UB study confirms risk from retiree coverage

Updated: 01/31/09 09:45 AM

By Phil Fairbanks
News Staff Reporter

The price tag facing local taxpayers is $3.7 billion and rising so fast that, in the eyes of experts, it might end local government as we know it.

But so far, the bill for retiree health care is being pushed off on the next generation.

A new study by the University at Buffalo concludes that nine of the region’s largest local governments are failing to adequately fund the long-term cost of retiree health care liabilities that, in most cases, are increasing at double-digit rates.

In Erie County, the price tag — $17 million last year and $18 million this year — is expected to triple over the next decade.

“Some of these numbers are amazing,” said Kathryn Foster, director of UB’s Regional Institute. “But you can’t just throw up your hands. This is not going to go away.”

The numbers are so big Foster and others wonder if, as the title of the institute’s study suggests, the figures will add up to “the end of local government as we know it.”

If governments fail to deal with the problem, she predicts that a day will come when no money will be available for parks, youth programs, senior citizen centers and other popular but nonmandated services — or elected officials will be forced to sharply raise property taxes.

The study stops far short of recommending a tax increase, but, to document the magnitude of the problem, it estimates how much local taxes could increase.

In Buffalo, for example, the taxes on a $100,000 house would increase $1,445 a year.

The one alternative the study vehemently opposes is doing nothing.

“The no-action option is the easy option,” Foster said. “That’s the one where we push it off on the next generation.”

By any account, the numbers are huge.

Buffalo Public Schools lead the list, with an unfunded liability of $1 billion.

The City of Buffalo is second at $945 million.

The institute’s numbers are similar to those disclosed two years ago when, for the first time, governments across the nation were required to forecast and make public their retiree health care costs.

“This is an iceberg lurking under water as the ship of state moves forward,” said E. J. Mc- Mahon, director of the Empire Center for New York State Policy. “And no one is doing anything about it.”

Western New York is not alone in confronting this approaching fiscal crisis.

The state has an unfunded liability of $50 billion, higher than that of any other state government. Even more dramatic is the total unfunded liability for all public sector employees in the United States — an estimated $1.5 trillion.

The time is coming when state and local governments will realize they no longer can afford to pay for retiree health insurance without reducing benefits, McMahon said.

“There’s no sugar daddy out there,” he said. “As economist Herb Stein once said, ‘If something cannot go on forever, it will stop.’ ”

Raids on reserves

No one is suggesting local governments raise property taxes to pay for their unfunded costs, although the UB study documents the potential impact on local taxpayers.

“We don’t see ourselves raising taxes,” said City Finance Commissioner Janet Penksa, who claims the study’s tax forecasts are high. “We’ve already set aside a considerable amount of money.”

Penksa pointed to the $113 million set aside in Buffalo’s reserve accounts. She also noted that Mayor Byron W. Brown has made retiree health care reform a major priority in negotiations with city unions.

But in tough fiscal times, elected officials often raid reserve accounts. Some state officials, therefore, want to allow local governments to establish trust funds that can’t be used for anything but retiree health care costs.

“About 50 percent of the states have already set up these trust funds,” said Darren E. Kempner, a finance policy analyst at UB’s institute.

Gov. David A. Paterson offered different reforms last year, notably a unilateral change in benefits.

Depending on coverage, the state now pays 75 percent to 90 percent of retiree health insurance premiums for employees who work at least 10 years.

Paterson wants to change to a sliding scale, cutting the state’s minimum share to 35 percent to 50 percent. The state’s share of the premium would rise for each additional year of service up to 30 years.

The governor also wants all retirees pay for their Medicare Part B premiums.

McMahon said Paterson’s changes can be enacted unilaterally by state lawmakers because the benefits are part of Civil Service Law, not union contracts.

Unions, of course, favor a far different approach. They want a statewide moratorium on all efforts to reduce retiree health benefits.

“CSEA and other unions believe keeping promises to retirees and doing what’s morally right is in the best interest of New Yorkers as a whole,” said Danny Donohue, president of the state Civil Service Employees Association.

If governments decide not to reduce benefits, they still can decrease their liability by increasing the amount of money they pay out each year. Right now, most governments are paying less than half of what they should.

Most of the nine governments studied by UB have adopted a “pay as you go” strategy limiting annual contribution to whatever is due that year.

Erie County and its new contract with county nurses provide one of the few bright spots in this ongoing debate. The agreement ensures that newly hired nurses no longer will receive fully paid health insurance in retirement.

On top of that, current nurses will pay 50 percent of their retiree health care costs. The one exception is county nurses who retire within the next five years.

“That’s the template for future negotiations,” County Executive Chris Collins said. “Call me an Indian giver, but that’s a promise we can’t afford to keep.”

The concessions came with a price, most notably a sizable pay increase for nurses.

“It sets a precedent,” said County Comptroller Mark C. Poloncarz. “I also think the other unions realize there have to be some changes.”

Joan Bender, head of CSEA Local 815, the county’s largest union, said her members understand the problem and at one point made a contract offer to the county that included retiree health care concessions.

Price tag rises

Collins claims the offer fell far short of what the county needs from its unions.

“They threw a lot of money at the nurses,” Bender said, “but there’s no way Mr. Collins can afford to buy us. Right now, we’re at a stalemate.”

The price tag, meanwhile, keeps rising.

“The potential costs of this have not woken people up yet,” said Robert Glaser, an accountant and chairman of Erie County’s control board.

“And,” he added, “hoping it goes away is not a strategy.”