Posted on 09/25/2006 9:33:14 AM PDT by NormsRevenge
SAN FRANCISCO - The bill is coming due for years of generous benefits bestowed upon state, county, city and school employees, and it's a stunner: hundreds of billions of dollars over the next three decades, threatening some local governments with bankruptcy and all but guaranteeing cuts in education, public safety and other services.
This staggering burden is coming to light because of new rules issued by the Government Accounting Standards Board. They require public agencies to disclose the future cost of health care and other benefits - such as dental, vision and life insurance - promised in addition to traditional pensions to the nation's estimated 24.5 million active and retired state and local public employees.
Health care costs for retirees from public agencies have been quietly mounting for decades while public officials have passed out generous retirement benefits during labor negotiations, sometimes in lieu of immediately disclosed salary increases. Government negotiators have rarely considered the long-term financial consequences of awarding health perks, according to Brian Whitworth, a specialist with JP Morgan Chase and Co.
"A surprising number of public entities didn't even make informal estimates of long-term costs prior to the new accounting rules," Whitworth said.
Last month, JP Morgan released what it considers the most comprehensive preliminary estimate. It projects public agencies' unfunded cost for health care and other nonpension benefits at $600 billion to $1.3 trillion. By comparison, the debt rating agency Standard & Poor's estimates the country's total unfunded public pension debt at around $285 billion.
"There's a good chance some government entities are going to go bankrupt," said California Assemblyman Keith Richman, R-Granada Hills. "But the issue isn't just bankruptcy. It's governments dying of a thousand cuts in services. The costs of promises that have been made are going to be astronomical."
Union officials say it's not their fault city governments put themselves in a hole by promising more than they can deliver.
When the new accounting rules take effect in 2008, taxpayers will be able to see for the first time just how much they're paying to provide benefits to active and retired state and local public employees.
"When the numbers are produced, they're going to be shocking," said Ronald Snell, director of state services for the National Conference of State Legislatures. "They'll be in the hundreds of billions, and it's definitely something that policy makers are going to have to take notice of and act upon. ... There are consequences of decisions made in the past."
The Government Accounting Standards Board, an independent nonprofit organization that establishes accounting standards for public agencies, saw a need to bring public sector disclosure rules in line with those of the private sector.
The new rules don't require governments to come up with the money right away, but to disclose these future costs and estimate the shortfall of money to pay for them. To prepare for these disclosures, public officials across the country already are beginning calculations.
So far, California, New York, and Maryland appear to have the biggest burdens, but that could change when estimates begin trickling in from Florida, Texas, Illinois and Pennsylvania. Of the country's 10 most populous states, none has completed a formal estimate of the liabilities, but those that have completed preliminary assessments are reporting astounding numbers.
The California Legislative Analyst's Office estimates $40 billion to $70 billion in retiree health care and related liabilities for the state. With cities and counties included, JP Morgan pegs California's debt at $70 billion to $200 billion. The state controller is just now beginning a detailed study.
New York's preliminary analysis puts state liabilities between $47 billion and $54 billion. In a recent state budget report, officials acknowledged "these costs are substantial and would significantly reduce or even potentially eliminate" New York's current $49.1 billion in positive net assets.
Maryland has initially estimated its liability at $20 billion.
Other states also have reported significant amounts: Alabama estimates $19.8 billion, Massachusetts $13.2 billion, Alaska at least $7.9 billion, and Nevada between $1.62 billion and $4.1 billion.
Many local governments also are beginning to acknowledge huge liabilities. San Francisco officials reported that city government's burden at $4.9 billion. Los Angeles Unified School District officials said the district's liability is more than $10 billion. New York City has yet to complete its analysis, but is expecting a large shortfall and already has set aside $2 billion to help cover it.
At the least, analysts say, the public can expect increased taxes and fees or reduced services as governments adjust their budgets to amortize the debt.
Little in the way of concessions is likely from public employee unions, said Suzi Rader, director of district and financial services for the California School Boards Association. Any attempt in future negotiations to limit already-granted benefits will be a contentious issue, she said, so public officials must instead hold the line on granting more perks to future retirees.
John Abraham of the American Federation of Teachers said union negotiators have long been aware that future retirement benefits must be paid from shrinking resources.
"If they haven't been looking at the numbers, shame on them," he said. "Do we recognize there is a cost problem? Absolutely. As costs have gone up, we've made accommodations."
Lori Moore, spokeswoman for the International Association of Fire Fighters, said nothing is really changing except the need for cities to reveal how much they'll owe in nonpension retirement benefits.
"The liability has always been there," she said. "They had to know in the back of their minds that it was there."
State, county and city elected officials, focusing most of their attention on current expenses, typically fund retiree health care on a pay-as-you-go basis with annual appropriations from their general funds.
Under the new accounting rules, the liability can be paid over 30 years, just like a home mortgage, but public officials are forced to acknowledge the debt and calculate an annual payment.
Governments that don't handle their liability properly could end up insolvent.
Parry Young, director of public finance at Standard & Poor's, said few governments are prepared for the necessary annual contributions."It's been a growing liability that wasn't being addressed. But now the chickens are coming to roost," he said.
First the airlines then GM and Delphi. The public employee unions are next. These municipalities have caved to striking employees for years. I know in some states it is illegal for striking public employees to strike. The punishment for which should be dismissal.
Regardless of contracts, towns, states and cities will simply have to walk away from these unreasonable guarantees of all sorts of goodies for people who do not work for the towns and states anymore.
As all these plans fade away, national healthcare comes clearer into view.
seems to me that this would be a principle reason for the neverending attempts by gummint to take over all healthcare, or whatever increments it can grab before this cat gets out of the bag....
Medicare.
I fail to see why public employees should expect better benefits than what the rest of us get.
Another argument for the 10K "birth benefit" account proposed by Tres Sec Snow that can accumulate interest over a persons lifetime...and to which they can contribute.
Level playing field at the start, people will be responsible for their own care when they retire, and it takes full advantage of the miracle of compound interest.
Estimated cost 40 bpy, versus some 700 bpy for medicare alone.
"Another argument for the 10K "birth benefit" account proposed by Tres Sec Snow that can accumulate interest over a persons lifetime...and to which they can contribute."
That is a good idea as long as the funds are not held in a "trust fund" like social security. In extreme cases, the government or some mechanism may need to step in, but that would seem to cover most people adequately enough over a life time.
Sadly, I fear that is correct.
No, private accounts that the government DOES NOT HAVE ACCESS TO once the account is created.
I trust a politician around "extra" money as much as I trust my dog around an unattended steak.
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