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Pre-Funding Of Retiree Health Benefits Raised PDF Print E-mail
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’ funds.

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.

One 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 benefits.

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

Money 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.
 
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