MTF report: Mass. municipalities face staggering retiree health care liabilities

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The 50 largest cities and towns in Massachusetts face a $20 billion liability for retiree health care benefits, an obligation that presents a serious threat to the provision of local government services in the future, according to a report released by the Massachusetts Taxpayers Foundation on Feb. 15.

The $20 billion represents what these governments must pay in today’s dollars for the lifetime health care benefits already earned by 150,000 current employees and retirees in the 50 communities, according to the report, “Retiree Health Care: The Brick That Broke Municipalities’ Backs.”

In the aggregate, the report finds, the retiree health care liability for the 50 communities is more than 99 percent unfunded and two-and-a-half times larger than their unfunded pension liability. [The 50 communities represent roughly half the state’s population.]

The report concludes that funding these obligations will place an overwhelming burden on local taxpayers.

“Retiree health care costs are simply unaffordable,” the report states. “This hemorrhaging will intensify as the soaring costs of retiree health care and other employee benefits force more severe cuts than municipalities have already implemented.

At a meeting with the state’s mayors on Feb. 16 in Salem, Andrew Bagley, director of research and public affairs for the Massachusetts Taxpayers Foundation, said the $20 billion figure is conservative, in part because assumptions about the growth rate of health care costs are typically too low. He said the retiree health benefit liability for all 351 Massachusetts cities and towns is likely between $25 billion and $30 billion.

“Something has to be done,” he said. “There’s no city or town that’s going to be able to pay for this. You can’t raise taxes high enough to pay for this.”

The report uses “other post-employment benefit” – or OPEB – liabilities reported by the 50 communities as required by the Governmental Accounting and Standards Board’s Statement 45. Each community calculates its own liability and chooses its own assumptions for investment performance and health care cost growth.

The report lays out a series of recommendations to reduce liabilities and control the spiraling costs of retiree health care. The first recommendation is to give local officials the authority to adjust health plans outside of collective bargaining, which remains the MMA’s top legislative priority.

Giving communities the ability to make “modest changes, but still keeping benefits at least on par with the state’s Group Insurance Commission, would have the dual impact of immediate and large savings in operating budgets while taking a significant bite out of OPEB liabilities,” the report states.

The report also makes the following recommendations, most of which would require changes in state law:

• Contribute set dollar amounts and cap municipal contributions instead of tying contributions to a percentage of the premium.

• Base benefits on years of service, as is done with pensions, rather than providing full benefits after 10 years of service.

• Raise the retiree health care eligibility age from 55 to 62.

• For part-time employees, increase the minimum eligibility hours to 1,400 per year and prorate benefits.

• End spousal/dependent coverage for future retirees.

• Improve public access to information and centralize reporting in the state.

Link to Massachusetts Taxpayers Foundation website for the report and more information