Thread: Public pensions from Detroit to Florida one reason for taxpayers’ distress

Public pensions from Detroit to South Florida one reason for taxpayers’ distress

BY STEPHEN K. HALPERT
shalpert@law.miami.edu

Detroit’s recent bankruptcy filing highlights the perilous financial condition of many state and local governments. Some of the contributing factors are not readily within local control: industrial decline, falling population and recession. But one common reason for the distress is very much of the governments’ own making: explosive growth in unfunded public pension liabilities.

Across the country, states and localities are facing staggering costs for promises of retirement benefits made to government workers. Nationally, state and local governments acknowledge accumulating unfunded pension liabilities of about $3 trillion and are estimated to owe another $1 trillion for retiree medical benefits.

These numbers are undoubtedly low because state governments rely on suspect actuarial calculations, including assumption of very high annual returns on their investments, typically between 7 percent and 9 percent.

Detroit — facing a $3.5 billion pension deficit — is not alone in its misery. A handful of other municipalities have already filed for bankruptcy because of unbearable pension liabilities, and more are contemplating a filing. Public pension issues have led to bitter state legislative battles, most recently in Illinois where legislative salaries have been suspended pending action on a $100 billion pension liability.

Many other state and local governments exist in a state of denial. Despite having accumulated substantial unfunded pension obligations — sometimes amounting to tens of thousands of dollars per taxpayer household — politicians continue to promise public workers generous retirement plans, substantially funded with IOUs.

Such a state of affairs cannot exist in the private sector.

A federal law, the Employment Retirement Income Security Act (“ERISA”), requires most private employers offering defined benefit retirement plans to make conservative interest-rate assumptions and to resolve any pension plan funding shortfall. As a consequence, most private employers have abandoned defined benefit plans in favor of pay-as-you-go defined contribution retirement plans.

Unfortunately, ERISA does not apply to state and local governments, which are free to make their own assumptions and to fund retirement plans as they see fit.

Unsurprisingly, politicians and public employees have agreed to compensation packages that provide for very generous future retirement compensation, but which are designed to impose no current political costs. Defined benefit plans — having almost disappeared from the private sector — not only proliferate among states and localities, but have grown more generous over time.

Today, state and municipal employees enjoy benefits packages that far outstrip those of the private sector. In Florida, the most generous benefits packages are offered by municipalities, especially to police and firefighters. Retirement may be permitted after as little as 20 years of service, with retirees receiving a lifetime of benefits based on the year or two of highest wages perhaps including overtime, unused vacation and sick days. The terms often include escalator clauses that grow the payments over time.

In Miami Beach, for example, 26 of the 38 firefighters who retired in fiscal year 2009 were in their 40s. The average initial annual benefit was more than $100,000 per year, and will grow at an annual rate of 2.5 percent. A Miami Beach 911 call operator retired in 2002 at age 54 with an initial pension of $150,000 per year, after inflating her $60,000 salary with massive overtime during her final two years. If she lives a normal life expectancy, including the escalator, Miami Beach taxpayers will pay her a pension of $8.6 million.

In the city of Miami, 154 police and firefighters retired on a single day, Sept. 26, 2010. Of those, 55 had initial annual pensions above $100,000 and 10 had initial pensions of more than $150,000. Many of the retirees were in their 40s.

The situation is less critical at the state level. Florida state retirement plans tend to be less generous than municipal plans, and the state has benefited from Florida’s sustained population and economic growth. Nevertheless, the Florida Retirement System reports being underfunded by more than $20 billion, a figure that grew by $1.3 billion in the most recently reported fiscal year. This number is low — Florida assumes an unrealistic 7.75 percent investment return — and is certain to grow.

There are two potential solutions to the problem of unfunded liabilities. One would be to adopt conservative funding rules similar to those imposed on private employers by ERISA. Introduction of conservative pension accounting would have a devastating impact on state budgets, and, predictably, has no support among state legislators.

Another would be to mandate defined contribution plans. Such proposals have been bitterly and effectively resisted by public worker unions. In the last legislative session, a proposal to mandate a defined contribution plan for new Florida government employees died in the Florida Senate, unanimously opposed by Democrats joined by one-third of Republicans.

In coming months, pension crises will surface in many more states and localities across the nation. Without significant change, Florida communities will follow.

Stephen K. Halpert is a professor of law at the University of Miami and a former senior staff economist on the President’s Council of Economic Advisers.

http://www.miamiherald.com/2013/07/27/v-fullstory/3524155/public-pensions-from-detroit-to.html

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Detroit Looks to Health Law to Ease Costs

By MONICA DAVEY and ABBY GOODNOUGH
Published: July 28, 2013

As Detroit enters the federal bankruptcy process, the city is proposing a controversial plan for paring some of the $5.7 billion it owes in retiree health costs: pushing many of those too young to qualify for Medicare out of city-run coverage and into the new insurance markets that will soon be operating under the Obama health care law.

Detroit wants insurance exchanges to cover retirees like Thomas Berry, a former police officer.

“There’s fear and panic,” said Michael Underwood, an ailing Chicago Police Department retiree.

Officials say the plan would be part of a broader effort to save Detroit tens of millions of dollars in health costs each year, a major element in a restructuring package that must be approved by a bankruptcy judge. It is being watched closely by municipal leaders around the nation, many of whom complain of mounting, unsustainable prices for the health care promised to retired city workers.

Similar proposals that could shift public sector retirees into the new insurance markets, called exchanges, are already being planned or contemplated in places like Chicago; Sheboygan County, Wis.; and Stockton, Calif. While large employers that eliminate health benefits for full-time workers can be penalized under the health care law, retirees are a different matter.

“There’s fear and panic about what this means,” said Michael Underwood, 62, who retired from the Chicago Police Department after 30 years and has diabetes and Parkinson’s disease. Mr. Underwood, who says he began working for the city when employees did not pay into future Medicare coverage, is part of a group suing Chicago over its plan to phase many retirees out of city coverage during the next three and a half years. “I was promised health care for myself and my wife for life,” he said.

Unfunded retiree health care costs loom larger than ever for localities across the country, and the health law’s guarantee of federal subsidies to help people with modest incomes afford coverage has made the new insurance markets tantalizing for local governments. A study issued this year by the Pew Charitable Trusts found 61 of the nation’s major cities wrestling with $126 billion in retiree health costs, all but 6 percent of that unfunded.

“The Affordable Care Act does change the possibilities here dramatically,” said Neil Bomberg, a program director at the National League of Cities. “It offers a very high-quality, potentially very affordable way to get people into health care without the burden falling back onto the city and town.”

But if large numbers of localities follow that course, it could amount to a significant cost shift to the federal government. Authors of the health care law expected at least some shifting of retirees into the new insurance exchanges, said Timothy S. Jost, a law professor at Washington and Lee University who closely follows the law.

“But if a lot of them do, especially big state and local programs,” he said, “that’s going to be a huge cost for the United States government, and it’s mandatory spending.”

Many cities are also wrestling with unfunded pension programs for retirees. But health care has become an easier target for cuts, in part because of generally stronger legal protections for pensions. Still, changes to retiree health care are playing out in courtrooms. The suit Mr. Underwood joined, filed last week in Chicago, claims that the health care benefits were also protected.

The Chicago plan, announced in May, would phase some of the city’s 11,800 retirees and their family members not eligible for Medicare out of city coverage by 2017. While some may seek insurance through new employers or through their spouses’ workplaces, others will probably be shifted to the insurance exchanges.

Much of the plan for the next few years is in flux, but the changes are expected to contribute to a larger effort to save Chicago $155 million to $175 million a year in retiree health care costs by 2017.

“With the implementation of the Affordable Care Act, our retirees will have more options to meet their health care needs,” said Sarah Hamilton, a spokeswoman for Mayor Rahm Emanuel, adding that most of the city’s retirees over 65 were already covered by Medicare. “We will ensure that they have all the information needed to navigate the options available going forward, while saving vital taxpayer dollars.”

Under the health care law, starting in October every state will have an online insurance market where people can shop for private plans. These policies will have to include 10 broad categories of benefits, including emergency services, hospitalization and prescription drugs.

People earning up to 400 percent of the poverty level can get federal subsidies to help with the cost of premiums, but only for policies bought through the new markets. The premiums will vary, depending on how much coverage a plan offers.

This year, 400 percent of the poverty level is $45,960 for an individual and $62,040 for two-person households.

Cities may also provide moderate monthly stipends to help retirees with the cost of health insurance bought through an exchange. Detroit, for instance, has proposed doing that.

But retirees say they worry about what the costs would actually amount to and whether the coverage would be as generous as some have received through city plans. A 60-year-old single man with an income of $45,000 might have to pay $4,275 a year, or about 52 percent of his total annual premium, for a midpriced plan bought through an exchange, with the balance covered by the federal subsidies, according to an estimate by the Kaiser Family Foundation, a nonpartisan research group. A couple who are both 55 with a combined income of $60,000 might have to pay $5,700 a year, or 42 percent of their total premium. In both examples, additional out-of-pocket costs of up to $6,350 per person could apply, depending on how much medical care they needed.

Professor Jost said that even with subsidies, insurance policies bought through an exchange could be more expensive for retirees than public sector health plans. Most exchange customers are expected to choose plans that cover 60 percent to 70 percent of medical costs for the average person, compared with public sector plans that have sometimes covered much more.

“These are people who stayed in the public sector all their lives because the benefits were more generous,” he said.

Some city plans, like those in Detroit, cover 80 percent to 100 percent of costs, officials said.

“The truth is, my health care is very good, with only $20 for prescriptions and $10 co-pays to see a doctor,” said Thomas Berry, 60, a Detroit Police Department retiree. “That was part of the promise that was made, and I don’t want to lose it.”

But some municipal retirees could actually end up spending less on coverage bought through the online markets than they do now. Several states have already approved rates for health plans to be sold through the new markets that are lower than what analysts had expected. But rates have yet to be announced in many other states, including Illinois and Michigan.

In an added wrinkle for Detroit, Michigan is among the states that so far have opted out of expanding Medicaid under the health care law. In such states, people with incomes below the poverty level — $11,490 for an individual and $15,510 for a couple — would not be eligible for the federal subsidies to help buy coverage through an exchange.

The law’s authors had intended for such people to become eligible for Medicaid, if they did not have it already. But the Supreme Court ruled last year that the expansion was an option for states, not a requirement. This potentially leaves a group of retirees who would be ineligible for either Medicaid or a subsidy.

In any case, officials in Detroit and elsewhere say the old insurance plans are no longer feasible. Detroit has more than 19,000 retirees — nearly twice as many people as currently work for the city — and 7,500 of them are younger than 65.

“I’m applauding Detroit,” said Dan Miller, the controller in Harrisburg, Pa., who added that in the future a similar plan might interest his city, where a state-appointed receiver is seeking to restructure hundreds of millions of dollars of debt.

“I’m hoping that Obamacare turns out to be a great solution, and I would love for our city to have the opportunity to do that.”

http://www.nytimes.com/2013/07/29/us/detroit-looks-to-health-law-to-ease-costs.html?_r=0&hp=&adxnnl=1&adxnnlx=1375124691-+6XsqVB8h/c2aLkru/Ywxg