New York City Paying Less With Highest Health Cost: Muni Credit
At $10,108 per person, New Yorkers bear the highest unfunded burden for retired public workers’ health benefits among the 15 biggest U.S. municipalities. Investors have responded by driving the city’s relative borrowing cost almost one-third below the five-year average.
Cities often cover these expenses, unlike pensions, on a pay-as-you-go basis. The top 15, comprising almost 9 percent of the nation’s population, have a combined $115 billion in retiree liabilities, and an average burden of about $2,300 per capita, data compiled by Bloomberg show. The benefits cover promises such as life insurance and health-care premiums.
While pensions are guaranteed constitutionally in many states, so-called other post-employment benefits are more open to change through negotiation. Retirees in Central Falls, Rhode Island, which exited bankruptcy protection last year, pay 20 percent of health-care costs until they turn 65, and some New Jersey workers retiring after June 2011 contribute a higher portion depending on their tenure.
“OPEB has gotten the reputation of being an easier liability to modify than the pensions,” said Tamara Lowin, director of research at Belle Haven Investments Inc., which manages $1.5 billion of munis in White Plains, New York.
Detroit, where an emergency manager took over this week, has the nation’s second-largest burden, at $8,024 per resident, followed by San Francisco, with $5,558, according to the Bloomberg Rankings compilation of cities’ financial reports. Cities with larger liabilities need to start addressing them before they overwhelm financial resources, said David Draine, senior researcher at the Pew Charitable Trusts in Washington.
“Like a credit card bill where you just make the minimum payment, every year you delay simply pushes those costs into the future and makes them bigger,” he said. “If costs continue to rise and take up larger and larger shares of budgets, it forces either painful tax increases, cuts in existing services or reductions in benefits promised.”
Investors are taking comfort in New York’s ability to keep its retirement promises. In Wall Street’s home state, where residents face the nation’s biggest tax burden, investors demand a yield penalty of 0.5 percentage point on 10-year, tax-exempt general obligations of New York City issuers, data compiled by Bloomberg show. That compares with the five-year average of 0.71 percentage point.
“Health-care financing remains a challenge for the Big Apple and for major cities across the country,” Matt Sweeney, a spokesman for Comptroller John Liu, who helps oversee the city’s pensions, said in an e-mail. “With that said, New York City meets its responsibilities to our retired police officers, firefighters, teachers and civil service retirees and will continue to do so.”
Income on New York City debt has the added benefit of being exempt from city, state and federal taxes, said Lowin at Belle Haven.
“Demand for New York City debt is always high regardless of supply,” she said.
In comparison, Los Angeles, the nation’s second-most- populous city, ranks ninth in terms of its OPEB liability, Bloomberg data show. With the same Aa2 rating from Moody’s Investors Service, third-highest, 10-year Los Angeles general obligations have a spread of about 0.9 percentage point, Bloomberg Valuation data show.
In New York, the state controls the retiree obligations its biggest city pays. Last year, Mayor Michael Bloomberg worked with Governor Andrew Cuomo to push a pension overhaul through the legislature. Still, retiree health-care expenses weren’t addressed. New York City’s pension funds are run separately from those representing state and other local workers.
To help balance the budget for the fiscal year that began in July, Bloomberg took $1 billion from a Retiree Health Benefits Trust set up several years earlier to pay for future employees’ health-care needs. He plans to take another $1 billion next year. The mayor is founder and majority owner of Bloomberg News parent Bloomberg LP.
In a report this month, the state Financial Control Board that oversees city fiscal policies expressed concern about swelling health costs for current and retired employees, which are forecast to grow to $8.3 billion by 2017 from $5.3 billion this year. It called the costs “unsustainable” without more funding, and estimated the city’s unfunded liability at about $88 billion as of June.
Localities may be forgoing funding retiree health care to avoid making a tacit agreement maintaining the level of benefits, Citigroup Inc. analysts led by George Friedlander wrote in a March 22 note to clients. Some anticipate benefits can be adjusted or subject to collective bargaining, they said.
Other jurisdictions may consider changing liabilities after a ruling this month in Illinois that said retiree health-care benefits aren’t protected by the state constitution as are pensions, the analysts said.
Retirees will pay more of their OPEB premium costs, shaving about $9 billion from Illinois’s $33.3 billion unfunded liability, JPMorgan Chase & Co. analysts led by Peter DeGroot wrote in a note to clients March 22.
Some cities with small liabilities can afford a pay-as-you- go approach, while others face sticking taxpayers with a “sizeable bill,” Draine said.
“For places like New York City and others that have racked up substantial liabilities, it’s really a costly and potentially unsustainable approach,” he said.
In the $3.7 trillion municipal market, investors are absorbing the slowest week of issuance since January, with localities set to offer about $3.5 billion.
At 2 percent, yields on benchmark 10-year munis are the lowest in two weeks, Bloomberg Valuation data show. They’ve still been above the interest rate on comparable-maturity Treasuries for 10 straight trading days, the longest stretch since October, Bloomberg data show.
The ratio is about 105 percent, compared with an average of about 92 percent since 2001. The higher the figure, the cheaper munis are relative to federal debt.
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