A $205 billion bomb

New York state and local governments' liabilities for retiree health coverage run to the hundreds of billions of dollars -- a burden that's only now coming into full view.

Governments in the state spend billions a year on health-insurance for their retired employees -- a benefit that will never be available to the vast majority working in the private sector.

Unlike pensions, which are at least partly pre-funded through large investment pools, retiree health care in New York's public sector comes out of annual budgets on a "pay-as-you-go" basis.

In New York City alone, the tab for that has risen 50 percent in the last five years. It'll hit $1.8 billion in fiscal 2011, and is expected to grow another half-billion dollars in the next three years.

But the pay-go expense of retiree health insurance -- which accountants call "Other Post-Employment Benefits," or OPEB -- is just the tip of a massive iceberg. Thanks to a new accounting standard, we're finally starting to learn the full, long-term cost of the public sector's retiree health-care promises.

What's emerging from the murky depths of government financial reports is a potentially monumental burden on future generations of New Yorkers -- a burden in addition to the cost of public pensions.

As detailed in a new study by the Manhattan Institute's Empire Center, unfunded OPEB liabilities in New York include:

* $60 billion for the state government.

* $13.8 billion for the state's 20 largest counties.

* And $6.5 billion for the top 20 school districts.

New York City's unfunded OPEB liability of $62 billion was tied with the state of California's for the largest in the country as of mid-2008. The Metropolitan Transportation Authority alone has amassed an unfunded liability of more than $13 billion.

Based on totals for the biggest pubic employers, I estimate that the unfunded OPEB liability for every level of government in New York comes to at least $205 billion -- equivalent to more than three-quarters of state and local bonded indebtedness.

Since Medicare is the primary coverage for Americans over 65, why is OPEB so expensive? First, most government employees retire early -- decades early, in the case of cops and firefighters. Second, most government plans provide backup for Medicare, including reimbursement of the $111-a-month Medicare premium.

The accounting rule doesn't require governments to pay their unfunded OPEB liabilities all at once, but it does oblige them to report whether they're making progress in pre-funding the benefit over a 30-year "amortization" period. The longer they do nothing about it, the bigger the number that hits their balance sheets.

In the two years since the new accounting rule took effect, the unfunded liability of New York's state government has grown by $8 billion. At this rate, within 10 years, the state's liabilities will exceed its total assets -- a condition accountants call "balance-sheet insolvency."

New York City is already there. Unlike other large governments, it chose not to spread its theoretical catch-up cost over 30 years. Instead, with breathtaking transparency, the city has booked its entire OPEB liability all at once. The result: As of fiscal 2008, the city government's balance sheet showed negative net assets of $97 billion.

Investors in city bonds apparently assume that the municipal OPEB obligation isn't really binding in the same sense as general obligation debt. If so, someone needs to break the news to municipal labor unions -- whose members do assume they'll receive lifetime health coverage if they retire from the city payroll. Other public employees around the state no doubt assume the same.

As these employees continue to accrue benefits, the cost is being shifted to future generations. This is why it is essential for elected officials to begin confronting the full financial implications of their retiree health-care promises.

The good news is that retiree health benefits, unlike pensions, aren't guaranteed by the state Constitution. Elected officials can still change course by restructuring health benefits for both current retirees and active employees.

How to burst this bubble? Early retirees in the public-sector should be required to pay a larger share of their premiums, and those over 65 should at least pay their Medicare premiums. Younger workers should be shifted into retirement medical trusts, supported by matching contributions from employers and employees, which would take the obligation off the backs of taxpayers.

The next governor and Legislature should move quickly to repeal a recent law that hinders such changes in school-district retiree benefits. The state Taylor Law, which has long prohibited collective bargaining of pension benefits, should be amended to prohibit collective bargaining of retiree health care, as well.

It's time to stop shoving massive, hidden costs onto the backs of future taxpayers.

E.J. McMahon directs the Man hattan Institute's Empire Center for New York State Policy. ejm@empirecenter.org