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
"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