Retiree health care expenses a 'ticking time bomb' - Eagle-Tribune: Home

Retiree health care expenses a 'ticking time bomb'

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Posted: Monday, July 30, 2007 3:14 pm

Michael J. Stella Jr., 63, was a Lawrence District Court judge for almost 12 years before he stepped down in 2004. Radiation and chemotherapy for cancerous brain tumors hurt his short-term memory and he worried he might make a mistake in a trial.

Stella, who was making $112,000 a year when he retired, receives a $77,321 annual state pension | and, even more valuable, state health insurance.

"It's the most important benefit in the world," said Stella of North Andover. "I don't know how much (the state health insurance plan) has paid for my hospitalizations, CAT scans, MRIs, hospitalizations. It has to be approaching a million bucks. It's keeping me alive."

Stewart Miller, a 65-year-old Andover retiree, also considers himself lucky. He has a pension comparable to Stella's, earned during a lifetime working for oil and chemical companies, allowing him and his wife to enjoy retirement.

But the pension doesn't come with health insurance. Miller is on Medicare and pays $190 a month for supplemental coverage. He wonders why he and others are helping pay for benefits that public employees get -- but they don't.

"I don't think that people who run the government | town, municipal, as well as state | have really looked at it from a taxpayer standpoint," Miller said, "The people in our communities can't continue to pay taxes that go along with increases in benefits."

For years, Massachusetts and most other states, including New Hampshire, have promised health care and other benefits to their employees even after they retire.

Now the bill is coming due, as new federal regulations force state and local governments to account for the post-retirement benefits they have promised.

In Massachusetts, the price tag rivals that of the costliest public works project in the nation's history, the Big Dig. The state estimates it will cost as much as $13.3 billion to pay for the health and other benefits of retired state workers and their survivors.

"It's a huge financial drain," said Elizabeth Keating, a Harvard University professor of public policy and a state pension expert. "The Big Dig cost $14.6 billion. So it is a very significant number."

New Hampshire health care liability is between $1.5 billion and $2 billion, according to Donald Hill, commissioner of the state Department of Administrative Services.

Cities and towns in the Bay State and the Granite State owe billions more. No one is sure of the total because most have yet to calculate what they owe.

Like the Big Dig, the burden threatens to siphon money from other priorities, like school aid and tax relief, touching the lives of every resident of the state.

The issue is beginning to hit home with taxpayers like Miller, increasing the pressure on government to cut back on public employee benefits.

Said Massachusetts Treasurer Timothy Cahill, who oversees the state retirement system: "It's a ticking time bomb."

And the state and its cities and towns have set aside virtually no money to pay the bill.

Like other states, Massachusetts pays for retirees' health care costs from its annual budget, a "pay-as-you-go" system. The tab for fiscal 2007 was $319 million, up from $240 million just five years earlier.

Perks of the job

Unlike most private sector workers, state employees are entitled to health insurance even after they retire. The state pays 85 percent of the premiums for employees like Stella, or 90 percent for those who retired before July 1, 1994. Their survivors can pick up the coverage.

State workers who qualify for Medicare must sign up for the federally funded health care when they reach 65. Stella, a lawyer in private practice before becoming a judge, will be eligible for Medicare in two years.

But many state workers do not qualify because they did not pay into Social Security. The state's Group Insurance Commission estimates it will cost $172.6 million this fiscal year to pay for those workers, although it could not say what percentage of retirees they represent.

The state also pays for supplemental coverage to cover gaps in Medicare for those who do qualify. That will cost another $155 million this year.

Compounding the problem, state workers can retire at a relatively young age. The median age for the approximately 1,300 state employees who retired in 2005 was 58, according to a study by the nonprofit Pioneer Institute.

Critics say legislators have made things worse by continuing to enhance retirement benefits without coming up with a long-term plan to pay for them.

For example, lawmakers approved early retirement plans for state workers in 2001 and again in 2003. Those plans cut payroll costs in the short term but shifted thousands of state workers onto the retirement rolls at a younger age, increasing the cost of retiree benefits.

Of the roughly 7,500 early retirees under the two plans, according to state retirement commission reports, more than half were under 60 and better than one in 10 under 55.

And those retirees are living longer, said Dolores Mitchell, executive director of the state Group Insurance Commission, and receiving health benefits whose cost is steadily rising.

"We're dancing as fast as we can,." Mitchell said of her agency's efforts to keep benefits steady while controlling costs.

Cities and towns

The same federal regulations that have forced states to disclose the cost of post-retirement benefits promised to their employees will apply to most cities and towns next year.

The costs are likely to be stunning, given the example of Danvers.

The town has already calculated its health care liability. It is $100 million | more than the entire town budget, more than the combined costs of its middle school and high school construction projects.

Last May, Danvers took a modest first step toward closing the health care gap by appropriating $250,000 to invest in a fund to start paying down the debt. This year, it's looking to invest another $250,000.

The Legislature has also contributed to the local burden. In 2000, it approved a new retirement plan that increased the amount teachers pay into the pension fund but allows them to hit the maximum pension of 80 percent of pay and retire at a younger age. Cities and towns pay up to 90 percent of the post-retirement health benefits of retired teachers.

Search for solutions

Massachusetts is not the only state on the hook for billions. California estimates its health care liability at as much as $70 billion, New York up to $54 billion, and Maryland and Alabama about $20 billion each. Nationwide, costs are estimated at more than $1 trillion.

The new regulations do not require states or local governments to set aside money to pay the future debt, but the disclosure will put pressure on them to do so. For one thing, those that don't start saving may face shrinking bond ratings, making it more expensive to borrow money to pay for new schools and other projects.

Massachusetts' $13.3 billion health care debt represents the cost of post-retirement benefits promised to current employees and retirees.

The state could continue to pay those costs from year to year, but the debt will only grow, consuming more of the budget and leaving less for other services. That would mean higher taxes or reduced services.

If it invests, the long-term pain will be diminished. Keating, the Harvard pension expert, said an investment trust could slice the debt in half in 30 years, just as paying off a home mortgage early reduces the final cost.

Massachusetts once took a pay-as-you-go approach to the pensions of its retirees. Beginning in the 1980s, the state began to invest money instead, as individuals do to build retirement reserves.

The state's $50 billion pension fund now grows through a combination of returns on investment and the state's annual contribution of more than $1 billion. The state system covers about 176,000 state employees and public school teachers, and about 96,000 retirees.

Cahill, the state treasurer, wants the state to invest for retirees' health care, too, now that the $13.3 billion cost has been added to the balance sheet. "We can't run away and pretend it doesn't exist any more," he said.

State lawmakers in July took the first step when they put $343 million from the state's tobacco settlement money into an investment trust fund.

Cutting benefits

Another option is to cut benefits or make employees pay more for them.

That's what many corporations began doing in 1990 when they were forced to account for benefits promised to their workers. According to Fortune Magazine, the number of large companies paying for post-retirement health care dropped from 40 percent to 21 percent between 1993 and 2003 and has continued to fall.

Now state and local governments are under the same accounting standard. Public employee unions are already sounding the alarm about the threat to their benefits, and with reason.

In North Carolina, government workers hired after last October will have to work 20 years to qualify for post-retirement coverage, according to the National Conference of State Legislatures. The previous wait was five years. Massachusetts employees qualify after 10 years.

In July, Marin County in California slashed retiree health care benefits for new hires. The unions agreed on condition current workers keep what they have.

The city of Duluth, which has a health care debt of $300 million, more than double its budget, imposed a hiring freeze and raised the time employees must work to qualify for retirement benefits from three to 20 years.

In Massachusetts, the task will be complicated by strong public employee unions, which successfully fought to turn back Gov. Mitt Romney's efforts to have state workers pay 25 percent of health insurance premiums, as many in the private sector do.

David Holway, whose National Association of Government Employees represents 12,000 people in Massachusetts, said government officials should look to curb health care costs rather than benefits.

"They talk about cost-shifting, increasing the amount people pay." Holway said. "They don't say, 'Let's sit down and figure out a way to get quality health care at a more economical cost.'"

Joseph L. Masterson, a 74-year-old Danvers resident who retired nearly a decade ago as executive vice president at North Shore Community College, is on Medicare but doesn't want to lose his state-subsidized supplemental coverage.

"You then have to go to the external market to find supplemental care that has the benefits and the flexibility of the state plan, which is hard to find and costly," said Masterson, whose state pension is $76,130 a year.

Former government workers would fight to preserve the benefits they earned, Masterson said, though they might accept greater cost-sharing.

But he said he also recognizes that with fewer private-sector retirees receiving health benefits, something must be done to relieve the pressure on government. One answer might be to shift early retirees to Medicare, he said.

"State retirees at 60 are fully covered by the state," Masterson said. "That is a fairly high cost. If more people came off that onto Medicare, that reduces the cost to the state."

Stella, the retired judge, made a point many in the public sector make: that he traded higher pay in the private sector for better benefits. The state shouldn't roll them back now, he said.

"I would like to say they should be able to, but that wouldn't be fair," Stella said. "I changed my life when I became a judge. I wasn't making big bucks."


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