Study Sizes Up States' Substantial Retiree Benefit Costs

By Kirstin Downey
Washington Post Staff Writer
Wednesday, December 19, 2007

About 90 percent of state workers get pensions, and the bill is coming due.

According to a new analysis by the Pew Charitable Trusts' Center on the States, states owe employees about $2.73 trillion for pension and health-care costs, much of which is unfunded.

Maryland, which has about 90,000 state employees, is facing a particularly high liability for its health insurance promise, $14.5 billion, compared with the $2.3 billion that Virginia owes its 100,000 employees, according to the report released yesterday. The difference is that Maryland is more generous to its retirees than Virginia is, researchers said.

The study did not include the District of Columbia, but officials there have estimated the cost for retiree health insurance at $509 million. Local governments also were not included, but they, too, are facing steep bills. The tab for Montgomery County alone is $2.6 billion.

Because of new government accounting standards for pensions and the cost of retiree health insurance, states are being required to tabulate how much the benefits they are offering workers actually cost. States have covered about 85 percent of the cost for pensions, mostly by establishing trust funds that have made investments that will build capital for the future, according to the Pew report, but few have set aside money for future health insurance costs. The 50 states owe at least $381 billion for retiree health insurance over the next 30 years.

"For states that have dug themselves into a deep hole, there are no quick and easy solutions," said Susan Urahn, the Pew center's managing director. "But there are fiscally responsible steps all states can take."

She said states will need to put more money into trust funds to be invested to cover the future expenses, instead of spending the money for such things as roads and schools, and they will need to reduce retiree benefits.

Private-sector employers have been grappling with these expenses for the past two decades. About 35 percent of private-sector workers had traditional benefit plans in 1980, and that number is expected to drop to 13 percent by 2016, according to the Pew report. Similarly, only about one-third of private-sector retirees now get retiree health insurance, down 50 percent from 1988.

The disparity between the private sector and the public sector is creating what the Pew report called "pension envy." Some people see the discrepancy as a reason to cut government employees' benefits, while others say governments should be setting superior standards.

Maryland officials are aware of the problem, but the Pew report overstates its magnitude, said Warren Deschenaux, director of Maryland's Office of Policy Analysis. He said the study failed to take into account an extra $100 million the state put aside in the past year to cover the expense.

"We're trying to figure out what we should do," he said, noting that cuts in retiree benefits are likely to be seen as part of the solution. The state has appointed a commission to figure out how best to do it.

Maryland retirees with five years of service receive the same health care benefits as employees, although they have to pay a portion of the cost. For those with 16 years or more of service, the state will pick up 80 percent of the tab. Workers who are employed with the state for 10 years and who then leave are also eligible for the subsidy, as are their spouses.

"That's fairly unique that people who leave the state" can get benefits, said Michael Rubenstein, who is assisting the commission. In addition, he said, state employees can retire after 30 years, prison guards can retire after 20 years and State Police officers can retire after 22 years. In other words, some workers are able to retire in their 40s with the same benefits as current employees.

"That's one of the reasons our plan is more expensive," Rubenstein said. He said officials are deliberating how to cut fairly or find funding.

Maryland workers who belong to the American Federation of State, County and Municipal Employees union are likely to resist any changes to their pensions. About 200 of them have appeared at commission meetings to lobby against changes to their retirement plans.

"I would hope government would take a more enlightened approach to its employees instead of being part of the race to the bottom that we see with other employers," said Sue Estey, AFSCME's assistant director for Maryland.

Virginia's costs are less than Maryland's because retiring employees are given only a cash subsidy so that they can purchase health insurance. Workers can retire after 30 years if they are 50 years old, and police officers can retire after 25 years, said Gordon Hickey, a spokesman for Gov. Timothy M. Kaine (D), who said the more conservative policy costs Virginia less money.

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