Retirees' Costs Worry Officials
Jurisdictions Must Set Aside Health Funds

By Kirstin Downey
Washington Post Staff Writer
Monday, October 29, 2007

There's a big bill in the mail for many state and local governments, including several in the Washington area, as accounting regulations imposed this year begin requiring them to calculate the future cost of retiree health insurance and set aside money to pay for it.

Arlington County, for example, is facing a $783 million bill, almost as much as its $888.5 million annual budget. Fairfax County owes $469 million. Alexandria officials were scheduled to discuss it at a retreat on Saturday; last year, they estimated it at $121 million, or about a quarter of the city's annual budget.

Montgomery County's $2.6 billion bill is the highest in the region. The state of Maryland is facing an estimated $20 billion price tag; the bill for the District is $509 million. The total cost nationwide may be more than $1 trillion. State and local employees make up 12 percent of the U.S. workforce.

The bills are not real demands for payment. Arlington County Manager Ron Carlee said the $783 million charge is an "actuarial liability," or the total present value of future retiree health benefits. The amount a jurisdiction really pays will depend on how much inflation rises, how well investments perform and what kinds of benefits are offered and to whom. Nevertheless, he said, the rule is making communities reveal how much they are spending to deal with the problem.

The financial reporting requirement, imposed by an independent group called the Governmental Accounting Standards Board, will put an additional squeeze on governments already feeling financial pressure because of the slumping real estate market. It could also hurt the credit ratings of governments that don't start cutting benefits and squirreling money away into special trust funds.

Most state and local governments are just beginning to calculate the extent of their unfunded liability for retiree health-care costs and lack plans to manage the expense, according to a new report by the U.S. Government Accountability Office. "The cost of providing health care benefits for public sector retirees will more than double as a share of salaries," according to the report, which added that "state and local governments may find it difficult to maintain current benefit levels."

Arlington officials said they are taking the issue seriously, including setting aside $11 million in a trust fund to start saving for the expense, finding ways to reduce health benefits to cut costs, studying employee compensation and setting up some of the same kinds of cost-containment measures that private companies have been using for the past decade.

"It is a crisis," said Mark Schwartz, director of the county's department of management and finance. "It's such a large number that everywhere I go, I talk about this."

At a recent Arlington County Board meeting, Carlee called it the top problem facing the government. He raised the issue as he defended the county's efforts to restrain health-care costs amid criticism from angry county firefighters who complained at the meeting about new restrictions on their access to care.

For decades, most local and state governments have paid health insurance bills as they came due, without needing to account for the likely future expense they were incurring.

The tab has increased in recent years because health-care costs have soared and the population is aging. Local government workers typically receive health insurance after they retire, a practice now uncommon in the private sector.

The cost is particularly high because public safety workers, including police and firefighters, retire at younger ages than other workers and need to receive health insurance for a longer period before they become eligible for Medicare, the government health insurance program for people 65 and older. In Alexandria, for example, half of the city workforce is employed in public safety jobs, but the city has held down costs by giving retirees only a flat amount annually toward their health insurance.

In 2004, the Governmental Accounting Standards Board, a little-known but influential nonprofit organization formed in 1984 to promote good fiscal management in the public sector, ruled that state and local governments had to calculate how much they will owe for retiree health care over the next 30 years, because that expense has an important effect on the government's financial position.

"Health care is a very expensive promise to provide, and the cost grows rapidly over time," said Dean Mead, research director for the Norwalk, Conn.-based group. "If you want to have a complete and accurate picture of a government's financial health, you can't ignore a big obligation like that."

The so-called GASB Rule 45 went into effect just this year for jurisdictions with more than $100 million a year in annual revenue. However, municipalities were given three years to adjust. Mead said GASB officials are aware it is causing a seismic shift in government accounting standards and could cause significant belt-tightening on retiree health benefits.

"The obligation is quite large in some cases," Mead said. "It's not a minor issue. It's not chicken feed."

Montgomery County's estimated health-care liability is high compared with other jurisdictions, but officials said it included not just the county and the public schools, as in the other communities, but also Montgomery College and the county's portion of the Maryland-National Capital Park and Planning Commission.

Arlington's obligation is higher than other Northern Virginia jurisdictions, Carlee said, because the county offers "a more generous retiree benefit" than others.

"Some of us are very generous in trying to maintain a continuity of health care and some don't do a thing," he said.

J. Walter Tejada, vice chairman of the Arlington board and a candidate for a board seat, said residents should not be worried about whether the county will be able to pay and said officials are planning how to handle the situation.

"We have a track record of paying our bills," he said.

Though governments have agreed to follow GASB's standards when preparing their financial statements, some governments have rebelled at adding the big number to their financial statement calculations. In Texas, legislators angry over the rules said governments didn't need to follow them. Connecticut created an alternative rule-making organization.

But bond-ratings agencies such as Moody's Investors Service, Fitch Ratings and Standard & Poor's have made it clear they expect local and state governments to take some action to show they have acknowledged the full liability and are trying to make sure their budgets are balanced. San Diego, for example, has eliminated health benefits for some city employees; North Carolina now requires new state employees to work for the state for 20 years instead of five years to receive health benefits in retirement.

Fairfax County has put aside $48.2 million toward its retirement health benefits, said Robert L. Mears, the county's director of finance.

"We've been way out ahead on this issue for years and carefully setting aside funding," he said. "We're comfortable in this first year of implementation."