The Post-Employment Health Benefits Promised to Public Employees Continue to Increase an Already Enormous Debt Obligation Which There Are No Funds to Pay
The Irvington School District, and the various other jurisdictions to which residents pay taxes, have obligated themselves to provide lifetime health care benefits to retired employees and their spouses at little or not cost to the retirees. The health benefits provided are far beyond anything the average taxpayer will have. No money is put aside by the District to pay for the promised benefits, and the amount of unfunded debt already accumulated is staggering and continues to grow every year.
The magnitude of the problem, and of the peril it creates for the future, can be gleaned from the following figures.
The unfunded liability for the health benefits of retired School District employees and spouses accrued just since July 1, 2009 is somewhere between $77.8 million and $89.0 million, and grows at a rate of more than $5.0 million every year.
For the Village of Irvington, the unfunded liability for retiree health benefits is $25.29 million (at June 1, 2012), an increase of $5 million from the year before; for Westchester County, $2.62 billion (yes, billion) (at December 31, 2010); for the State of New York, over $67.7 billion (at March 31, 2013). Bloomberg has reported that at March 31, 2012, the State’s accrued liability for health benefits was $15 billion more than the total debt on its balance sheet and that the combined total unfunded retiree health care liability of the State, New York City, local governments and public authorities was $240 billion.
New York State law does not permit School Districts or government bodies to establish a segregated fund to which annual contributions are made in order to fund the retiree health benefits as they come due. Requiring the creation of such segregated funds was the approach taken by the Federal Government in ERISA legislation when the unfunded status of pension benefits became known to the public.
The following discussion of the unfunded liability of the Irvington School District for post-employment health benefits describes the scope of the problem here, and outlines the methodology used by actuaries to quantify that liability. The methodology is common to all entities faced with the problem. Because certain key assumptions used by the actuaries are not in accord with reality, the harsh fact is that the magnitude of the burden taxpayers will ultimately have to bear to pay for the promised health benefits of retired public employee is significantly greater than the actuarial reports indicate.
Unless and until the public becomes aware of the gravity of the situation and demands a solution, the fiscal black hole will grow and intensify. Detroit and the United States Postal Service illustrate what happens then.
Disclosure Required for the First Time.
Before 2006, no New York school district or municipality was required to disclose in its annual audited financial statements significant details about its liability for the cost of post-employment health benefits it is obligated to provide to active and retired employees. In that year, Government Accounting Standards Board Statement 45[i] was adopted to require certain disclosures by taxpayer-funded bodies on a phased in schedule dependent upon the size of the entity.
The first time GASB 45 became applicable to the Irvington School District was the fiscal year ending June 30, 2010. Since then, District has been required to include as a footnote in its annual audited financial statements a calculation of the costs that have accrued for its post-employment health benefits. Neither the District, nor any other governmental bodies, is required to include this liability on its balance sheet[ii], but because of the disclosure requirement the magnitude of the financial black hole retiree health benefits is creating is slowly working its way into the public’s consciousness.
The Irvington School Board has taken some steps to reduce the speed at which the District’s unfunded liability to pay for health benefits promised to its employees is increasing. The Board is to be commended for doing so. Nevertheless the District’s deferred liability – or outstanding debt obligation – to provide post-employment health benefits to employees and their respective spouses or significant others, for life, continues on a steep upward trajectory.
The following discussion incorporates the effects of changes made in the past two years or so by the School Board to reduce the upward curve of the liability. It has taken steps to increase the contributions required from those receiving health benefits and to lengthen the duration of employment required to vest post-employment health benefits, but the debt obligation continues to increase by a significant amount each year. More must be done.
It must be noted at the outset that the methodology used by the actuaries to calculate the District’s unfunded liability for post-employment health benefits is not something tailored specifically for the District. The methodology, with its peculiarities, is consistent with GASB 45 requirements and with that used by other entities subject to GASB 45.
Under current State law, the District can only include in its annual budget only the amount necessary to pay that year’s actual premium cost of health insurance covering its active employees and its then retired employees who receive such benefits. The cost accruing for health benefits that the District is legally obligated to provide to retirees in the future is simply noted in the GASB 45 footnote and remains unfunded. In fact, current New York State law does not permit funds to be raised and held for that purpose.[iii]
GASB 45 requires certain significant disclosures. Among them are:
(a) The “Annual Required Contribution” or “ARC”, i.e., the cost incurred that year to (i) pay as they come will due the post-employment health benefits of both active and already retired employees, plus (ii) amortize over a period not to exceed thirty years the liability for post-employment benefits accrued only since GASB 45 became applicable to the District for which no funds to pay have been set aside.
For the year ended June 30, 2013, the ARC was $7,927,429.[iv] For the year ending June 30, 2014, the actuaries have calculated that the ARC will have increased to $8,069,533.[v] For the year ending June 30, 2015 they project it will increase to $8,215,734.[vi]
(b) How much of the ARC was not paid during the year, but just accrued.
The actuaries refer to the retiree health benefit costs that accrue each year as the Net OPEB Obligation or NOO.[vii] In simple terms, the accrual is the amount the actuaries have determined that the District would have to put into an interest bearing account now to pay as they come due that year’s increase in the cost of its obligation for retiree health benefits.
The NOO is arrived at by increasing the ARC by an interest factor[viii] and then reducing the resulting total by the sum of (a) an amount equal to a notional – that is, non-existent – amortization of the UAAL as it stood at the beginning of the year, and (b) the amount of the premium payments actually made during the year that is allocable to already retired employees.
For the year ended June 30, 2013, the health insurance premium paid for already retired employees was $1,831,350. The NOO, i.e., that year’s increase in the unfunded accrued costs of post-employment benefits, was $5,727,578.[ix]
For the year ended June 30, 2014, the premium paid for already retired employees is $1,789,541. The NOO accrual is $5,850,035.[x]
(c) The total amount of retiree health benefits accrued and unpaid since 2008, when GASB 45 became applicable to the District.
At June 30, 2010, the first year that GASB 45 became effective in the District, the total liability for retiree health benefits accrued, but for which no money was set aside to pay, was $11.23 million.
At June 30, 2011, it was $16.86 million.
At June 30, 2012, it had grown to $22.06 million.
At June 30, 2013, it had increased to $27.78 million.
At June 30, 2014, the actuaries have calculated that it will be $33,401,002.[xi]
Note that these figures relate only to period since July 1, 2009 and show an increase of more than $5.0 million year after year.
(d) A calculation of the total actuarial accrued liabilities of the District for unfunded retiree health benefits, including accruals during periods prior to the effective date of GASB 45, as at a periodic evaluation date.
The practice of the District has been to have this valuation made as of the first day of its fiscal year every two years, the most recent valuation date being July 1, 2012.
The aim of the calculation is to determine how much would have to be deposited into an interest-bearing account on the first day of a fiscal year to have the total cost accrued up to the last day of the preceding fiscal year for post-employment health benefits of (a) currently active employees who will in fact receive such benefits[xii], plus (b) those retirees already receiving them, “well funded according to a commonly used standard”[xiii].
The calculation basically determines the present value of a string of payments to be made in the future by discounting the payments back to a current date at a periodic rate of reduction based on estimated prevailing interest rates.[xiv]
To make this determination, the actuaries take into account work history data, life expectancies, health cost inflation trends, and other factors. The amount resulting from this calculation is called the Actuarial Accrual Liabilities or AAL. The actuaries also report what they designate as the UAAL, which is a statement of how much of the AAL is not funded. No fund has been established by the District to pay the AAL, so the AAL and the UAAL are identical.
The AAL/UAAL was $77,832,540 at July 1, 2012. This was 318% of the District’s payroll at that date.[xv] Of this $77.8 million, $30.5 million was the liability for the health benefits of already retired employees. The balance of $47.3 million was the accrual for the post-employment health benefits of active employees who by virtue of length of employment have a vested right to receive such benefits, plus an amount determined by the actuaries to be a reasonable accrual for active employees who can be expected to earn such a vested right.[xvi]
Based on the footnote disclosure information prepared by the actuaries for inclusion in the District’s financial statements for the year ended June 30, 2014, indications are that at July 1, 2014 the AAL/UAAL will be over $89 million, but the actual figure must await completion of an updated actuarial valuation.
The Reality is Worse.
As startling as the picture painted by these figures may be, the reality is much grimmer.
As noted above, the AAL/UAAL is a discounted present value of a stream of required future payments. The calculation includes two assumptions, neither of which is factual.
The first assumption is that a fund has been created and set aside that will earn interest over thirty years to offset accruing costs. The notion is that each year the District contributes annually to a non-existent fund amounts sufficient so that the combination of the annual contributions plus interest on the fund balance at the rate of 4% per annum will result in all health benefits promised to retirees being “well funded” after 30 years.[xvii]
Not only is there no segregated, interest-bearing fund set aside to satisfy the liability, but as mentioned above, New York State law does not permit such a fund to be created.
The second assumption is that each year a portion of the accrued cost is being amortized, i.e., paid out of the non-existent fund on a schedule that reduces the unfunded cost much in the way that a 30-year house mortgage is paid. There is no such amortization.
At a discount rate of 4% applied over 30 years, and assuming no radical changes in the actuarial assumptions of interest rates, health care cost trends, employee behavior, etc., the Rule of 72 indicates that actual liability of the District as of the given dates is nearly four times the calculated AAL/UAAL.[xviii]
Employee/Retiree Census Information[xix]
At July 1, 2012, the Irvington School District had 255 active employees. There were then 162 retirees receiving District-provided health benefits, plus 80 spouses, for a total of 242 persons entitled to such benefits for life. Just under half of the retired employees were under age 70. Of the spouses, 49 were under 70.
A District employee can retire at age 55. Of the 255 active employees, 39 were 55 or older with vested rights to receive lifetime health benefits. Another 32 were in the 50-54 age bracket, 10 of whom had 15 or more years of service.
For a person 70 years of age, the average life expectancy is 14.2 years for a male and 16.5 years for a female. For 55 year olds, the average life expectancies are 25.3 and 28.7 years. [xx]
The 2012 Actuarial Report calculated the annual net cost to the District of providing health care to a retired employee and spouse to be $15,534.40 for each year they are both under 65, and $12,120.95 for each year they are both 65 or over.[xxi]
The Health Benefits Provided[xxii]
The share of the cost of health benefits borne by the District’s active employees and retirees varies somewhat among the different classes of employees.
Teachers, while actively employed, must pay 12% of the annual premium cost of their health insurance; administrators, 16%; clerical personnel and teacher aides, 5.5%; custodial staffers, 6.0%. The balance of the premium cost is paid by the District’s taxpayers. When an employee retires, the arrangement changes.
A teacher who retires with 15 or more years of service pays nothing after retirement for health insurance. It is provided by the District for the life of the retiree. The coverage provided includes a spousal benefit, i.e., the spouse or significant other of the retiree is also covered for life at no cost to the retiree or this additional beneficiary. A teacher who retires with at least 10 but less than 15 years of service gets the same duration and scope of coverage, but must pay in retirement the same percentage of the annual premium as the individual was paying at the time of retirement. A teacher who retires with less than 10 years of service has only the COBRA right to continue coverage at his or her own cost.
An administrator who was hired on or before March 8, 2012 and retires with more than 5 years of service will receive lifetime health coverage and spousal benefit without cost to the retiree or such additional beneficiary. If hired after March 8, 2012, 10 years of employment is needed to qualify for retiree health benefits, and in retirement the retiree must pay the same percentage of the annual premium as the individual was paying at the time of retirement.[xxiii]
Clerical personnel, teacher aides, and custodial staffers hired on or before July 1, 2011 who retire after 10 or more years of service receive at no cost to them health coverage and spousal benefit, in each case for life. If hired after July 1, 2011, the individual must have 20 years of service before retirement to have any health benefits provided by the District during retirement, but for those eligible retirees the benefits are provided at the sole cost of the District (the taxpayers), except that custodial staffers in this category will have to pay in retirement the same percentage of the annual premium as the individual was paying at the time of retirement.
The health benefit provided by the District includes pharmaceutical costs. It also includes the cost of enrollment of each of the retiree and spouse in Medicare Part B, which last year was $1,198.80 per person.
The ability of the School Board to make changes in retiree health benefits is limited by another State law that says a school district outside of New York City cannot change retiree benefits (e.g., by making retirees pay more for them) unless the same change is made for active employees. Because the District’s employees are all unionized, this means that the unions would have to agree to lesser benefits or higher costs for current employees before similar changes can be made to retiree benefits.
District Taxpayers Face Similar Problems in Other Taxing Jurisdictions
The School District’s plight cannot be considered in isolation. Residents pay taxes not just to the District, but also to the Village, the Town, the County, and the State, and all of these overlapping tax jurisdictions have major unfunded health care liabilities for retirees. As of December 31, 2010, Westchester County alone had an unfunded accrued actuarial liability of $2.617 billion (yes, billon), an amount that was 606% of its payroll for current employees and about half again higher than the similar percentage in either Nassau or Suffolk County.[xxiv] At March 31, 2013, New York State’s unfunded liability for retirement health benefits of its direct employees was $54.3 billion, to which has to be added approximately $13.4 billion for the retirement benefits of employees of SUNY and CUNY, a total of $67.7 billion.[xxv] Bloomberg has reported that at March 31, 2012, the State’s accrued liability for health benefit was $15 billion more than the debt that appears on its balance sheet and that the combined total unfunded health care liability of the State, New York City, local governments and public authorities was $240 billion.[xxvi]
The figures all have to be considered in the light of the fact noted by the Comptroller of the State of New York:[xxvii]
“As people are living longer and the baby boom generation retires, the number of retirees is significantly increasing, sometimes exceeding the number of active public sector employees in individual municipalities….In some cases , the cost of providing retiree health benefits already surpasses pension costs.”
In the 1960’s and 70’s, similar problems arose in connection with defined benefit pensions promised by both private and public employers. In 1974, the Federal Government enacted ERISA, a statute that required employers to actually start funding the promised pension benefits in a way that would over 30 years result in the creation of a fund sufficient to pay all the promised benefits. New York State and its smaller governmental units followed suit. While public employee pensions remain a major cost for taxpayers, in New York State they at least do not have an unfunded liability risk anywhere near that posed by retiree health benefits.
The major public employee pension plans in the State today have liabilities totaling $157 billion, but trusts established for the sole purpose of paying the promised pensions hold funds equal to 94% of the liability[xxviii], and for the past 20 years 83% of the pension payments actually made each year come from the earnings on the trust funds.[xxix] It has been reported that pension fund of the State’s own employees was fully funded as of 2008.[xxx] The impact of the market crash in that year and lingering recession may have changed for the worse the status of public employee pension funds throughout the State, but it is expected that they will recover.[xxxi]
A Choice is Required
It is clear that a choice has to be made by the taxpayers in the Irvington School District. One option is to ignore the situation and let today’s young pay the piper when the ever-growing mountain of unfunded retiree health care costs has to be paid. That is the approach taken by the Federal Government in facing up to the well-known problems of Social Security and other entitlement programs, and the economics of the Affordable Care Act are explicitly grounded on having the young pay a disproportionate share of medical costs for the benefit of their seniors.
Some may find requiring later generations to pay for the profligate policies of current generations to be objectionable on ethical or moral grounds, or because they question whether the younger generations will forever remain either uninformed or stoic about what their elders have done to them. The former is certainly the view of the Government Accounting Standards Board, which believes that “the amount of the future benefit is an expense that must be recorded rather than deferred as a liability to a future generation.” [xxxii]
For those taxpayers who share this view, the alternative is to take action designed to (1) get the State to enact legislation that authorizes school districts, municipalities, etc. to set up trusts into which annual deposits can be made to fund of accrued and accruing promised retiree benefits over a period of years, (2) make District employees and retirees bear a greater share of their health care, and (3) reduce the overall cost of the health insurance provided by paying only for a policy that approximates the coverage the average taxpayer has instead of the gilt-edge coverage that is now the norm.
Possible Legislative Action
For at least the past six years, and probably longer than that, bills have been introduced in the New York State legislature to authorize the establishment of trusts to hold deposits made by school districts and other public bodies that will amortize the accumulated unfunded liabilities for retiree health benefits. The State Senate passed such a bill in 2010 but it died in the Assembly. The current versions are Senate Bill S4279-2013 and Assembly Bill A3636-2013.
Those who believe that the situation is dire and if not soon remedied will develop into a Detroit scenario would be well advised to contact their State Senators and Assembly representatives to urge enactment of the pending bills.
School Board Action
It goes without saying that any attempt by the School Board to increase the share of the health care costs borne by active employees and retirees will meet strong resistance from the unions. The Board has had some past success in achieving this result and should be encouraged to keep up the good fight.
Making the health care coverage being provided something less than the standard now provided is another possible way to reduce costs. To do that will be even more difficult than winning increased employee/retiree contributions. That is because the health insurance plan is the State-Wide Schools Cooperative Health Plan to which many school districts belong. It is without a doubt a plan that everyone not under the school district’s umbrella – possibly even Congressmen -- should envy.
While it may be quixotic to think something can be done to achieve cost reductions via reform of the health plan to make it more resemble what most people who are not public employees have, it should at least be considered.
Quite possibly many taxpayers would be surprised to learn that in addition to paying the Medicare Part B premium for each employee and spouse, and each qualified retiree and spouse, their dollars pay for a health plan that has no deductibles and minimal co-pays, and among its broad coverage includes 100% of the cost of a full-range of preventive tests and procedures, 100% of the cost of 365 days of inpatient hospital care for each Spell of Illness after a $100 copayment (actually after two years because the Plan states “Two days count as one day on inpatient care in a Hospital”), 40 visits per calendar year of home health care service, plus contraception, voluntary or elective abortion, the expenses of an employee acting as a surrogate mother, and a full range of prescription benefits.
* * * * * *
The steady build up of unfunded liabilities for retiree health care costs is an iceberg that will eventually sink the fiscal boat of New York taxpayers unless something is done about it. School Boards and local government bodies can do nothing to change the situation unless the State Government takes aggressive action to get the situation under control. That will not happen unless the taxpaying public becomes aware of the danger and demands action. The same is true for most States and the Federal Government also faces this problem.
The tip of the iceberg is beginning to show in the press, although the implications of what is being reported seem not to be realized. Thus, it reports of the attempts to solve the bankruptcy of Detroit there are buried in the stories references to the unfunded liabilities for retiree health care being a major cause of the financial problems of that City.
The New York Times reported on May 10[xxxiii] that the United States Postal Service owes $99.8 billion to its current and retired workers, and Congress since 2006 has required it to put $5 billion each year for 10 years into a fund to pay its future retirees’ health benefits, but for the past three years the Postal Service has defaulted on these payments. The increase in Post Office revenue in recent years has not been sufficient to offset its debt.
One can only wonder how the younger generations can possibly pay these debts.
[i] Government Accounting Standards Board Statement 45, Accounting and Financial Reporting by Employers for Post-Employment Benefits Other than Pensions.
[ii] If they were, the result in many cases would be to make the reporting entity insolvent.
[iii] Office of the New York State Comptroller, Division of Local Government and School Accountability, GASB 45: Reporting the True Cost of Other Post-Employment Benefits, at p. 12 (May 2008). [Hereinafter referred to as True Cost Reporting.]
[iv] Irvington UFSD- GASB 45 Disclosure as of June 30, 2014, prepared by Questar III BOCES [hereinafter cited as “2014 Disclosure”], at p. 3.
[vi] Id. at p. 4.
[vii] The acronym OPEB is short for Other Post Employment Benefits Other than Pensions, a long way of describing retiree health benefits.
[viii] The Irvington School District uses an interest rate of 4%. The deduction is one year of interest at that rate on the NOO as it stood at the beginning of the fiscal year.
[ix] 2014 Disclosure, p. 2.
[xi] All statistics are from page 2 of the 2014 Disclosure.
[xii] For active employees who haven’t yet satisfied age and service requirements to get vested retiree health benefits the calculation includes an accrual of one year’s worth of post-employment health benefits.
[xiii] Explanation received from District’s actuary. Standard not otherwise described.
[xiv] The discount rate was 4% and the time period was thirty years.
[xv] 2014 Disclosure, p. 3.
[xvi] See endnote 10 above.
[xvii] Irvington uses 4% as the annual interest earnings on the non-existent fund. The Hastings-on-Hudson school district must have a better manager for its imaginary fund because it assumes a 6% interest rate. The 2013 Actuarial Report, p. 2, says that an increase of 1% in the interest rate decreases the liability by 15.20%.
[xviii] This is a rule of thumb that says the number of years it will take a specified interest rate to double a given sum can be determined by dividing that sum by the interest rate. At 4%, the sum will double roughly every 18 years.
[xix] Irvington Union Free School District Actuarial valuation Postretirement Benefits (GASB 45) as of July 1, 2012, With Estimated Disclosures for the Year Ended June 30, 2013, dated 3/19/2013 prepared by Questar III –BOCES, at pp. 8, 10. [Hereinafter cited as 2013 Actuarial Report.]
[xx] U.S. Department of Health and Human Services, Center for Disease Control, National Center for Health Statistics, 62 National Vital Statistics Reports No. 7 (January 6, 2014)
[xxi] 2013 Actuarial Report, p. 14.
[xxii] This information in this Section is from the 2013 Actuarial Report at p. 13, the 2014 Disclosure at p. 6, and more specific information provided by the District’s Assistant Superintendent for Business & Facility Management.
[xxiii] Id. at p. 13.
[xxiv] Prof. Kevin M. Bronner, The Budget Crisis Associated With State and Local Government Employee Health Care Costs, 6 Albany Government Law Review 83, 104 (2013).
[xxv] State Comptroller’s Comprehensive Annual Financial Report for Fiscal Year Ended March 31, 2013, at p. 110.
[xxvi] Martin Z. Braun, New York State Retiree Health Costs Rise 29% to $72 Billion, Bloomberg.net, May 17, 2012.
[xxvii] True Cost Reporting, at p. 6.
[xxviii] Pew Center On the States, The Widening Gap Update 1, at p. 5 (June 2012), http://www.pewstates.org/uploadedFiles/PCS_Assets/2012/Pew_Pensions_Update.pdf.
[xxix] Thomas P. DiNapoli [NY State Comptroller], Retirement Security for Americans and the Role of Defined-Benefit Pension Plans, 72 Pub. Admin Rev. 483, 483 (2012).
[xxx] True Cost Reporting, at p. 7. But see note 30.
[xxxi] Joseph Spector, the Albany Bureau Chief of The Journal News, reported on April 17, 2014 that last year 139 municipalities had to borrow a total of $368 million to meet pension obligations. Westchester County borrowed $25 million for this purpose in 2013 and is borrowing $43.5 million more this year to meet a $100 pension payment obligation. The Journal News, Thursday April 17, 2014, page 5A, col. 1. It has also been reported that some required contributions have been made by promissory notes, i.e., IOUs, instead of in cash.
[xxxii] True Cost Reporting at p. 4.
[xxxiii] Page A15, col. 6.