NCPA - National Center for Policy Analysis


May 29, 2007

Retiree health benefits amount to an exceptionally cushy deal for America's public-sector workers.  Texas, for example, pays 100 percent of health insurance premiums for state employees who can retire in their early 50s.  Unlike pensions, these other retiree benefits generally are financed on a pay-as-you-go basis, says E. J. McMahon, a senior fellow with the Manhattan Institute and a member of Government Accounting Standards Board (GASB) Derivatives and Hedging Task Force.

These benefits impose huge and growing future liabilities on taxpayers -- liabilities that states and localities have long hidden from public view, says McMahon:

  • Last week the Texas Senate completed passage of a bill that would allow the state and its local governments to avoid funding long-term obligations for retiree health insurance and other non-pension benefits.
  • If Gov. Rick Perry signs the measure, Texas will simply defy a key provision of established government accounting standards.
  • This would be stunning setback for efforts to improve transparency and accountability in government finances around the country.

The total unfunded liability for state and local retiree benefits (other than pensions) has been estimated at $2 trillion ($50 billion for Texas governments alone).  While unfunded liabilities will be reported in notes to financial statements, the number of immediate concern to legislators and taxpayers will be the "annual required contribution," which amortizes the amount over 30 years:

  • For example, a city with a total unfunded liability of $1 billion might initially have an annual required contribution of $35 million.
  • If it pays the whole amount, there is no impact on the balance sheet.
  • If it chooses to pay only $20 million, the result is a net liability of $15 million.
  • The required contribution will grow rapidly if it is ignored or under-funded -- so governments that choose to ignore the number will risk seeing their credit ratings suffer.

Source: E. J. McMahon, "Accounting, Texas-Style," Wall Street Journal, May 29, 2007.

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