The
Post-Employment Health Benefits Promised to Public Employees Continue to
Increase an Already Enormous Debt Obligation Which There Are No Funds to Pay
Summary
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.
Pay-As-You-Go Funding
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]
Required Disclosures
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.
[x] Ibid.
[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)
[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.
