A Bailout of Unfunded Municipal Retiree Health Benefits?

Detroit and Chicago have announced plans to off load their unfunded retiree health plans onto the Affordable Care Act exchanges. The Detroit announcement predates the July 18 filing for bankruptcy protection. These cities believe they will save tens if not hundreds of millions in expenditures annually if they are successful in their intentions.

For the 61 largest cities, Pew Research has found that retiree health obligations under current contract or policies are only 6 percent funded. In Detroit that number is close to zero.

While the Affordable Care Act requires employers with 50 or more employees to offer health insurance or pay a fine (presumably municipalities are covered, but it does not matter, they almost all provide insurance anyway), the Act does not cover retirees. So cities-and perhaps states-might look at what Detroit is planning and decide to follow suit. Many private companies and some governments stopped paying for retiree health care years ago.

There are two levels of the issue. Retirees and employees who have worked under contracts promising the health benefits in their retirement presumably cannot willy-nilly be deprived of those benefits by a unilateral cancelation by the employer. Of course, at will or contract employees would not have that protection. For future retirees, the city could announce that any new contract would not contain retiree health benefits for hires after the date new contract is signed. But for employees already covered and retirees already covered under earlier contracts, it would seem a renegotiation of the terms of earlier contracts would be required to end the benefits. Folks already retired would have little incentive to make large concessions since they cannot lose their jobs if they refuse. Therefore, for these groups, it would appear bankruptcy of the city might be the only way to have the promised benefits nullified.

Government employee pension benefits are in many states sacrosanct and are constitutionally protected. That is certainly the case in Pennsylvania and Michigan. Whether Federal bankruptcy judges will use Federal law to set aside state constitutions in the pension issue remains to be seen. At the same time, health benefits for retirees could be more easily dealt with in bankruptcy. But, for cities looking to dump retiree health benefits for employees and retirees working under contracts containing such provisions, get ready for lawsuit and labor unrest.

This problem is even worse for city employees who were not covered under Medicare until 1986. They are completely dependent on the municipality for their retiree health care. Being forced into an exchange could pose serious difficulties for them.

While the offloading of retiree health care onto Obamacare exchanges might be appealing to many hard pressed cities and towns, it might be more complicated than they think. On the other hand, if they have a strong enough case to file bankruptcy, retiree health costs might be the trigger to file.

In the larger picture, if cities are able to offload their retiree health promises to the Affordable Care Act, then US taxpayers will get a big share of the tab. Watching 58 year olds enjoy retirement from Detroit or Chicago city jobs and get Federally subsidized health care until they reach 65 might not sit well with 60 year olds in the private sector who have no retiree health care until eligible for Medicare and have to keep working and keep paying taxes to subsidize the Detroit retiree’s health benefits. Further, if this strategy turns into a flood of unexpected exchange participants, what happens to the projected Obamacare expenditures? Undoubtedly, they will be off. And what if a bunch of private sector companies follow suit?

This is another unforeseen consequence of a health care law with ramifications and complications beyond comprehension.