The Association of U S West Retirees



States struggle to cover retirees
By Dennis Cauchon
Monday, December 18, 2006

State and local governments are starting to take aggressive steps to reduce the enormous cost of providing health care benefits to retired teachers, police officers, firefighters and other public workers.

As 43 state legislatures prepare to convene next month, governments are cutting benefits, setting aside money to cover future costs and shifting expenses to the federal Medicare program.  The efforts are the first to address a liability of more than $1 trillion for providing medical care promised to about 25 million current and future retired state and local civil servants.

The changes are being driven by a new accounting rule, which took effect Friday and forces states and large local governments to report how much they owe for medical benefits promised to retirees.

"The numbers make your jaw drop," says North Carolina state Rep. Dale Folwell, a Republican.  His state reported a $23.8 billion unfunded liability for retiree health care, more than three times what the state owes in ordinary debt.

The retirement of baby boomers 79 million born from 1946 to 1964 will make it hard for state and local governments to keep up with the cost of medical benefits for retirees.  What governments are doing now:

West Virginia.  The state pension board is to vote Wednesday on shifting prescription drug coverage for retirees to Medicare, a federal program.  The change, along with making retirees pay more, would slash the state's $8 billion unfunded liability to $5 billion.

North Carolina.  Civil servants hired after Oct. 1 will have to work 20 years before qualifying for 100% state-paid medical coverage.  Previously, workers had to wait only five years.

San Diego.  City Council this month eliminated retiree health coverage for some workers who got big pension hikes in 2002.

South Carolina.  Republican Gov. Mark Sanford's next budget will propose putting $245 million in a new trust fund dedicated to retiree medical benefits.  Georgia, Vermont, Virginia and New York City also have started trust funds or plan to create them.

"By tackling this early, we hope to save money in the long run," says Ted Cheatham, director of West Virginia's Public Employees Insurance Agency.

Because of soaring revenue, states haven't had to cut other spending or raise taxes to cover retiree medical care.  State and local government attempts to shed retiree medical costs could be bad news for Medicare because many now pay retiree health care costs that would otherwise be paid by the federal government.

Medicare's financial situation already is deteriorating.  The government's audited financial statement, released Friday, reported that Medicare's unfunded liability rose $2.4 trillion in 2006 to $32.3 trillion.

USA TODAY reported in May that federal, state and local governments owe at least $57.8 trillion $510,677 per household for Medicare, Social Security, civil servant health care and other obligations.

Unlike pension benefits, medical benefits usually are not protected by law and can be discontinued by state legislatures.  "These benefits are affordable as long as we do something now," says Charles Agerstrand, a retirement consultant for the Michigan Education Association, which represents teachers.  "If not, we're heading for a major collision."