The leak in states' budgets

The tab for retiree health care benefits is spiraling out of control.

EMAIL  |   PRINT  |   SHARE  |   RSS
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all RSS FEEDS (close)
By Katie Benner, writer-reporter

NEW YORK (Fortune) -- As cities and states wonder whether their starved pension funds will dry up and force them to use budget money to pay the annual cost, retiree health care benefits are already draining state coffers.

States pay the costs of retiree health care, which range from full coverage for life to more modest benefits, out of their annual budgets. And the tab has been spiraling out of control. In 2008, employer health insurance premiums increased by 5%, or twice the rate of inflation.

"Governments have piled up huge unfunded health care liabilities, the dimensions of which are just now being realized," writes Lance Weiss in a report released in 2006 by Deloitte titled "Paying for Tomorrow." "Estimates of unfunded liabilities associated with retiree health benefit plans represent a fiscal crisis for many states and municipalities."

Deloitte estimates that public pension systems owe employees about $1 trillion in current and future health care costs; and that as medical expenses zip higher they will eat away at larger portions of state budgets.

For example, New Jersey owes about $68 billion in future health benefits, the largest unfunded obligation of its kind in the country, according to a 2008 study by the Center for State and Local Government Excellence.

The study also found that Jersey has the highest future health care obligations per capita at $7,946.92 per resident, and that total future obligations were equal to about 140% of the state's overall budget.

New Jersey's proposed 2010 budget allocation for public school funding is set at $11.4 billion, according to the state's budget proposal. Of that amount, $775.5 million is set aside to pay for retiree health care costs. That's about 7 percent of the overall budget and up about 3 percent from the previous year.

Actuaries say that New Jersey is quite typical of what is going on all across the country.

At the very least, this fluctuating health care cost makes it difficult for states to budget and at worst it forces them to siphon funds from other programs to meet the needs of their retirees. And for now these are legally binding promises that must be paid.

Until the federal government can reveal a plan to dramatically rein in health care costs, services and taxpayers will feel significant strain for years to come as state and local governments cut spending and raise taxes to meet this rising cost.

In their fight to address the problem, politicians find themselves in the constant tug-of-war between being fiscally responsible and keeping their constituents happy. Now they're in a position where it is impossible to do either and the result could be more than a financial disaster.

"They'll have to try and throw the agreements with public employees out," says Roland Machold, a former treasurer of New Jersey. "There will be salary freezes and benefits will be slashed and people will forget that our future as a society depends on quality of these institutions." To top of page

Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET
More Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.