Retiree Health Care Costs are Straining Budgets in MA’s Poorest CitiesCategories: New England Developments,OPEB/GASB 45/75
Massachusetts Taxpayers Foundation September 22, 2014
In 2011, the Foundation published Retiree Health Care: The Brick That Broke Municipalities’ Backs, a groundbreaking report that detailed the enormous liabilities for retiree health care facing municipalities in Massachusetts. Cities and towns in the state are estimated to have a total of $30 billion in unfunded retiree health care liabilities, and funding those obligations would crush municipal budgets and taxpayers.
Following the Foundation’s report, the state formed an Other Post-Employment Benefits (OPEB) Commission in 2012 to study what drives the liabilities and to make recommendations for reform. These recommendations were the basis for the Governor’s reform proposal in 2013 to toughen eligibility standards and link benefits to length of service. The Legislature has taken no action on his or any other proposal for OPEB reform.
Facing liabilities that are simply unaffordable and beyond their capacity to fund in advance, municipalities instead use a “pay-as-you-go” approach (referred to as “paygo”) in which they fund only their share of health care premiums for that year’s retirees. Under such an approach, municipalities set nothing aside for the costs of benefits that current employees will receive upon retirement. Instead, those obligations are pushed into the future and added to existing liabilities.
However, relying on paygo to meet obligations has serious consequences. As annual spending on retiree health care grows, the fiscal squeeze already pressuring municipalities tightens further and forces cuts in basic services. Even if municipalities ignore their long-term obligations and do not pay down their retiree health care liabilities, they cannot escape the fact that those costs are rising and eroding the resources available for important services like education and public safety.
This bulletin analyzes retiree health care spending in nine of the 10 municipalities with the lowest per capita incomes in the state and populations of at least 10,000. It includes data for Amherst, Chelsea, Everett, Fitchburg, Holyoke, Lawrence, New Bedford, North Adams, and Springfield. The bulletin examines two measures of retiree health care costs: the increase in retiree health care spending relative to the increase in property tax revenues between fiscal 2009 and fiscal 2013, and retiree health care spending as a share of total property tax revenues in fiscal 2013.
Municipalities have few options for controlling paygo costs because benefit eligibility is determined almost entirely by state law. An employee needs only 10 years of service to receive full benefits for life beginning as early as age 55. In many municipalities, part-time employees qualify for the same benefits as full-time employees. Furthermore, nearly all municipalities contribute at least 50 percent towards the cost of premiums, though many contribute more than that. With such generous benefits, it is not difficult to understand why the costs of retiree health care are growing much faster than property taxes.