The dangers of skyrocketing public pension obligations are well documented. But that’s only half the story.
On Tuesday, the Pew Charitable Trusts updated its analysis of state non-pension retirement benefits, which consist primarily of retiree health care. The report found that such costs are increasing — by about 6 percent in 2015 — and many states are woefully short when it comes to funding such liabilities.
According to the study, states cumulatively have $46 billion in assets to meet $692 billion in “other post-employment benefits” — those other than pensions. Nevada is one of 19 states with a funding ratio of less than 1 percent, meaning the state — which had about $1.27 billion in obligations as of 2013 — has stashed away virtually nothing to cover the future costs of providing such benefits.
The Pew report notes that these ratios are low in many states such as Nevada because they set aside funding for retiree health care on a pay-as-you-go basis. But as costs continue to increase, that will only further strain budgets.
Nevada is actually ahead of the curve, in some respects. The state in recent years has made cost-saving reforms regarding benefits and eligibility for new hires and is one of only five states that doesn’t make any contributions for certain retirees. The Pew analysis notes that Nevada also provides its Medicare-eligible retirees access to coverage through a private exchange.
The Pew report comes as states and cities face an accounting adjustment. New “Governmental Accounting Standards Board principles urge officials to record all health care liabilities on their balance sheets instead of pushing a portion of the debt to footnotes,” The Wall Street Journal reported this week.
The increased transparency is long overdue and could make it easier for states and local governments to confront runaway retiree obligations. It could also affect municipal bond prices. “I think the market has understated the concern,” one analyst told the Journal.
Not surprisingly, government unions hate the new accounting recommendations. A spokesman for the American Federation of State, County and Municipal Employees told the Journal that “implementing new standards during a fragile recovery may lead to hasty and unwarranted decisions about retiree health benefits.”
Translation: The taxpayers who must finance government worker benefits should be kept in the dark lest they demand the gravy train be called back to the station.
The Pew analysis concludes that “for many states, the gap remains significant between the retiree health care benefits that these governments have promised workers and the funding to pay for them.” It recommends, “Policymakers should closely monitor future retiree health care liabilities, and many should consider ways to better manage these costs.”
Sound advice. The report should be must reading for every elected official.