Pre-Funding Of Retiree Health Benefits Raised

JULY 1993 - Concept New To Public Sector - Throughout
the 1980’s, the Legislature spent much time and money addressing the
issue of the state’s unfunded pension liability. By most accounts,
Massachusetts had one of the largest unfunded pension systems. It was
estimated that there was as much as a $13 billion shortfall between the
future cost of pensions and the ability of the state and local pension
funds to pay those costs. There was much at stake for both the fiscal
solvency of the state and local governments and for public pensioners.
Pension funding legislation received broad support by not only
management and labor groups but by fiscally conservative watchdog
groups such as Massachusetts Taxpayers Foundation.

As we reported in our May 1993 edition of The Voice,
the Legislature’s actions have resulted in the state realizing a 22%
drop in its unfunded liability since January 1990. This amounts to
early $2.5 billion in increased assets between the state and teachers’

Now that this financial
crisis has been addressed, Public Service Co-chairman Rep. Kevin
Blanchette (D-Lawrence) has set his sights on addressing the next
fiscal crisis that the state and its municipalities face: the
pre-funding of retiree health care benefits.

of Rep. Blanchette’s bills, H-2676, would establish a mechanism to
begin this process. "I have always been pro-active when it comes to
issues affecting retiree benefits; that is why I have filed this
legislation. We have made a commitment to provide health care benefits
to retirees and now we must begin to honor that commitment." If
Massachusetts were to adopt Rep. Blanchette’s proposal, it would become
the first state in the nation to begin prefunding retiree health

The private sector has
been forced to address this through a recent change in accounting
practices. The Financial Accounting Standards Board (FASB) recently
established requirements that companies account for the future
liability of retiree health care costs as they are incurred during the
retiree’s career.

General Motors
was forced to take a charge against its 1992 fourth quarter earnings of
$20.8 billion as a result of this new requirement. Estimates for all of
corporate America range in the vicinity of between $500 billion and $2
trillion. As FASB regulations do not regulate public sector finances,
there are no figures available to measure the impact such a bookkeeping
requirement would have on state and local governments.

Health Costs Outpace Pension Costs

managers investing pension funds see the extra cash available because
of better funded pension funds as a source to use to begin pre-funding
health care costs.

One such money
manager, Freedom Capital Managment Corporation of Boston, has been a
vocal advocate of prefunding. "The rate of increase in pension costs
has been stabilized as a result of the pension reform legislation, This
provides an opportunity for cities and towns to put aside those savings
to begin prefunding of future retirees health care costs. As retirement
systems become fully funded, the pension surplus could be dedicated to
fund health care costs," is how the firm’s Vice President, Terry
Gerlich, sees it.

Future pension
costs are determined by today’s salaries and have factored into them
projected pay raises. Since health care costs have been rising at a
rate far greater than salaries, the future costs of retiree health care
benefits will be harder to meet than the costs of pensions. Health care
costs increased by well over 10% a year through most of the 1980s. This
rate was not only far above the rate of wage increases, but well beyond
the rate of inflation as well.