March 16 (Bloomberg) -- The U.S. public pension mess, with its $2 trillion to $3 trillion in unfunded liabilities, is such a volcano of gloom that it takes a potentially bigger problem to turn our eyes away from it.
Turn your attention instead to the size of the taxpayer-backed health-care obligations for public employees.
“Frankly, if you want to look at a truly scary set of unfunded liabilities, health care for retirees is a better choice than pensions,” said California Treasurer Bill Lockyer in an October speech meant to play down the pension crisis.
Not that Lockyer or his Democratic and union allies want to reduce any benefits that are at the heart of the problem. In their view, the real scourge is “pension envy” or perhaps “health-care envy” -- the failure of the private sector to keep up with government-benefit levels.
States and localities make their own decisions on how to finance these health-care policies. Far more government employees than private workers receive health and dental care -- and those plans cost more, require lower employee contributions and provide more comprehensive coverage.
Such generosity comes at a cost to taxpayers and municipal budgets, especially given the “promise now, pay later” approach of officials. As a recent Bloomberg News article noted, while most public pension plans are 75 percent funded, the figure for health-care plans is only 4 percent nationwide. So unlike pensions, governments are setting aside little money in advance to pay for their future obligations.
Courts Back Unions
Public-sector unions and their allies have foiled even modest efforts to scale back pensions, and the courts have done the rest. Now the unions are gearing up to fight changes in health-care plans, as well -- an issue that has reared its head after Stockton, California, announced that it was possibly headed toward a Chapter 9 bankruptcy driven by $417 million in liabilities caused by an absurdly generous lifetime medical plan.
The unions’ job is considerably easier thanks to a California Supreme Court decision in November that will make it as hard to change health-care benefits as it is to deal with pensions.
It’s not that leaders in California, which is in the deepest public-employee-related fiscal hole, don’t understand the scope of the problem. Controller John Chiang released a report in February that acknowledges a $62.1 billion unfunded health-care liability.
“California should pay $4.7 billion in 2011-12 to pay for present and future retiree health benefits,” according to Chiang’s office. “In the 2011-12 budget act, the state provided $1.71 billion to only cover current retirees’ health and dental benefits.”
With pensions, government employers and employees contribute a percentage of income into retirement funds. The liabilities depend on how well the funds perform, with higher estimated rates of return leading to a lower predicted debt and vice versa. But as Bloomberg News reported, “States haven’t financed almost 96 percent of the $627.4 billion they were projected to owe for future retiree benefits in 2010.” They try to pay these health-care costs as they go.
Few governments have the excess cash available to prepay these already promised benefits. But often there are straightforward ways to solve the problem. In 2006, Orange County cut its $1.4 billion health-care liability, in a model effort touted not just by the Republican board of supervisors but by the union representing county workers. The union said the deal demonstrated its willingness to help fix the system.
Retirees had been placed in the same medical pool as current workers. Because retirees are older, their health-care costs are higher, so the county was subsidizing the rates for retirees. The county separated the pool, raised the monthly contributions paid by retirees and reduced the unfunded liability by $815 million. But the retirees’ group sued the county and took the case to the state Supreme Court, which ruled in a way that has made it far easier to challenge cutbacks of these benefits.
Pensions are vested, contractual rights. As such, the California courts have consistently quashed efforts to change benefits for existing workers, as is frequently done in the private sector where employers have frozen pension benefits.
Health care typically is different. It has been viewed as a non-vested benefit that can be changed at the discretion of the employer. Until now, in California.
“Under California law, a vested right to health benefits for retired county employees can be implied under certain circumstances from a county ordinance or resolution,” according to the state Supreme Court ruling.
The Orange County Register editorial board opined that “much in the way that federal courts have found penumbras in the Constitution -- i.e., meanings between the lines, or in the shading or the shadows -- the state Supreme Court found that certain benefits are the result of ’implied’ contracts.” Localities now face a high hurdle to change these benefits.
Treasurer Lockyer warned about a health-care “time bomb,” but threw the problem back to the taxpayer.
“Nothing is more important in providing for retirement security than preserving the defined-benefit pension for those who have it,” he said in the October speech. Any changes would need to be “on our terms,” he added, to preserve “the power of workers and their unions to be a balancing force to business and the unregulated marketplace in American life.”
To Lockyer and other representatives of the public sector, the real retirement problem is not billions of dollars in unfunded liabilities that are leading to slashed services and higher taxes, but a stingy private sector that isn’t generous enough to its workers. Instead of proposing reforms that bring government benefits down to manageable levels, the state’s Democratic leaders are proposing a bizarre new mini Social Security system that provides a few crumbs to private-sector workers. But their goal is clear.
“In general,” Voltaire wrote, “the art of government consists in taking as much money as possible from one party of the citizens to give to the other.”
In California, this art form has been perfected. It’s anybody’s guess how the government class continues to get away with it.
(Steven Greenhut is vice president of journalism at the Franklin Center for Government and Public Integrity. He is based in Sacramento, California. The opinions expressed are his own.)
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