Retiree health is LI’s next tax time bomb – By George J. Marlin

The following appears in the February 25 – March 3, 2011 issue of the Long Island Business News:

For years, the best-kept secret in New York has been the future cost of the unfunded retiree health care liabilities of the state and its local governments. However, thanks to new government accounting standards, the Empire Center for New York State Policy, a fiscal-issues think tank located in Albany, has estimated the total liabilities to be an astounding $205 billion.

Most municipalities pay 100 percent of retiree health premiums and when a 65-year-old enrolls in Medicare, the former government employer generally reimburses those premiums. At present, these “Other Post Employment Benefits,” or OPEB as they are described in audited reports, are more than 30 percent of the annual employee health costs and are expected to consume a greater share of municipal budgets every year. Because municipalities are solely responsible for these retiree benefits, which are paid annually out of operating budgets, many local governments, agencies and special districts may be forced to curtail services to meet these skyrocketing obligations.

The “pay-as-you-go” method of funding these benefits has been characterized by many analysts as an unjust burden on future taxpayers. Here’s what the respected Federal Reserve board of Boston said about the issue:

“Because this accounting method provided no incentive to set aside current funds to meet the growing demands of these benefits, it quietly shifted the true burden of payment to future generations. This burden would rest not only with future employees, who might see reduced benefits, but also with communities, which could see services cut or taxes increased to cover growing benefit payments. Allowing tomorrow’s citizens to pay for the retirement of today’s workers is inconsistent with the concept of interperiod, or intergenerational, equity.”

The Empire Center report reveals that the counties with the largest OPEB burdens, in both absolute and per-capita terms, are Nassau and Suffolk, with unfunded obligations of about $3.5 billion and $4.2 billion, respectively. And among the state’s most populous towns, Long Island’s have the highest per-capita liabilities.

Unlike public employee pensions, however, public sector retiree health benefits are not guaranteed by New York’s state constitution. Hence, Albany has the power to lighten the regulatory and tax burden on local governments by implementing statutory changes. Local governments also have the ability to negotiate reasonable sharing by new and existing retirees of this surging expense. The Empire Center recommends these OPEB reforms: Repeal the 2009 state law restricting the ability of school districts to alter retiree health benefits. Require all active and retired public employees in New York to contribute at least 10 percent to individual coverage and 25 percent to family coverage premiums (the same level as state workers), as recommended in 2008 by the state Commission on Local Government Efficiency and Competitiveness. Amend the Taylor Law to flatly prohibit future collective bargaining of retiree health benefits in New York’s public sector.

Such reasonable reforms are needed now if municipalities are to avoid the ultimate catastrophe: much higher taxes coupled with fewer or compromised public services.

Unfunded Liability
$ Per
Babylon $119,684 541             
Brookhaven $256,700 523             
Hempstead $810,403 1,059             
Huntington $188,943 934             
Islip $159,642 473             
North Hempstead $117,768 519             
Oyster Bay $314,470 1,039             
Smithtown $133,900 1,099             
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