Retiree Health Care Cost Dilemma

According to an article in the New York Times, the Empire Center for New York  State Policy will be issuing a report which shows New York’s cities, counties, and authorities have promised more than $200 billion in retiree health care benefits,while setting aside very little to pay for them.

The daunting size of the health care obligation raises the possibility that localities will be forced at some point to choose between paying their retirees’ medical costs and paying the investors who hold their bonds. Government officials aim to satisfy both groups, and have even made painful cuts in local services when necessary to keep up with both sets of payments.

Only a few places have tried to rein in their costs, by billing retirees for a portion of the premiums, for example. Retirees have responded with lawsuits, but ratings agencies and municipal bond buyers have shrugged off these warning signs.

The $200 billion that New York State and its localities owe retirees in the aggregate is less than the amount they owe their bondholders, about $264 billion. But health costs are rising, and in some places the obligations have already eclipsed the value of the government’s outstanding bonds. Most credit analysts seem to expect that if a municipality has to default on something, it will default on its retiree health promises, not on its bonds. Pensions, meanwhile, are considered protected by the New York State constitution.

The article also points out that these costs pressures are not unique to New York.  Many states, cities, and counties are facing this situation, but this is first study to aggregate the obligations for a single state.   The study also found that New York City has the largest retiree health obligation, $62 billion as of June 30, 2008.




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