a pay-as-you-go method.