“Without addressing the cost of health care…you’re essentially rearranging the deck chairs on the Titanic.”

$15 billion – What Massachusetts needs to pay retiree insurance benefits for 30 years, but doesn’t have

Corrections officers were among those who attended a public hearing at the State House on Oct. 31, 2013 opposing a bill that would cut health benefits for public retirees. (Shira Schoenberg for The Republican/MassLive.com)

By Shira Schoenberg | sschoenberg@repub.com masslive.com Follow on Twitter on April 24, 2015 at 7:15 AMState budget

BOSTON – Massachusetts has committed to paying more than $15 billion over the next 30 years for health insurance for its retirees. But the state has set aside almost none of the money needed to pay for it.

Talk of reform under former governor Deval Patrick, a Democrat, went nowhere. Budget proposals by Gov. Charlie Baker, a Republican, and the Democratic-controlled House would not make a dent in the unfunded liability.

“Each year we delay action on this, the problem gets bigger and more unwieldy,” said Carolyn Ryan, assistant director of policy and research for the business-oriented Massachusetts Taxpayers Foundation, which has studied the impact of retiree benefits on state and local governments.

In fiscal year 2014, the state owed $15.6 billion in future health insurance benefits, which must be paid out over the next 30 years. The state had only set aside money to pay for 3.3 percent of that, leaving an unfunded liability of $15 billion, according to state financial documents.

The basic problem is that the cost of providing health insurance to public retirees is increasing faster than Massachusetts is setting aside money to pay for it.

Massachusetts provides health insurance, life insurance and prescription drug benefits to public retirees and their families, with copays and deductibles similar to those in private plans.

Until recently, Massachusetts funded these other post-employment benefits (OPEB) at the amount that needed to be paid out that year – not the far larger amount of costs that were being accrued that year to be paid in the future. In the last decade, national accounting standards changed to require governments to calculate the amount they committed in future benefits. So Massachusetts learned, for example, that in fiscal year 2013, it budgeted $415 million for retiree health care costs, while employees were accruing $1.3 billion in benefits.

The issue is similar to one facing the state employee pension system, which state officials often talk about the need to fund. But the pension system is better funded. As of 2014, the pension fund had money to pay for 70 percent of its $30 billion liability. It is expected to be fully funded by 2040.

The state has made efforts to fund OPEB. It set up a $350 million fund in 2009, and has been paying into it each year. State officials committed to dedicating an increasing portion of payments from a settlement with tobacco companies. The tobacco payments are projected to increase from $56 million in fiscal year 2014 to $250 million by 2023. A percentage of capital gains tax revenue above a certain threshold also pays for OPEB. But the cost of providing benefits increases annually, so by 2023, the state would still be funding only around half its yearly obligation, according to projections in a state financial report.

In his 2016 budget, Baker was supposed to set aside $112 million for OPEB, based on a funding schedule, but he proposed instead freezing payments at $85 million, giving him more money to spend on current operating expenses.

“We are definitely considering OPEB reform,” said Dominick Ianno, chief of staff at the Executive Office of Administration and Finance. “Unfortunately, in the context of a $1.8 billion budget deficit that we inherited, this wasn’t the year we were able to accomplish reform in this area.”

Baker proposed requiring some employees to pay a higher percentage of their health care premiums, which would lower the liability in the long term because it would affect how much those employees pay for health care when they retire. But facing resistance from state employees, the House Ways and Means Committee scuttled that plan in its version of the budget.

Without addressing the cost of health care…you’re essentially rearranging the deck chairs on the Titanic.

Massachusetts is not unusual. A 2012 report by the Pew Center on the States found that states had set aside just 5 percent of the money they needed to pay for health insurance and other retiree benefits. Seventeen states had no money set aside, and only seven funded at least 25 percent of their liability.

A report released in December by the Center for State and Local Government Excellence found that the mean unfunded OPEB liability per state was $10 billion, and the median was $2 billion. Massachusetts had the ninth highest unfunded liability among all 50 states.

Ryan said Massachusetts’ costs are high because the state has generous eligibility requirements and high health care costs.

Ryan said taxpayers should be worried about the liability. “These are not what ifs. These are actual bills that we’ve already incurred,” Ryan said. “Over the next 30 years, we’re going to be paying out $16 billion….You won’t be able to spend that money on education, transportation and other things.”

In 2013, a state task force recommended changes to OPEB, including increasing the age and years of service required to be eligible for coverage and prorating benefits based on years of service. Patrick proposed legislation that would have made some of these changes. But public sector unions protested the changes, which they said would break promises made when employees were hired. The bill did not pass.

State Rep. John Scibak, D-South Hadley, served on the OPEB commission. Scibak said the issue of pension funding has historically gotten more attention than OPEB funding, even though the pension system is in better shape. “It definitely is an issue and a concern, and it’s one that has not historically gotten sufficient attention from the commonwealth or from municipalities,” Scibak said.

Part of the problem, Scibak said, is spending money to hire police officers or social workers has a tangible political benefit, while no one would see the impact of spending money to pre-fund retiree health benefits. But Scibak pointed out that OPEB costs will continue to rise as long as people continue living longer and health care costs continue to increase, which has been the trend in recent years. Paying for this will squeeze state spending in other areas.

One difference between pension and OPEB reform is that Massachusetts courts have determined that pensions are contractual benefits, so they cannot be changed once an employee is hired. Retiree health care is not protected in the same way, so the state could potentially change benefits or contribution rates.

Shawn Duhamel, legislative director of the Retired State County and Municipal Employees Association, said he believes the Legislature will reconsider OPEB in some way. “The issue of OPEB isn’t going to go away. A solution needs to be found,” Duhamel said.

Duhamel wants government to focus on controlling health care costs, rather than cutting benefits or forcing retirees to pay more. “The overall problem with health care isn’t who’s paying the bills, it’s the cost of the product in the first place,” Duhamel said. “Without addressing the cost of health care and the root of the problem first, you’re essentially rearranging the deck chairs on the Titanic.”

State Treasurer Deborah Goldberg said the unfunded OPEB liability “remains a concern.” “I will continue to work with the Governor, our legislative leaders and labor on ways to more effectively address the issue,” Goldberg said in a statement.

Jared Magee, a researcher for the Legislature’s Joint Committee on Public Service, said the committee has not yet identified priorities for the coming session. Magee said there have been no bills filed similar to the one filed by Patrick in 2013. But OPEB reform is one of the major issues the committee deals with each session. “The matter of pension liability and OPEB liability is not going to go anywhere until we deal with it,” Magee said. “But at least at this early stage in the game, we have no plans yet.”

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