The large retirement liability that gets little attention
Taxpayers must always be vigilant when it comes to government spending, and they should be alarmed when government officials fail to act to resolve a looming debt problem. Most Rhode Island voters are well aware that Rhode Island has a multi-billion dollar unfunded pension liability. The unfunded pension liability, as of 2011, for state employees and teachers is approximately $4.4 billion while the unfunded pension liability for municipal employees, as of 2009, was approximately $2.1 billion. In 2011, for the third consecutive year, Rhode Island enacted pension reform legislation. The governor referred to the legislation enacted in 2011 as “comprehensive” while the general treasurer claimed it “fixes our problem.” However, Rhode Island’s problem is not just a multi-billion dollar unfunded pension liability, but also a multi-billion dollar unfunded liability for retiree health care.
Unlike their counterparts in the private sector, many public employees in Rhode Island not only enjoy a pension, but also receive health care when they retire. In accounting terminology, retiree health care benefits are referred to as other post-employment benefits, or OPEB. Currently, the unfunded OPEB, or retiree health care, liability for state employees is approximately $775 million. Even worse, at the local level, the unfunded retiree health care liability is at least $2.4 billion as of 2009, according to a report by the Rhode Island Auditor General. One local television station has calculated the amount to be $3.6 billion in 2011. This means, at the local level, the unfunded retiree health care liability is larger than the unfunded pension liability. Yet, you rarely hear it being discussed.
The amounts, which have certainly grown since 2009, are staggering. For example, the city of Providence’s unfunded retiree health care liability is $593 million. The city of Pawtucket’s unfunded retiree health care liability is $437 million. The city of Warwick’s unfunded retiree health care unfunded liability is $257 million. The town of Johnston’s retiree health care liability is $226 million. The city of Cranston also has an unfunded retiree health care liability of approximately $52 million to cover police and firefighter employees and, according to one former school committee member, approximately $35 million for school employees.
Ominously, the amounts of these retiree health care liabilities are actually much higher. These retiree health care obligations are sometimes based on assumptions that within 10 years health care costs will only be increasing at 4 or 4.5 percent a year, while the Government Accountability Office projects that the cost of retiree health care will be increasing 6.7 percent each year for decades.
In an attempt to address these unfunded retiree health care liabilities, the state of Rhode Island and some cities and towns are trying to fully fund these retiree health care plans. However, progress has been slow to almost non-existent in most cases. For example, the state of Rhode Island has been fully funding its plan since fiscal year 2011, but its retiree health care plan for state employees is only 1.5 percent funded. The city of Cranston has been partially funding its retiree health care plan for police and firefighters since fiscal year 2007, but it is only 0.22 percent funded. Other communities are not even trying to fully fund these retiree health care plans and instead are engaging in a pay-as-you-go approach for retiree health care costs.
These retiree health care obligations began decades ago as a result of the efforts of public employee unions. For example, in Cranston, in 1980, a “neutral arbitrator,” who was the spouse of a high ranking pro-labor Democrat, made a binding arbitration decision that required Cranston to provide free family retiree health care to firefighters even though firemen could retire in their early 40s after 20 years of work. Mayor Edward DiPrete blasted the decision as removing “any incentive for a man to remain with the fire department for more than the minimum 20 years” and as likely to substantially increase pension costs as well. What Cranston firefighters won through binding arbitration, police officers in Cranston gained by contractual agreement shortly thereafter, out of a sense of fairness and a feeling of futility in contesting the issue in binding arbitration. Since then, Cranston firefighters or Cranston police officers have never made a single payroll contribution to fund this expensive retirement benefit.
As for state employees, they began receiving retiree health care benefits in 1989 with the support of Governor Edward DiPrete. DiPrete had modified some of the views he once held as mayor regarding public employee compensation. Coincidently, in 1988, DiPrete was re-elected in a close election with the endorsement of various public employee unions, including Council 94, which represents state employees. In 1989, the General Assembly enacted the legislation, which required the state of Rhode Island to pay anywhere between 50 and 100 percent of the health care for any retired state employee. It passed the General Assembly with the support of the House Finance Chairman, who happened to be the business agent of Council 94 as well. To pay for this benefit, state employees only had to pay 0.25 percent of their pay. The DiPrete administration indicated that this small payroll contribution from state employees would completely cover the cost of this benefit. The DiPrete administration was shortsighted. By the early 1990s, as health insurance premiums were increasing, the taxpayers had to start spending millions to pay for this benefit.
Because of arbitrators and politicians friendly or beholden to public employee unions, Rhode Island taxpayers, at the state and local level, are now responsible for multi-billion-dollar retirement liability. This liability grew to become a multi-billion-dollar problem because public officials did not follow the principle that public sector retirement benefits should be kept in line with private sector retirement benefits. During the early 1990s, private sector companies began to drop retiree health care benefits. This occurred because the accounting rules for private sector businesses required the disclosure of the future cost of retiree health care benefits. Once the magnitude of the liability became apparent, businesses dropped the benefit to keep investors. Today, only a small percentage of private sector companies offer any type of retiree health care benefit. Now that recent accounting rules for governmental entities show how high the cost is for retiree health care benefits, taxpayers must act like investors and demand a change from their public officials or change their public officials. Retiree health care benefits for current public employees must come to an end. Ending this benefit will not prevent state and local government from hiring or retaining workers. There are communities in Rhode Island who do not offer their public employees retiree health care benefits and these governments still function. Cranston city employees, other than police and firefighters, are not offered retiree health care benefits, but the city of Cranston has little difficulty filling city positions. Retiree health care benefits for public employees will come to an end eventually, either through legislation and negotiation or through litigation and bankruptcy. It is unsustainable.