The Other Benefits Mess

The pull of public service aside, the lure of government work often lies in the benefits -- the guaranteed pension, generous health insurance and other perks that reward a lifetime of teaching, fighting fires or pushing paper at the county municipal building. The good news for public servants is that courtesy of the recent bull market, their pensions are fairly well assured.

When it comes to other post-employment benefits -- health care in particular -- the story is far different. Says Alicia Munnell, of the Center for Retirement Research, "We know precisely what the assets are -- zero."

That's because state and local governments aren't required to set aside money to meet future promises other than for retiree pensions. Most pay what they owe each year out of their current budget. But starting this year, government retirement plans must at least account for their long-term health care and other benefits liabilities (known as OPEB, or other post-employment benefits) and publish the calculations. "The numbers are going to be very large," says Ron Snell, of the National Conference of State Legislatures.

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Some estimates are already in. New Jersey's unfunded OPEB obligations could amount to $78 billion. California's could run $70 billion, and New York's is somewhere around $50 billion. Alabama's and North Carolina's unfunded IOUs are roughly $20 billion.

By contrast, North Dakota, Montana, Oregon, Rhode Island and Utah have long-term OPEB obligations estimated at less than $1 billion. Of course, smaller liabilities may simply indicate stingier benefits. But one problem with the whole exercise is that the assumptions used to calculate OPEB obligations, including the value of plan investments and expected rates of return, are all over the map.

Expect states to take a hard look at promised perks. Unlike pension obligations, health-care promises aren't typically guaranteed. Shifting more costs to retirees -- in the form of higher premiums, higher deductibles or reduced benefits -- is an option, just as it has been for private companies. Also on the table: limiting future obligations by scaling back benefit packages for new hires, and controlling costs with generic drugs or managed-care plans. Will taxpayers be tapped for more, too? Not without a hue and cry, says AARP economist Clare Hushbeck. "Many taxpayers have no retirement plan whatsoever. Asking them to shore up a system of very generous benefits doesn't seem equitable."