Bankrupting Newton: Health Care for Retirees

To recruit and retain public service employees, state and municipal governments across the country have for decades been offering pension and other post-employment benefits (OPEB), most notably health care.

At present, Newton pays for its retirees’ health care and life insurance coverage on a pay-as-you-go basis.

In other words, Newton did not set aside money in the past when these employees were actively working in order to pay for their health care and life insurance when they retired. Nor is Newton now setting aside funds for its current employees in order to pay for their health care once they retire in the future. Rather, these “unfunded” retiree health care costs are, as a matter of policy, paid for through annual appropriations. In FY09, the cost of the pay-as-you-go method came to $14.1 million dollars.

New accounting standards issues by the Government Accounting Standards Board require municipalities to disclose the total amount of these future liabilities and the amount required to be paid currently to cover these future health care and life insurance costs. According to the FY09 Comprehensive Annual Financial Report prepared by Newton’s Comptroller, the total unfunded future liability stood at $595 million as of June 30, 2009.

The annual required contribution (ARC) represents a level of funding that if paid on an ongoing basis in the present is projected to cover these future liabilities. For FY09, Newton needed to pay $54 million dollars (above and beyond the current $14.1 million that we did pay) to fund our future liability. This $54 million payment is not a one time payment. We would still need to pay more than $20 million next year and for each of the next 28 years.

In light of Newton’s current budget of approximately $300 million in which there is considerable concern about lack of funds to pay for current level of services and such underfunded areas as capital maintenance and refurbishment, this $54 million represents a significant amount.

The pay-as-you-go method that Newton (like so many other cities and towns) is using is not sustainable. Because life expectancies and health care costs are rising simultaneously, the future retiree health care costs represent a significant unfunded obligation. Newton, like so many other cities and towns, has made a commitment to public service employees to provide health care benefits after they retire – these commitments are growing annually and Newton, like so many others, has not adequately saved to pay for these commitments.

Pre-funding is both prudent and necessary. By saving early, the total liability is reduced dramatically. According to an analysis by the Commonwealth, full pre-funding following the guidelines of the Generally Accepted Accounting Principles for Governments reduces the liability by 45%. Without pre-funding, Newton places on future Newton residents a crippling obligation. Without pre-funding, Newton also seriously threatens its commitment to pay former, current and future retirees health care and life insurance benefits.

Waiting until the Commonwealth passes legislation to force municipalities to fund these liabilities (as it did with pensions) simply puts off until tomorrow payments that should be made today.

One of the important choices that the City of Newton has been making is to not set aside money currently for any of Newton’s health and life insurance post-retirement benefits for employees that have already retired and for current employees who will eventually retire.

As a first step towards pre-funding, I hope to work with others to docket an item before the Board of Aldermen for the City to accept Chapter 479 of the Acts of 2008, allowing the creation of a dedicated trust fund for advance funding of post retirement health care benefits.