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Updated: Tuesday, 24 May 2011, 12:14 PM EDT
Published : Monday, 23 May 2011, 5:45 PM EDT
PROVIDENCE, R.I. (WPRI) - Alarm bells have been sounding for years over the shaky status of pension plans in some of Rhode Island's largest cities and towns. But a Target 12 investigation reveals an even bigger ticking time bomb buried on their balance sheets.
The state's municipalities have promised to provide nearly $3.6 billion worth of medical coverage to their current and future retirees over the next three decades, but government financial reports show they've put aside almost nothing to pay the bill – just $27.5 million, or less than 1 percent of the future cost.
To put it in perspective, the $3.6 billion unfunded liability for city and town retiree health care is significantly larger than their pension plans' shortfall of roughly $2.2 billion.
As with pensions, communities do not need to come up with the money for these so-called "other post-employment benefits," or OPEB, all at once. But most have barely begun to grapple with the cost.
"You've heard the general treasurer recently say pension reform for state employees and municipal employees isn't a problem – it's the problem," said Dan Beardsley, executive director of the Rhode Island League of Cities and Towns. "Well, I would say OPEB obligations and dealing with those obligations is either equal to or just a notch down from the needed pension reform."
"That's how big it is," he said. "The numbers are staggering."
Nearly every community liable
Across the state, the estimated long-term liabilities for retiree health care range from $1.5 billion in Providence to $780,502 in Foster, according to data compiled by Target 12 from financial reports by the auditor general, the Department of Revenue, the Rhode Island Public Expenditure Council and the communities themselves.
Even adjusted for population, Providence's liability is still the highest in the state at $8,411 per resident, followed by Johnston ($7,864), Pawtucket ($5,315), Newport ($4,761) and West Warwick ($4,679), Target 12 found.
The figures reveal 26 communities have set nothing aside for retiree health care obligations. Westerly has been the most aggressive in stashing away money; its $14 million health liability is 57 percent funded.
Rhode Island's capital city spends more than 15 percent of its annual budget on health coverage for its current employees and retirees, who are offered a number of different options instead of one standard citywide plan, according to a March report by Mayor Angel Taveras' emergency fiscal review panel.
Many Providence retirees receive paid lifetime medical coverage for both themselves and their spouses, unlike at the state level where spouses must buy into the plan. The maximum co-pay for city retirees is $400 annually and has not changed for several years, the panel found.
Providence's average liability per employee is $156,686, compared with $36,546 at the state level. "The city cannot afford to fund this extremely costly benefit particularly for early retirees," the report said.
In addition, many Providence retirees are not required to sign up for Medicare when they reach age 65. Taveras has asked the General Assembly to pass legislation that would allow him to shift retirees into the federal program for seniors, which he says would save $11.4 million a year.
'Enormous and fast-growing'
These numbers have come to light over the past few years thanks to new accounting rules adopted in 2004. They represent yet another burden for governments already struggling with budget deficits, particularly as health costs rise rapidly and baby boomers begin to retire.
"I think it's very hard for anyone, myself included, to really get your head around how big of a problem pensions and health care are," General Treasurer Gina Raimondo told Target 12. "I definitely don't think that people realize that just the health care component alone is enormous and fast-growing."
Health insurance coverage is available to retired workers in nearly every city and town in Rhode Island, though the generosity of the benefits – including retirees' share of premiums and whether they must switch to Medicare at 65 – varies widely.
What doesn't vary is the lack of resources set aside so far to provide coverage down the road. Until recently, most cities and towns dealt with retiree health insurance on a pay-as-you-go basis, using annual tax revenue to cover medical claims as the bills came in.
Retiree health insurance is less common in the private sector. In 2009, 28 percent of large employers offered it up to the Medicare eligibility age and 21 percent continued to after that, according to a survey by consultants at Mercer. That was down from 46 percent and 40 percent, respectively, in 1993.
"So the average taxpayer who has to pay this bill is being asked to pay more in the context where they themselves are getting less," Raimondo said.
No money put aside
The reason Providence and other governments are now reckoning with the future cost of providing retiree health is a ruling by an obscure private panel, the Government Accounting Standards Board (GASB), which sets national standards for public-sector financial statements. Officials generally follow its recommendations due to pressure from investors and ratings agencies.
GASB ordered states and localities to disclose their retiree health obligations in June 2004 following a spirited five-year debate. Unions lobbied against the new rule, arguing the large long-term shortfalls would lead governments to scrap retiree medical coverage rather than pre-fund the benefits.
Governments are not required to fund their retiree health obligations under the new accounting standards, though some are beginning to do so by creating trust funds. As with pensions, the idea is that putting money aside now and growing it through investments will lower the cost to taxpayers in the future.
In the short run, though, it will mean a larger share of annual municipal budgets going toward retiree health. In Providence, for example, the city spent $39 million in 2009-10 to cover retiree health bills as they came in. But it would have spent another $80 million if it had also made the full contribution suggested by its actuaries to cover future costs. The entire city budget was $640 million last year.
"The problem with pensions is we haven't put enough money aside," Raimondo said. "The problem with health care is we haven't put any money aside."
Cuts in benefits 'highly likely'
The key question now is how Rhode Island's cities and towns will find the money to pay for the benefits they've promised their retirees and current workers – and whether they'll do so at all.
"You're either going to reduce services, reduce your expenditures, or you're going to raise taxes, or some combination of the two," said former Auditor General Ernest Almonte, who is now a partner at accounting firm DiSanto, Priest & Co. "But this is a real liability that has to be paid."
A recent study by the Center on Budget and Policy Priorities, a liberal research group in Washington, argued it would be "inappropriate" to lump retiree health together with pension promises in assessing governments' obligations, because medical coverage does not carry the same legal protections as pensions.
"With health care costs projected to continue to grow faster than [the economy] and faster than state and local revenues, it is highly likely that current provisions for retiree health insurance will be scaled back," the center said. "Many states [and localities] are likely to decide that their plans are unaffordable."
That contention is starting to be tested. Last year, a U.S. District Court judge ruled Rhode Island's state government could alter retiree health benefits, turning aside a legal challenge by unions. The Senate Finance Committee is considering a bill that would enshrine new legal protection for the benefits locally and require that retiree plan provisions mirrors those of current employees.
Just last month, a California Superior Court judge ruled that medical benefits San Diego promised its retirees back in 1982 are not "vested" and therefore can be changed. "Officials in other states will be watching this case closely if it goes to appeals, and will clearly reference it in their own efforts to roll back OPEB elsewhere," a Governing magazine columnist wrote.
Borrowing is another solution, though one that may be more difficult in the wake of the financial crisis. Gainsville, Fla., sold $35 million in taxable bonds in 2005 to fund its retiree health obligations, and Oakland County, Mich., has done the same.
Another option is to ignore GASB's new accounting rule altogether. In 2007, Texas enacted a law exempting the state and local governments there from complying with the reporting requirements, and developed its own alternative calculation. Other governments are continuing to cover retiree health on a pay-as-you-go basis, while Utah stopped granting the benefits to new employees altogether.
No OPEB in 3 cities
While most of Rhode Island's 39 communities are facing liabilities for retiree medical coverage, three of them are not: Exeter, Hopkinton and Richmond. That's because those municipalities never offered the benefits in the first place. (West Greenwich has offered health benefits to five retirees in a one-time deal.)
Hopkinton Town Manager William McGarry said his small community of 8,188 had no intention of changing that. "Those types of benefits have caused a great deal of consternation in a lot of the other towns and cities where the unfunded liabilities are very high," he said. "We don't have that problem and we're very thankful we don't."
Hopkinton hasn't had a problem recruiting qualified employees even though it fails to match the retiree medical benefits other municipalities offer their workers, McCarry said. The town has received lots of applications for open vacancies, especially since the recession.
Another outlier of a different kind is Westerly. The wealthy town of 22,787 near the Connecticut border created a trust fund for retiree health care obligations in the early 1990s on the advice of its financial advisers, and has now set aside $8 million to cover a $14 million liability.
"It was just a very conservative funding decision that was made probably more than 15 years ago by the town of Westerly," Town Manager Steven Hartford said. Local leaders are proud that they continued to save money even during the recession, though they wish the trust was fully funded already, he said.
In addition, Westerly has signed a contract with its police union that caps the town's annual payment toward retiree health insurance at $6,000, Hartford said. It was also one of the first towns to switch some employees from a defined-benefit pension to a defined-contribution 401(a) plan.
'It really is that bad'
In Rhode Island, the League of Cities and Towns is pushing legislation at the General Assembly that would allow municipalities to reduce promised health benefits. Another proposal the League supports would create a statewide trust fund where communities could pool their assets for retiree medical benefits.
Westerly's Hartford said communities will need to take two steps to move forward: first, start putting money aside to cover the cost of retiree health insurance, as his town has been doing; and second, change the system to reduce the value of benefits for new employees.
Almonte said he is concerned the liabilities could be even higher than reported because medical costs are rising so rapidly. The cost of retiree health benefits is projected to increase 6.7 percent a year between now and 2050, according to the Government Accountability Office.
Raimondo is slated to release two reports soon proposing a new policy on the state's pension funding, but she said those will not address the retiree health issue. But Gov. Lincoln Chafee is attempting to tackle it.
“These costs and the reality of unfunded pension and OPEB liabilities either have or will threaten to jeopardize the fiscal stability of municipalities and we cannot stand by without acting," the governor said in March.
Chafee's budget for 2011-12 would create a new Municipal Accountability, Stability and Transparency (MAST) Fund, which would offer additional state aid to cities and towns that put money in a trust fund to cover their retiree health obligations. Starting in 2013-14, the state would cut its contribution to their teacher retirement funds if they do not fund their OPEB obligations.
Hartford supports the MAST proposal, but Cranston Mayor Allan Fung has criticized Chafee for failing to pair it with legislation that would allow communities to cut benefits. In response, Chafee said he was open to signing a bill that would do that.
What's important is that state and local leaders are starting to examine the retiree health issue and debate the best steps to address it, Raimondo said.
"Sounding the alarm and educating people is huge," she said. "I think that their natural tendency, when you're looking at problems like this, is to think it can't be that bad – and it is. It really is that bad."
Target 12 Investigator Tim White contributed to this report.
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