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By Robert Elder
AMERICAN-STATESMAN STAFF
Sunday, February 11, 2007
Texas' new $50 billion question
New rule requires state to total the real cost of public retiree health care
The State of Texas treats the cost of health care benefits for its retirees the same way a lot of people do: Grimace at the size of the bill, pay it and hope the tab doesn't rise too much the next time around.
The state spent $629 million in 2005 to help pay for health care for retired state employees, teachers and some higher education retirees. The retirees themselves pay hundreds of millions of dollars more in premiums, co-pays and drug costs.
Until now, the state has reported those costs on a pay-as-you-go basis. But a new nationwide accounting rule, which will take effect in Texas over the next two years, requires governments to disclose the accrued cost — the total bill for all current and future retirees — of benefits it has promised.
According to a new estimate by the Legislative Budget Board, Texas could quickly rack up at least $50 billion in liabilities for health care and other benefits promised to retirees.
The rule doesn't require Texas to set aside that whopping amount. But the state will have to list it as a liability on its books, much like a corporation does — the idea being to give policy makers, the public and credit rating agencies a sense of how well prepared a government is to meet its financial obligations.
The rule presents state and local governments with stark choices.
In Texas, the state can bite the bullet and start putting away billions of dollars each year in a trust fund for retiree costs. The budget board estimates at least $2 billion a year is needed; if no payments are made, the liability will reach the $50 billion figure in a decade.
If the state doesn't contribute the extra money, it could see its credit rating sink, which would raise the cost of borrowing money.
More immediately, the rule is likely to accelerate the debate about whether the state can continue to afford pension payments and health care benefits for retirees.
"It sure does put a spotlight on what these programs cost," said state Sen. Robert Duncan, R-Lubbock, the Senate's leading authority on pension and benefits issues. "It's naive to think these programs can go on forever without adjusting to the changing economic environment we're in, especially with health care."
Duncan said he does not expect any move toward ending benefits, especially retiree health care, particularly as state governments such as California are testing new ways to insure more people.
In September, Ronnie Jung, executive director of the Teacher Retirement System, warned the Senate Finance Committee that once the full costs are in the open, it inevitably sparks discussion about reducing benefits.
"These are huge costs and when you promise them, somebody has to pay or there are no health care benefits," Jung said. "There is no silver bullet and no easy answer. It does require more money or less benefits."
Girard Miller, a former president of Janus Mutual Funds who is a consultant and commentator on benefit issues, said the accounting rule is "a wonderful service" because it requires costs to be disclosed.
"It gets people thinking about it," Miller said. "Otherwise, there's a tendency to sweep this under the rug."
Miller also advises governments not to rush into possible solutions because the accounting rules could change.
"It's foolhardy to jump in and try to solve the problem all at once," he said.
Duncan said he agrees. Right now, he said, state policymakers are studying the issue and how other governments are coping.
"It's too early at this point in time to reach a conclusion" on how to deal with the accounting rule, he said. "Sometimes you don't want to be the guinea pig."
For large states, the numbers are hard to hide. California has pegged its liability for health care costs at about $70 billion. South Carolina's figure is $24 billion.
In New York City alone, the cost is an estimated $54 billion. Mayor Michael Bloomberg has proposed putting about $2 billion of its budget surplus into a fund to help pay for retiree costs. California and Massachusetts are among the states considering contributions to a trust fund for these costs.
Will Texas follow suit?
"That's a lot of money to be setting aside," said Eva DeLuna Castro, a senior budget analyst for the Center for Public Policy Priorities in Austin. Generally speaking, "whatever money lawmakers try to set aside" — for the state's Rainy Day Fund, for instance — "they end up using for other purposes."
"One concern is that officials, whether they're state or city or whoever, once they realize what the actual long-term cost of employee benefits are, they won't react by funding the benefits, but they will cut them instead," she said.
The accounting standard isn't just a problem for big governments. It applies to about 25 million state, city and county employees nationwide.
In 2005, J.P. Morgan Chase & Co. estimated that the current value of retiree health care and other post-employment benefits for government employees is between $600 billion and $1.3 trillion.
Under the new standards, Austin would be required to report an annual obligation of $66 million in retiree health care costs, according to a 2003 report. The $66 million includes costs for the retirees and active employees as well as an amount to catch up on past payments for promised benefits. The city's total liability for promised benefits is $606 million.
Those numbers could change once Austin gets an updated report on its liabilities, which is expected soon.
Travis County, by contrast, is putting up a fight. County Auditor Susan Spataro complained that the rule forces governments to put a liability on their books that in most cases won't be close to an accurate estimate.
Spataro said private actuarial firms have delivered wildly different estimates on the liabilities the county will incur. This year the county will spend $4 million on health care for retirees.
Factors such as the future costs of health care, the county's employment and the impact of federal health care regulations combine to produce misleading cost estimates, Spataro said.
Additionally, she said, it's up to county commissioners to decide whether to provide benefits on a pay-as-you-go basis. That means the costs are not a long-term liability that should be subject to the accounting rule.
Spataro said she and other officials may draft legislation that exempts Texas governmental entities from the rule.
"I think we'll find a (legislative) sponsor and it will be looked on positively," she said.
Corporations have had to report their post-employment benefits since the early 1990s. Analysts said the rule helped spark a dropoff in benefits.
The percentage of private firms with 200 or more employees providing retiree health insurance fell to 36 percent in 1993 from 66 percent five years earlier, according to a report this week from the Center for Retirement Research at Boston College.
Between 1993 and 2006, the share of private employers providing retiree health benefits has ranged between 40 percent and 35 percent, the center said.
That's a sharp contrast with state and local governments that employ 200 or more workers: 82 percent of these governments offer and pay for some share of retiree health benefits.
Robin Prunty, an analyst with credit reporting giant Standard & Poor's, said she doesn't expect such a sharp drop in the public sector, in part because of public pressure.
It may be harder to trim benefits, or eliminate them, when the debate "is going to be in a very public arena," Prunty said.
Grasping the meaning of GASB Rule 45
In 2004, the Governmental Accounting Standard Board issued Rule 45, which applies to governmental entities that provide health care, life insurance and other post-employment benefits to retirees.
The rule requires public employers that offer health plans to report the estimated accrued cost of the benefits. The state of Texas, for instance, appropriates money for the benefits in each two-year budget cycle, a pay-as-you-go system.
The rule doesn't have the force of law, but major credit-rating agencies are unlikely to bless an audit statement that doesn't include the estimate. That would damage the government's credit rating and raise the cost of borrowing money.
The rule takes effect in stages. In Texas, the teacher and state employee retirement systems will begin reporting their liabilities in their fiscal 2007 report. The state itself will start reporting in fiscal 2008.
Options for Texas
1. Set up a trust fund for retiree health care costs. The state would have to set aside at least $2 billion a year to avoid incurring $50 billion in liabilities over the next 10 years.
2. Continue a pay-as-you-go system and have the liabilities mount on state financial statements, endangering its credit rating.
3. Contribute smaller amounts to the trust and trim benefits.
4. Cut benefits or have state retirees pay the full cost of all post-employment benefits.
Sources: Governmental Accounting Standard Board, Texas House Research Organization, Texas Legislative Budget Board