Internet Explorer 11 is not supported

For optimal browsing, we recommend Chrome, Firefox or Safari browsers.

Looming Retiree Health-Care Costs? Let the Feds Help.

As retiree health-care costs soar, maybe state and local governments would be wise to shift some of the burden to Uncle Sam, according to a new report.

As retiree health care costs soar, state and local governments would be wise to shift more of the burden to the federal government as they try to get a handle on their growing liabilities.

An analysis by Moody’s Investors Service notes that growing health care liabilities pose an increasing credit risk for many municipal governments. States alone listed a total of more than $530 billion in unfunded “other post-retirement benefits” (OPEB) liabilities in 2012, Moody’s reports.

A big chunk of these liabilities occur because roughly two-thirds of states and large local governments offer supplemental health insurance to retirees who are at least 65 years old and eligible for Medicare. Governments that shift more of the cost burden for supplemental health care to Medicare-eligible retirees, and force them to enroll in federal programs available to them (like Medicare Part D) would save big in the long run. The report notes that even small reductions "can have a considerable impact on future costs because savings compound over retirees’ increasingly long lifetimes."

“A lot of the liabilities are concentrated in a handful of states,” said Marcia Van Wagner, the author of the report, which advises that investors pay attention to which states are seeking to reduce their liabilities through Medicare.

Case in point: Maryland in 2011 reduced its $16.1 billion OPEB liability by 40 percent, largely by requiring retirees to enroll in Medicare Part D (prescription drug coverage) in 2020 when the Part D federal coverage is scheduled to improve. The move also increased prescription drug copayments, retiree premium payments and out-of-pocket maximums. In a single year the state cut its liability down to $9.4 billion.

The savings could increase in the coming years as Medicare-eligible retirees will comprise a growing portion of state and local government retirees. This shift is thanks to two policy factors: one, fewer retirees are those who entered government service before 1986, when Medicare participation for state and local government employees became mandatory. And two, pension reforms that have raised retirement ages will eventually reduce the number of retirees younger than 65, said Van Wagner.

Local governments will not benefit as much as states in this cost shift because they have a greater portion of public safety retirees who retiree younger and are not Medicare-eligible.

A big reason governments have such looming unfunded health care liabilities is because they are not prefunded as pension benefits are for retirees. Most governments fund retiree health care on an annual basis without setting aside money to invest and earn returns to help reduce future liabilities. (OPEB generally does not have the same legal protections that pensions have against altering benefits, however.)

Van Wagner noted that states like California, New York, Texas and Illinois are among the states with the largest liabilities. Last week, California’s Controller John Chiang released a report showing the state’s unfunded retiree health care liability to be $64.6 billion, an increase of $730 million from the prior year.

“While most [states] are focused on unfunded pension obligations, this is a sleeper problem that can become the next big fiscal threat if we continue to do nothing,” Chiang said in a statement.

California is among the states that provide supplemental insurance coverage for Medicare-eligible retirees. But Chiang is proposing a five-year plan to phase in lower OPEB contributions and reduce the state’s liabilities by roughly $18 billion, or 27 percent.

Liz Farmer is a former GOVERNING fiscal policy writer.
Special Projects
Sponsored Stories
In recent years, local governments have been forced to adapt to a wildly changing world, especially as it pertains to sending bills and collecting payments.
Workplace safety is in the spotlight as government leaders adapt to a prolonged pandemic.
While government employees, students and the general public had to wait in line for hours in the beginning of the pandemic, at-home test kits make it easy to diagnose for the novel coronavirus in less than 30 minutes.
Governments around the nation are working to design the best vaccine policies that keep both their employees and their residents safe. Although the latest data shows a variety of polarizing perspectives, there are clear emerging best practices that leading governments are following to put trust first: creating policies that are flexible and provide a range of options, and being in tune with the needs and sentiments of their employees so that they are able to be dynamic and accommodate the rapidly changing situation.
Service delivery and the individual experience within health and human services (HHS) is often very siloed and fragmented.
In this episode, Marianne Steger explains why health care for Pre-Medicare retirees and active employees just got easier.
Government organizations around the world are experiencing the consequences of plagiarism firsthand. A simple mistake can lead to loss of reputation, loss of trust and even lawsuits. It’s important to avoid plagiarism at all costs, and government organizations are held to a particularly high standard. Fortunately, technological solutions such as iThenticate allow government organizations to avoid instances of text plagiarism in an efficient manner.
Creating meaningful citizen experiences in a post-COVID world requires embracing digital initiatives like secure and ethical data sharing, artificial intelligence and more.
GHD identified four themes critical for municipalities to address to reach net-zero by 2050. Will you be ready?