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Nancy Smith

Public Pensions' Scary First Cousin: Retiree Health Benefits

February 24, 2015 - 6:00pm

The subject of public employee retirement systems is one of the toughest nuts for legislatures especially to crack.But for many local governments in Florida, there's another, seldom-mentioned "ticking time bomb" -- something separate but oh-so-related to public pensions: commitments to subsidize retiree health care premiums.

A report released earlier this week by the LeRoy Collins Institute, "Beyond Pensions: Florida Local Governments and Retiree Health Benefits," reveals public employees' health care premiums in the Sunshine State are responsible for some $8.4 billion in unfunded liabilities.

And health care benefits are not transparent.The LeRoy Collins Institute, headquartered at Florida State University, calls them a "hidden" pension cost, because they're not documented by state agencies.

(Read the entire report in the attachment below this story.)

David Matkin, the assistant professor at the University of Albany who wrote the study, claims there are several causes for concern.

First, he says, few Florida local governments have set aside funds to cover the promises they made to their employees to provide health benefit subsidies during their retirement. Instead, most opt to pass the cost of retiree health benefits that have already been earned onto future taxpayers. All the delay does is increase how much those benefits will cost taxpayers down the road.

Second, the baby boomer generation is retiring. That means, over the next 20 years the number of workers who will begin to draw retirement benefits is going to rise significantly.

Third, experts predict health care costs and insurance premiums will require an increasingly larger portion of household income in the coming years.

If you understand the two kinds of retiree health benefits, it's easier to see the problem:

  1. Implicit benefits:All local governments in Florida are required to provide their employees with implicit benefits (see Florida Statute 112.0801). Governments provide implicit benefits by giving retirees an option to purchase the same health insurance coverage available to their current employees and at the same premium cost.
  2. Explicit benefits:These benefits are not required under any Florida statute. They usually reward a retiree for years of service through monthly subsidies. For example, a worker who retires after 20 years or service might get a $5 subsidy for each year of service. That means he/she would receive a monthly health insurance premium subsidy of $100.

Most of this underfunded liability for retiree health benefits -- more than $6.5 billion -- comes from locally-administered plans.

Another $1.9 billion is from the cities and counties share of the Florida Retirement System health insurance subsidies unfunded liability.

According to the report, the largest underfunding problems are in governments that provide explicit benefits. Nearly half of Florida counties and larger cities provide locally-administered explicit benefits, which are in addition to the subsidy provided through the Florida Retirement System Health Insurance Subsidy.

Nearly all retiree health benefits are funded using the pay-as-you-go approach. This means governments are not setting aside money to fund benefits as they're earned, but instead leaving it to future taxpayers to pay the true costs.

The report has concluded, "in order to fund their retiree health benefits on an actuarially sound basis, most local governments that sponsor a locally-administered explicit-benefit plan should increase their contributions by 2 percent to 10percent of their payrolls."

Collins reports information for the report was collected from the annual financial reports of the 100 largest cities in Florida and all Florida counties. The financial reports from fiscal 2008 to 2011 were accessed from the Florida Auditor General website and data on local government OPEB (Other Post-Employment Benefit) plans were gathered from each report. Two researchers separately collected data from each of the financial reports to minimize coding errors.

The report was funded primarily by the Jessie Ball duPont Fund.

It seems doubtful that the Legislature will get to health care insurance programs this session, or find a way to push -- or even nudge -- local governments toward more fiscally sound practices. Look within the report (again, in the attachment below) to see how Florida's cities rank in terms of obligations.

One city that may require special attention is Tampa. Could it be the tip of an iceberg?

The lengthy cover story in this months Chief Investment Officer magazine, "The Riddle of Tampa Bay," reveals the uncertain future of thousands of Tampa police and firefighters "who rely on the belief that when they retire, they will be taken care of."

Editor-in-Chief Kip McDaniel, in a Letter from the Editor, bluntly opines, I can tell you without an iota of doubt that the structure of the Tampa Fire & Polices retirement investments is unwise. Theres innovation -- and then theres whatever this is.

Problems in Tampa arise almost entirely from who and how the fund has been managed, audited and allowed to produce financial statements "not designed to inform," according to the story.

Edward "Ted" Siedle of Forbes Magazine, in his latest-edition story, "$2 Billion City of Tampa Pension Story Major Media Missed," asks, "Riddle Me This: Why is major media sitting on the sidelines as the greatest financial story in the history of America -- public pension secrecy -- unfolds?"

Says Siedle, "A fund this size should have a nationally reputable consultant overseeing its investments.

Health care benefits are not mentioned specifically, but in the LeRoy Collins Institute report, Tampa is one of the cities with a high unfunded liability.

Pension reform generally was a priority of Speaker Will Weatherford during 2014 legislative session. But Weatherford's best efforts fizzled as the session ended. Now new Speaker Steve Crisafulli, decrying the $500 million liability "unsustainable" public employee pensions add, told Sunshine State News on Tuesday he wants to carry on Weatherford's pursuit of real pension reform.


Reach Nancy Smith at nsmith@sunshinestatenews.com or at 228-282-2423. Twitter: @NancyLBSmith

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