Paying for retiree health care
Most Georgia agencies and city and county governments offer employees continued health benefits once they retire. But most governments contribute little more to their plans than the current health care costs of retirees — a policy called “pay as you go.” That’s usually well short of the amount actuaries estimate is needed to cover the plans’ long-term costs.
Government … Actual annual contribution … Recommended contribution … Percentage contributed
State-wide school plan … $362.5 million … $1.05 billion … 34%
State-wide college plan … $83.4 million … $367.8 million … 23%
Georgia staff plan … $181.5 million … $317.1 million … 57%
Atlanta … $37.5 million … $100.0 million … 38%
Fulton County … $27.3 million … $90.8 million … 30%
DeKalb County … $22.9 million … $68.9 million … 33%
Cobb County … $18.5 million … $18.4 million … 101%
MARTA … $18.4 million … $18.0 million … 103%
Gwinnett County … $16.9 million … $15.2 million … 111%
Clayton County … $6.2 million … $11.2 million … 55%
Marietta … $2.3 million … $5.0 million … 45%
Decatur … $365,181 … $2.0 million … 19%
Norcross … $172,493 … $1.9 million … 9%
Lawrenceville … $259,979 … $1.7 million … 16%
Henry County … $416,512 … $1.1 million … 36%
Buford … $140,326 … $946,388 … 15%
Kennesaw … $6,195 … $642,560 … 1%
Smyrna $471,802 … $542,368 … 87%
Fayette County … $42,960 … $334,702 … 13%
Peachtree City … $1,093 … $255,292 … 0%
Atlanta Regional Commission … $229,644 … $229,644 … 100%
Metro Atlanta plans total … $152.1 million … $337.2 million … 45%
State plans total … $627.4 million … $1.74 billion … 36%
Total … $779.6 million … $2.08 billion … 38%
Note: Contribution percentages are rounded to the nearest percentage point.
Sources: Latest available annual data from the financial filings by state and local governments to the Municipal Securities Rulemaking Board; staff research.
Under-funded retiree health plans
Rising health care costs, growing retiree rosters and years of “pay-as-you-go” policies have left most of Georgia’s state and local retiree health care plans deep in a hole. Most governments set aside little money beyond payments for current retirees’ medical benefits.
Government … Unfunded total liability
State-wide school plan … $10.9 billion
Georgia staff plan … $3.9 billion
State-wide college plan … $3.8 billion
Fulton County … $1.8 billion
Atlanta … $1.5 billion
DeKalb County … $805.5 million
Cobb County … $201.1 million
MARTA … $163.5 million
Clayton County … $161.2 million
Marietta … $78.2 million
Gwinnett County … $67.0 million
Decatur … $30.1 million
Lawrenceville … $20.1 million
Henry County … $12.7 million
Buford … $8.7 million
Smyrna … $5.3 million
Kennesaw … $3.8 million
Fayette County … $1.9 million
Norcross … $1.2 million
Peachtree City … $1.2 million
Atlanta Regional Commission … $959,534
Metro Atlanta plans … $4.8 billion
State plans … $18.5 billion
Total … $23.3 billion
Note: Figures are rounded.
Sources: Latest available annual data from the financial filings by state and local governments to the Municipal Securities Rulemaking Board; staff research. Some governments do not update retiree health care liabilities annually.
State and local governments face a deficit of more than $23 billion in paying for the lifetime health benefits promised to public workers when they retire, an analysis by The Atlanta Journal-Constitution shows.
To cover the gap, which is likely to grow, politicians and government officials have few alternatives other than to substantially reduce the benefits they promised or require employees, retirees and taxpayers to pay more for them.
Moreover, this comes at a time when state and local governments already face an estimated $21 billion shortfall in their pension funds.
The costs of retiree health care have outstripped pension obligations because governments generally deal with their rising medical bills on a pay-as-you-go basis. Most don’t set aside money to cover long-term health care promises, as they are required to do with their pension plans. The governments will likely keep falling further behind because health care costs are rising and many Baby Boomer workers are nearing retirement.
Retiree health care costs used to be “small potatoes,” said Leon “Rocky” Joyner, a long-time actuary at Segal Co. But more and more governments now have a greater number of retirees than active employees in their health plans. They’re struggling to keep up.
“It is a big problem. It doesn’t need to be ignored,” Joyner said.
Georgia is on the hook for more than $18 billion for its three retiree health plans. Its statewide plans for retired teachers and staff are deepest in the hole, with almost $15 billion in unfunded liabilities in 2012, according to state financial disclosures.
The state needs to chip in almost $1.4 billion a year to keep up with payments on those two plans. But last year it contributed only $544 million, just covering its share of the benefits paid out that year. Member premiums covered the rest.
“We’re real concerned,” said Chuck Freedman, a retired state budget officer and advocate with the Georgia State Retirees Association.
He said the plan’s deficit worsened during the 2007-2009 recession when then-Gov. Sonny Perdue and lawmakers tried to patch holes in the state budget. State law prohibits pulling money out of the health plans’ reserve funds for other uses. But state leaders indirectly removed $954 million in 2009 by chipping in less money than the plans were paying out for medical benefits.
“The governor yanked out close to a billion bucks,” said Freedman. “It’s been slow going back in.”
Eighteen local governments are in the hole for almost $5 billion, according to the AJC analysis.
Among those, Fulton and DeKalb counties and the city of Atlanta have the largest unbacked promises to provide health care to retirees. They face deficits of $1.8 billion, $805 million, and $1.5 billion, respectively.
But their annual payments are not making a dent in those liabilities. Instead, the governments are in a “pay-as-you-go” mode, contributing enough to cover the benefits, but little extra for the large unfunded promises.
The underfunding has come into sharper focus because of tougher accounting rules that went into effect in recent years, said Jerrell D. Coggburn, chairman of the public administration department at North Carolina State University. The rules require governments to estimate and disclose the full cost of their retiree health care promises, both as an annual charge and a single, lump-sum liability.
Municipal and state governments have been reporting “these billion-dollar unfunded liabilities,” Coggburn s said. “Now they have to figure out what to do.”
Costs vs. benefits
Local and state government leaders face a tough balancing act.
Rising health care spending could crowd out other needs if state and local governments pay the full amount now. But the funding gaps will get even bigger later if they don’t solve their long-term challenges.
Either way, taxpayers now or later could get hit with higher bills, fewer services, or both. Current and future employees are also affected, as governments have less money to hire workers or give pay raises.
Governments also could try to eliminate the plans entirely, but will likely face legal challenges if they do. Often, their efforts to re-tool health care benefits run into a buzzsaw of opposition from angry employees and retirees when retooled plans mean higher premiums, fewer benefits and a bigger share of medical bills.
Some government employees argue that they accepted jobs with lower pay than private-sector workers, partly because they came with richer pension and health care benefits.
But that deal seems to be unraveling, said Stephen Borders, president of the Atlanta Professional Firefighters union.
“Health insurance was always thought to be guaranteed and that’s not so anymore,” he said. “It’s another thing that erodes more every day.”
Charlie Craig, who retired from the Atlanta police in 2006, said his city-sponsored health benefits are still “pretty good.” But he worries that future changes will cost him.
“I was a police officer. It’s a dangerous job. I’ve been shot at,” said Craig. “The city is paying too much money for the retirees but that’s what we signed up for. You make a little bit of money and have good benefits.”
To avoid cutting benefits for current workers and retirees, many governments are taking a more gradual approach by making health plan changes that affect only new and future employees.
For instance, Marietta’s retirees once got free health coverage for life. But in 1991 the city cut back, requiring later hires to pay for part of their health benefits when they retire. By 2006, it had stopped paying for the retiree benefit for all new hires except those who work at least 20 years.
Such moves, however, don’t immediately help with today’s big obligations for those already hired or retired, said Coggburn, the North Carolina State University professor. “If you make a change in the policy today, it doesn’t do anything to the (funding gap) that you already have,” he said. It takes years for such cost-savings to kick in.
Atlanta ‘turning the corner’
Unless things change, state and local budgets will feel the strain in coming decades, the U.S. Government Accountability Office warned in a 2009 national study. By 2050, the GAO projected, retirees’ health care costs will more than double their share of government budgets, to 2.1 percent of their overall revenues.
Some cities are already well above that.
Atlanta’s cash spending on retiree health care has risen 28 percent since 2009, to $37.5 million last year. The full annual cost last year was nearly $100 million as actuaries determine it, which includes the estimated long-term cost of benefits to be paid decades from now. That’s about 5 percent of Atlanta’s total annual revenues of $1.9 billion.
Yvonne Yancy, Atlanta’s human resources chief, said she expects the city’s health care burden to begin shrinking soon as the result of cost-control efforts. She said aggressive negotiations with insurers have resulted in cost savings. The city also expects to save money through education programs encouraging employees to live healthier lifestyles and to use emergency rooms less.
“We are turning the corner on our health care spend,” said Yancy.
But some retirees and employees feel that Atlanta and Georgia have gone too far with their cost-cutting moves.
The Atlanta Pension Funds Membership Association sued Atlanta in 2009 after the city required most retirees to join Medicare in 2008 to cut costs. The APFMA retiree group noted that about 1,500 of those retirees were hired before the city joined Medicare in 1986. They weren’t eligible for the federal program, and faced much higher premiums as a result.
Atlanta denied that it tried to force ineligible retirees — the most costly members of its retiree health plan — into Medicare. But in a 2011 lawsuit settlement, it agreed to clearly tell such retirees that they didn’t have to join Medicare.
State cuts controversial
Georgia’s statewide plans followed a similar playbook. In 2010 the Georgia Department of Community Health, which runs the state’s largest health care plans, started pushing eligible retirees who hit age 65 to join Medicare’s more comprehensive “Advantage” plan or pay the full cost of their state benefits. The change saved about $116 million, the DCH said.
In 2012, the state also started requiring new employees to pay more of their retiree health care costs than earlier hires. The DCH estimates it will save $11 billion over 30 years.
Compared to pension plans, “we have more latitude” to make changes, said Tim Connell, chief financial officer of the Georgia Department of Community Health.
But making changes can sometimes stir up a hornet’s nest.
Earlier this year, the DCH dramatically increased employees’ and many retirees’ out-of-pocket medical costs.
But the governor and lawmakers did an about-face after teachers and retirees denounced the DCH’s changes online and at the state capitol. They restored $100 million to the health plan to lower employees’ and retirees’ medical costs.
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