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New York faces another iceberg

By Norman Poltenson

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Think of New York State and its 3,200 employer-entities (state, county, municipal, school districts, towns, villages, and public authorities) as the Titanic, steaming on its maiden voyage. Now think of the Empire State’s off-the-books debt as icebergs.

New York dodged one financial iceberg April 1 when it approved a balanced budget without the usual resort to budget gimmickry. Yet, dead ahead lies another iceberg called retiree health benefits, which until recently lay below the water line. 

We can see the iceberg now because the government has finally adopted new accounting standards mandated by an independent rule-making body called the Government Accounting Standards Boards, or GASB for short. GASB rule number 45 forces government officials, for the first time, to record the true costs of the promises made to state and local employees by declaring retiree benefits “deferred compensation,” whose costs should be recorded when earned. These costs appear as liabilities on the government entities’ balance sheets for voters and investors in the public-finance markets to see.

The Empire Center for New York State Policy estimates the current obligation just for public-sector, retiree-health-care insurance at approximately $205 billion, which equates to roughly three-quarters of New York’s state and local government (2008 figures) obligations that are on the books. Unlike pension benefits, health care is not pre-funded and each entity is responsible for its own liabilities.

The private sector dealt with this issue beginning in 1990 when GASB’s non-governmental counterpart — the Financial Accounting Standards Board — insisted that private employers account for their promises to employees by recognizing the obligation as a long-term liability. The private sector responded by reducing benefits, insisting on cost-sharing, or eliminating health-care benefits to retirees. Some companies, like General Motors and Chrysler, sought bankruptcy to remove the health-care liability.  

Retiree health-care insurance expenditures just for New York State retirees currently cost $1.4 billion annually. By the end of the decade, it is projected to double and by 2026 triple. While projections are not available for all of the other government entities, it is anticipated that the growth pattern is similar.

GASB brings the retiree health-benefit issue into view, but it does not require state and local governments to actually fund their promises. The rule-making body does, however, require each government entity to calculate the present value of future benefits, record the unfunded actuarial liability, and determine the annual required contribution.

The GASB rule change has shown a spotlight on the size of the financial iceberg called retiree health benefits. Our state government’s unfunded obligation is $60 billion, nearly equal to the debt that is officially recorded on the books. New York City owes another $62 billion. The counties, cities, school districts, towns, and villages are obligated for $28.69 billion, while the largest public authorities have assumed $14.4 billion. The remaining $39.7 billion is owed by other local governments and school districts.

On a regional level, Broome County’s unfunded actuarially approved liability is $186,314,000 spread over a population of 194,630. The resultant is $957 per capita. Oneida County owes $48,643,000 for its 231,044 residents or $211 per capita. Onondaga County bears unfunded liabilities of $700,900,000 for its population of 454,753 which equates to $1,541 per capita.

The combined municipal and school liabilities for our region’s major cities are startling. The city of Binghamton owes $275,832,000 for a population of 44,401. That obligation translates into $6,212 per capita. Utica, with a population of 58,040, is on the hook for $250,872,000 or $4,322 per capita. Syracuse owes $1,551,866,000 for its population of 138,560. That’s a whopping $11,200 per capita, which leads all other New York cities.

Now that we see the size of the iceberg and the potential impact of colliding with reality, New York has an opportunity to change course. The private sector learned its lesson of making promises without accounting for them. Today, only 28 percent of companies with more than 200 employees and 3 percent of small businesses offer health-care benefits to retirees. These firms also require substantial retiree contributions to the system. 

New York State, on the other hand, covers, on average, 91 percent of the premium cost to insure its retirees. Our state and local governments are also generous in covering supplemental “Medigap” costs, in allowing retirees to apply up to 200 unused sick-days to premium costs, and in permitting vesting periods of only 5-15 years.

Public-employee unions are hard at work to incorporate Article V, Section 7 of the New York State Constitution into retiree health benefits. They have been successful in applying the section to pensions, thus ensuring that the contractual obligation cannot be “diminished or impaired.” Thus far, the state’s highest court has ruled that the provision does not apply to retiree health insurance, which offers the legislature and governor a chance not only to rein in the skyrocketing cost trajectory but also to enjoy immediate savings.

The time to act is now. Gov. Cuomo can redeem his poor performance with the unions in enacting a new Tier 6–pension reform
by expending some political capital to modify the current generosity of retiree health benefits. While he has already unilaterally imposed higher insurance co-pays on retired state employees, he and the Senate need to counter five bills in the Assembly that will increase the cost of these benefits and a strong push by public-sector unions to place all contracted retiree health benefits under the protection of the state constitution.

GASB has been beneficial in opening our eyes to the financial impact of generous post-retiree health benefits. I hope the public will pressure our elected officials in Albany not to kick this political can down the road. Failing this, the public-finance markets will certainly react by insisting on higher interest rates for greater risk.

As I write this column, Greek government bonds are paying 22 percent interest. Is this the tip of the iceberg for New York or will we avoid a collision?       

 

Norman Poltenson is publisher of The Central New York Business Journal. Contact him at npoltenson@cnybj.com

 

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