NCPA - National Center for Policy Analysis


December 28, 2006

Until now, local governments have paid whatever retiree health care was owed in a given year.  But now that the federal Government Accounting Standards Board requires local governments to fully examine what retiree health care will cost them for past, current and future employees, they will be faced with a fiscal calamity, say Keith Matheny and Erica Solvig in the Desert Sun.

The impending dilemma has been years in the making, the result of several factors, including:

  • Skyrocketing health care costs; state spending for retiree health care increased an average of 17 percent a year for the past five years.
  • An increase in life expectancy coupled with public-sector employees retiring in their 50s with full benefits; local governments are forced to pay increasing costs for more years per employee than ever before.
  • Unbreakable labor contracts which leave cities and schools in the tough position of making good on what they've promised in contracts, or negotiating a way out.
  • A lack of savings; cities and schools use pay-as-you-go systems, meaning no money is set aside for the millions of dollars in future costs.

The new accounting standards won't kick in for many until 2008. And they only require putting the costs on the books -- not necessarily funding them.  But bond-raters are expected to start penalizing governments that carry large debts. That could impact how much a city or school pays to borrow money for infrastructure projects -- or their ability to borrow at all.

Source: Keith Matheny and Erica Solvig, "Warning bells tolling for rising health care costs," Desert Sun, December 18, 2006.

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