Will ACA Bail Out Unfunded Municipal Retiree Health Benefits?

Detroit and Chicago have announced plans to offload their unfunded retiree health plans onto the Affordable Care Act exchanges. The Detroit announcement predated the July 18th 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 in the nation, 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 to employees 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. Folks already retired would have little incentive to make large concessions since they cannot lose their jobs if they refuse.  Eliminating future retiree health benefits for current employees would require contract renegotiation.  Therefore, for these groups, it would appear bankruptcy of the city might be the only way to have the promised benefits nullified.  Health benefits for retirees and current employees who have no protection of a contract might be offloaded with or without filing bankruptcy.

 

For new employees who will be on labor contracts, the city could negotiate to eliminate retiree health benefits. And for non-contract employees it could simply adopt a no retiree health benefit policy. There are local Pennsylvania examples.  In the City of Pittsburgh, police and fire personnel hired after 2005 do not get retiree health care the way employees working in those departments and employed prior to 2005 do.  The Port Authority’s largest union (its 2008 contract called for the union and the Authority to “jointly issue a statement with regard to their support for national health care”) has language in its 2012 contract stating that employees hired on or after July 1, 2012 would be eligible for three years of retiree medical coverage, as opposed to previous stipulations that allowed coverage until Medicare eligibility if the employee had 25 years of service or had reached age 55 and had ten years of service.

 

Government employee pension benefits are sacrosanct in many states to the point of being 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 lawsuits and labor unrest. Bankruptcy or threats of massive layoffs will almost certainly be needed to get meaningful results.

While the offloading of retiree health care onto the 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 expenditures?  Undoubtedly, they will be off. And what if a bunch of private sector companies follow suit?

 

If a few large municipalities such as Detroit and Chicago are successful in reducing their expenses substantially by pushing retirees into the exchanges, there will undoubtedly be a flood of other municipalities around the country rushing to do the same. Moreover, there could be a number of school districts that could benefit from dumping retiree health benefits.  In short, taxpayers might find themselves on the hook for funding much more health care than Affordable Care Act drafters imagined. 

 

This is another unforeseen consequence of a health care law with seemingly unlimited ramifications and complications.

Confused Blather from Mayor’s Spokesperson on Pensions

Pittsburgh’s Controller asserts in newspaper accounts that Pittsburgh has not sufficiently addressed its pension problems or reduced expenditures enough to warrant having state financial oversight of the City terminated. A sentiment shared by the oversight groups-the Intergovernmental Cooperation Authority and the Act 47 coordinator-and the Allegheny Institute.

The Mayor’s office fired back with its usual rejoinder claiming enough has been done and says the following about the pension situation, "The Controller knows all too well that the City’s inherited pension problem can only be solved at the state level." Okay, what is wrong with this statement? There are two huge obvious fallacies in one sentence.

First, the City did not inherit the pension problem. Who died and left the pension plans to the City in their will? Of course, this part of the spokesperson’s comment is nonsensical. Pittsburgh created the pension crisis through its own behavior of overpromising and underfunding the pension plans over the course of many years. Granted, the union favoring Act 111 binding arbitration law was a key factor in egregious contract settlements during the last thirty years.

However, the Act 111 problem was known about decades ago and nothing was done about it. How many mayors, city council members, state representatives or civic leaders went to Harrisburg to lobby heavily for reforming Act 111 to reduce the extraordinary advantage the public safety unions have in the contract bargaining process? It is safe to say not more than one or two and only after the City was declared to be in financial distress. Indeed, how many would stand up for reform even now? Act 111 reform has been and continues to be anathema to the unions and is a political non-starter in union dominated precincts across Pennsylvania but especially in Pittsburgh.

To further add to the silliness of the spokesperson’s response, she continued with the claim that only the state can fix the problem. How is that? The pension obligations were entered into by the City and it must deal with its self- inflicted wound by adequately funding the pensions, curbing all expenses and supporting meaningful labor regulation changes and lobbying for authority to offer 401(k) type plans to all unvested employees.

Still, the best thing it could do would be to adopt private sector growth enhancing policies in order to shore up and expand its tax base while keeping a tight rein on spending. The ability to generate additional revenues from real growth as opposed to more taxes and higher tax rates is crucial to solving the underlying financial problems in the City. Of course, what we see emanating from the City are a steady diet of policies aimed at top down directed economic development, cronyism, and forays into every progressive, anti-free market notion coming down the pike. Too bad. The controlling political powers never seem to get it.

City’s Retiree Benefits Problem Getting Worse Fast

As we have written on previous occasions, the City of Pittsburgh’s legacy cost issue is multi-faceted-although little attention is given to some important parts of the problem. Heavy focusing of time and effort on one part of the problem can allow others to worsen. 

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Surveying the Pension Landscape in Allegheny County

Allegheny County is home to nearly 300 pension plans that cover the gamut of local government employees: from police officers and firefighters to bus drivers, clerks and garbage collectors, from elected and appointed officials to various white- and blue-collar classifications.  Not counting school employees (who are part of a statewide pension plan), the local government pension “system” in the County covers more than 18,000 active workers and pays out benefits to over 14,000 retirees and/or their beneficiaries.

 

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Another Alarm Bell Sounded on State Pension Plans

The American Legislative Exchange Council (ALEC) has taken a look at state pension plans and the picture is not pretty: on average, these pension plans were 81 percent funded and carried a total of $359 billion in unfunded liabilities. Pennsylvania-reflecting the SERS, or state workers pension plan-reported a funded ratio of 84 percent and $14 billion in unfunded liabilities. Some states (DE, NY, OR) eliminated any unfunded liabilities while others (IL, LA, OK) were among those with low funded ratios.

With public pension plans assuming a high rate of return and being heavily slanted toward defined benefit type plans, the study notes that the solution lies in "fundamental reform". This would mean looking at the level of benefits and phasing in new defined contribution (401k) type plans for new hires.

This would be sound advice as the state inches closer to the date when huge rate spikes for its state workers pension plan and the teachers’ pension plan as well as the multitude of local pension plans that are in trouble.

Stating the Obvious in Pension Debate

The pension reform train is full speed ahead, and Pittsburgh sees one last opportunity to jump off, at least for a brief time (two years). The legislation before the House would allow Philadelphia to raise an additional 1 percentage point on its sales tax (bringing it to 8 percent) and would outline reform for the remainder of municipal pension plans in the state (discounting Philadelphia’s 3 plans, there would be over 2,500 subject to the reform program), including Pittsburgh’s plans.

Now the political debate is over Philadelphia’s desire to quickly get its sales tax vs. Pittsburgh’s desire to opt out and try its parking garage plan. Some fear that opening up the bill for Pittsburgh will allow for other amendments, thus requiring another read by the Senate, and the possibility for the bill falling apart.

Of course, there are numerous opinions floating around about whether Pittsburgh should get a temporary pass and what the legislation would mean. A sampling:

The Mayor said the reforms "will force this city to make some very difficult decisions…It will be very difficult for us to look at those taxes and to look at those service reductions". Of course it will force difficult decisions: that is the point. The City has to start to decide how to perform services (in house, contracting with the County, bidding out to private vendors, or not at all) if it wants to offer a menu of them and still meet the obligations of promises it made to City employees. The City would be facing a difficult decision under Act 47 if they followed through on the directive to put an additional $10-$15 million into pension by either cutting spending, raising taxes, or privatizing garages.

The head of the fire union said "If it happens, the costs will fall on the backs of the employees of the city." No surprise in his line of argument. But on whom else would he like to see the costs fall on-taxpayers across the state? And what type of solution would he advocate for: a sales tax that just affected the City of Pittsburgh? That would do more damage to the City and would likely make it into an island.

A state legislator said "There’s no reason we can’t give them a period of time to get their house in order." How much more time? The City has been in oversight and Act 47 since 2004 and there have been suggestions of selling assets for just as long. It was only at the beginning of this year that the idea of the parking garage sale/lease moved beyond the trial balloon stage.

We will see how it all plays out early next week.

The Perfect Storm

When will elected officials tackle the building pension crisis? According to researchers at the American Enterprise Institute "it is only when the gloom of crisis finally descends that public officials will muster the will to address the mismatch between [pension] promises and resources".

Obviously in Pennsylvania that gloom arrives at different times-with two statewide systems (one for teachers, one for state workers) and more than 3,000 local government plans-depending on the funding status and weight of unfunded liabilities. It could be easily argued that the gloom is on Pittsburgh. Just yesterday the Council approved its Act 47 amendment that calls for an additional $10-$14 million per year to be put toward pensions. Philadelphia is at that point as well with unfunded liabilities of close to $4 billion and a funded ratio of 55% in 2008, only besting Pittsburgh (29%) and Atlanta (53% in 2007) according to a Pew Charitable Trust study of the issue. The majority of other local plans entered the economic downturn with healthy funded ratios. Now the Public Employee Retirement Commission is trying to build consensus for municipal reform, including an option to shuttle the most troubled municipal plans to state control and oversight.

The day of reckoning for the statewide systems in Pennsylvania is closer to 2012 when rate spikes are expected to take hold. A presentation made to the Senate Finance Committee last month showed that the employer (school district) pension contribution is supposed to grow from 4.75% in 2011 to 16.40% in 2012. The companion state retiree system shows employer contribution rising from 8.79% in 2011 to 28.30% in 2012.

That same AEI study notes an expert as saying "once granted, a pension is a contractual obligation of the employer" and taxpayers will be on the hook for any shortfall. Not a reassuring situation for a state contemplating tax hikes or a region where its largest County just added two new taxes and its largest City is looking for a variety of tax and fee options.