It is not uncommon for a police officer to retire at age 50, or in some places even earlier, after 20 or 25 years of on-the-job service. Medicare health coverage does not commence until that officer reaches age 65.
Who pays for the retired cop’s health insurance in the meantime, and how much does it cost?
Usually, the answers are A) local and state taxpayers and B) nobody really knows. But the answer to B, at least, is starting to change.
The Governmental Accounting Standards Board has strongly suggested that officials record health care liabilities on government balance sheets by 2018, The Wall Street Journal recently reported. While the guidelines are not mandatory, refusing to comply can complicate the audit process, and as a result most governments typically follow the board’s recommendations. Police aren’t the only public servants affected by the new disclosure rules; they apply throughout state and local government and their subdivisions.
Unlike public pensions, worker retirement benefits, including health care, have often been partially masked by state and local government budgets. Portions of the debt have been relegated to footnotes, rather than included on balance sheets. And most states and localities have no savings to fund future retiree health care costs; they simply treat these benefits as an operating expense.
That strategy has not worked. A recent report from The Pew Charitable Trusts found a $645 billion shortfall between promised health benefits and assets set aside to pay for them. Of course, that shortfall varies from state to state, depending on how their programs are structured. And a shortfall in money saved does not automatically mean retirees are not receiving benefits, since most states appropriate revenue to pay costs on a year-by-year basis.
However, as anyone who has tried to manage a budget knows, the first step is creating a reasonably accurate picture of inflows and outflows. When Aurora, Illinois, changed its budgeting to adhere to the new guideline, it recognized about $150 million in costs that had previously gone unreported. In New York state, reported health care liabilities will rise to about $72 billion, compared to $17 billion, once the new accounting standards are implemented.
Recognizing the true cost of health care benefits will not solve the shortfall. But some supporters of the new accounting standards hope that they will push lawmakers toward action. Given the increasing cost of health care and the rising number of retirees, not planning for these costs could create even bigger problems. “By not dealing with it, we could be setting ourselves up for a very unwelcome surprise,” New York State Comptroller Thomas DiNapoli told the Journal.
Of course, there are some who worry that the new standards will lead to major cuts to these benefits. While the collective shortfall for health care benefits is less massive than the shortfall for public sector pensions, states generally face fewer barriers to cutting the former. The American Federation of State, County and Municipal Employees opposed the new auditing rules, suggesting they “may lead to hasty and unwarranted decisions about retiree health benefits.” But continuing to sweep the problem under the rug will not make it go away.
We already knew that many localities cannot afford the pension promises they have made to current and former employees, who are retiring in large numbers as baby boomers age out of the workforce. The new rules will make clear that a lot of the same places can’t afford the health insurance promises they have made, either.
And since the iron law of finance – and everything else – is that the impossible never happens and the inevitable always does, a lot of those promises are going to be broken. The only questions are when, where and how.
The new disclosure rules by themselves cannot fix the problem, but at least they can help measure its scope. That’s a start. By making it obvious that a lot of places can’t afford the promises they have already made, it might at least create some pressure to move away from the practice of having future taxpayers pick up the tab for services that current taxpayers are enjoying.
Posted by Larry M. Elkin, CPA, CFP®
City Hall, Aurora, Ill. Photo by Paul Sableman.
It is not uncommon for a police officer to retire at age 50, or in some places even earlier, after 20 or 25 years of on-the-job service. Medicare health coverage does not commence until that officer reaches age 65.
Who pays for the retired cop’s health insurance in the meantime, and how much does it cost?
Usually, the answers are A) local and state taxpayers and B) nobody really knows. But the answer to B, at least, is starting to change.
The Governmental Accounting Standards Board has strongly suggested that officials record health care liabilities on government balance sheets by 2018, The Wall Street Journal recently reported. While the guidelines are not mandatory, refusing to comply can complicate the audit process, and as a result most governments typically follow the board’s recommendations. Police aren’t the only public servants affected by the new disclosure rules; they apply throughout state and local government and their subdivisions.
Unlike public pensions, worker retirement benefits, including health care, have often been partially masked by state and local government budgets. Portions of the debt have been relegated to footnotes, rather than included on balance sheets. And most states and localities have no savings to fund future retiree health care costs; they simply treat these benefits as an operating expense.
That strategy has not worked. A recent report from The Pew Charitable Trusts found a $645 billion shortfall between promised health benefits and assets set aside to pay for them. Of course, that shortfall varies from state to state, depending on how their programs are structured. And a shortfall in money saved does not automatically mean retirees are not receiving benefits, since most states appropriate revenue to pay costs on a year-by-year basis.
However, as anyone who has tried to manage a budget knows, the first step is creating a reasonably accurate picture of inflows and outflows. When Aurora, Illinois, changed its budgeting to adhere to the new guideline, it recognized about $150 million in costs that had previously gone unreported. In New York state, reported health care liabilities will rise to about $72 billion, compared to $17 billion, once the new accounting standards are implemented.
Recognizing the true cost of health care benefits will not solve the shortfall. But some supporters of the new accounting standards hope that they will push lawmakers toward action. Given the increasing cost of health care and the rising number of retirees, not planning for these costs could create even bigger problems. “By not dealing with it, we could be setting ourselves up for a very unwelcome surprise,” New York State Comptroller Thomas DiNapoli told the Journal.
Of course, there are some who worry that the new standards will lead to major cuts to these benefits. While the collective shortfall for health care benefits is less massive than the shortfall for public sector pensions, states generally face fewer barriers to cutting the former. The American Federation of State, County and Municipal Employees opposed the new auditing rules, suggesting they “may lead to hasty and unwarranted decisions about retiree health benefits.” But continuing to sweep the problem under the rug will not make it go away.
We already knew that many localities cannot afford the pension promises they have made to current and former employees, who are retiring in large numbers as baby boomers age out of the workforce. The new rules will make clear that a lot of the same places can’t afford the health insurance promises they have made, either.
And since the iron law of finance – and everything else – is that the impossible never happens and the inevitable always does, a lot of those promises are going to be broken. The only questions are when, where and how.
The new disclosure rules by themselves cannot fix the problem, but at least they can help measure its scope. That’s a start. By making it obvious that a lot of places can’t afford the promises they have already made, it might at least create some pressure to move away from the practice of having future taxpayers pick up the tab for services that current taxpayers are enjoying.
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