NCPA - National Center for Policy Analysis


December 20, 2005

Local and state governments face a looming crisis as they realize that the cost of promising generous health care benefits for public service retirees will swamp their budgets, says the New York Times.

According to the Times:

  • The city of Duluth, Minn., estimated that providing free lifetime health care to its public workers will cost an estimated $178 million, more than double the city's operating budget.
  • The state of Alaska's pensions for current public workers are underfunded by $5.7 billion, prompting the legislature to push through changes for in pension and retiree health care benefits for new, future employees.
  • Michigan's unfunded liabilities to its public employees now total around $30 billion.
  • An actuary firm has estimated that, nationwide, state and local government retiree benefits could total $1 trillion.

The Government Accounting Standards Boards, which sets standards for state and local governments, has established a new rule requiring large public governments and school boards with large health care obligations to retirees to start reporting their benefits costs in 2007. Smaller governments will start doing so in 2009.

However, unions say that if governments are forced to disclose their benefits costs, they will likely start trimming them, as has been done in the private sector. Indeed, many states and cities have already begun cutting costs:

  • Duluth will begin setting aside money in a trust fund to pay for future obligations; the city's mayor also raised the requirement from 3 to 20 years that a city employee must work to qualify for retirement benefits.
  • Alaska will replace its current comprehensive medical coverage for new public employees with a high-deductible health plan and Health Savings Accounts.
  • Michigan is considering legislation that would shift more health care costs to retirees.

Sources: Milt Freudenheim and Mary Williams Walsh, "The Next Retirement Time Bomb," New York Times, December 11, 2005.

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