Starting next year, the state must disclose its un-funded obligations for health insurance for retired state employees, teachers and some police and firefighters – and start figuring out a way to pay a tab that is expected to easily surpass a three-year-old estimate of $1.2 billion.
There currently are close to 9,000 retired state employees and 6,500 retired teachers, and another 42,000 active employees in the pipeline. The state pays up to 100 percent of premiums for retired state employees and 45 percent for teachers. Full-time police and firefighters were given a similar, 45 percent benefit by the Legislature earlier this year.
Actuaries currently are working on an updated figure to give to the governor and the Appropriations Committee within the next month, although it won’t include the police and fire benefit, which is still being calculated. The full liability will have to be listed in the state’s financial statement starting next fiscal year.
“I wouldn’t be surprised to see figures entirely different than anything we’ve seen before,” said Sen. Peter Mills, R-Somerset, who has dogged the administration on its indebtedness.
“The work that was done before left me in confusion and three years have passed. Health care costs are all over the lot, but basic trends can’t be anything but adverse,” Mills said.
Add to that the police and fire benefit, which he guessed will cost between $50 to $100 million, and the number goes even higher.
“We failed to estimate it before passing the law, knowing full well it was very costly,” he said, calling that “the first order of malfeasance.”
The new accounting rule – known in government circles as the Government Accounting Standards Board statement No. 45 or GASB 45, for short – doesn’t have the power to require states to save for their un-funded liability over time. But, if they don’t, the bonding houses that rate the quality of government bonds say it likely will affect state credit ratings.
“Reality dictates that an entity may opt to defer funding in times of budget stress. However, indefinite deferrals are damaging to credit quality,” the bond house, Fitch Ratings, wrote in an overview titled, “The Not So Golden Years.”
“There is no law that requires it,” said State Controller Ed Karass, of the state’s obligation to start saving for the inevitable. “The penalty will be that our bonding ratings will suffer and if our bond rating suffers, the cost of borrowing goes up significantly.”
Right now, Maine, like most other states and governmental entities, is largely on a pay-as-you-go system, meaning the state pays the premiums for its retirees when they become due – when the person retires. What most governments haven’t done is set aside money for what those costs will be in the future, when more baby boomers retire and the cost of health care goes up.
“Pay-as-you-go puts off a lot of inevitable pain,” Karass said. It also allows decision-makers – the governor, legislators, city managers, mayors and city councils – to grant benefits without really facing their actual cost.
“They make better decisions regarding the financial obligations that they face,” Karass said, if they know the true cost of the benefit they’re grating. “They will have an understanding of how they will be affected in the future.”
Karass said Maine is ahead of the curve on retiree health benefits, because it started estimating them in the mid-1990s, and even put money aside for the liability.
While that fund was raided to balance the budget, $73 million remains, including $13 million put in by the Legislature this past year as part of a budget surplus.
Saving more aggressively for those un-funded liabilities will affect annual state budgets and the amount the Legislature has to spend just like GASB 45’s cousin – GASB 27 – did in the mid-1990s regarding un-funded pension liabilities. Maine passed a constitutional amendment in 1997 requiring the Legislature to pay down its pension debt in 31 years. That debt still amounts to more than $3 billion, according to figures from fiscal year 2005.
GASB 45 requires the state to amortize or spread out its un-funded liabilities over a maximum of 30 years and it is expected, that like pensions, the state will gradually build up its reserve fund.
“Everybody realizes that going from pay-as-you-go to the full actuarial fund is going to be very painful,” Karass said, and the bond houses expect states to “ramp up over time.”
Karass said in talking to his colleagues across the country, the amount needed to cover the un-funded liability could exceed 5 to 20 times what states are currently paying for retirement health benefits.
Cities and towns, too, have to comply with the new rule on a rolling scheduled based on the amount of revenues they collect. Those collecting more than $100 million are on the same schedule as the states and have to start reporting their liability in 2007. Those with revenues of $10 million to $100 million start in 2008; and, under $10 million in 2009.
Portland appears to be the only city large enough to be affected next year, but Finance Director Duane Kline said the city stopped paying retirement benefits for retirees 10 years ago.
“Even that long ago health care costs were rising so fast…they were outstripping our other costs,” Kline said. “The decision wasn’t popular and still isn’t. It was a great benefit for employees,” but the city couldn’t afford it.
Martin Hanish is the chief financial officer for the Maine Municipal Association. It handles the Maine Municipal Association Health Trust, covering 9,500 active and retired employees.
“Municipalities in Maine are small by national standards,” he said. “Most of ours will not have to comply until 2008 or 2009.”
Even then, a good number don’t pay retirement health benefits.
“The number of municipalities that actually pay the premium for their (retired) employees is a minority,” Hanish said. Some do, however, include their retirees in the same pool as their active employees and therefore provide what’s known as an “implied subsidy” because retirees are benefiting from the group rate.
Hanish said the Maine Municipal Association is surveying its members in the next several months to determine which cities and towns are affected and in what way.
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