* Fewer local governments offer retiree health coverage
* Average employee health care cost to hit $11,188 in 2013
By Jilian Mincer
Oct 15 As cash-strapped U.S. cities and states
struggle to address gaping budget holes, a long-honored benefit
for public-sector workers has come into the cross-hairs of
budget cutters: retiree health insurance.
A growing number of states and cities are eliminating or
reducing health coverage for retirees, a benefit that has long
fallen by the wayside for most private-sector workers.
But the coverage, which has meant that most retired public
workers have all their medical bills fully paid, is expensive
and hugely underfunded. And because health coverage does not
typically have the strong legal protections that hamstring
changes to public pension benefits, it is easier for governments
to scale back.
The trend could leave millions of public workers with
thousands of dollars in unanticipated healthcare costs.
"In 20 years, very few people will have this benefit," said
Dennis M. Daley, a public management professor at North Carolina
State University in Raleigh, North Carolina.
Illinois, which has some of the nation's largest pension
liabilities, approved legislation in June that would for the
first time require retirees to pay an increasing amount for
previously free retiree health insurance. The state expects to
save $800 million annually.
More than 77 percent of the roughly 19 million employees of
large U.S. state and local governments were eligible in 2012 for
retiree health insurance. That is in sharp contrast with the
private sector where employers pay for retirement healthcare
costs of only about a quarter of workers, according to the most
recent Kaiser Family Foundation survey.
But rising healthcare costs, plummeting tax revenues and
unfunded pension liabilities - which have forced some towns into
bankruptcy - have forced states and cities into a rethink.
Many have increased eligibility ages, hiked out-of-pocket
expenses and dropped coverage for family members. In some cases,
they have eliminated insurance altogether. Others are planning
Almost a quarter - 23 percent - of local governments with at
least 250 workers did not offer retiree coverage in 2012,
compared with 17 percent in 2011, according to an October report
by Cobalt Community Research, a nonprofit research coalition in
Lansing, Michigan. Smaller governments provide even less help.
Only 39 percent of governments with 51 to 100 employees offered
retiree health insurance in 2012 versus 55 percent a year ago.
"I don't think any local government wants to hurt employees
or retirees and reduce coverage, but they are balancing that
with the challenge of lower revenues," said William SaintAmour,
executive director of Cobalt, noting the stark choice between
providing core services for citizens and benefits for employees.
"It's been very much a pills or potholes discussion."
HEALTH BENEFITS HAVE LESS LEGAL PROTECTIONS
Consulting firm Aon Hewitt estimates that the average U.S.
health-care cost per employee will climb in 2013 to $11,188, up
from $7,874 in 2007. Providing retiree coverage could be a
significant savings for employees.
Fidelity Investments estimates that a healthy couple
retiring in 2012 with only insurance coverage from Medicare, the
government program for the elderly, would spend about $240,000
on out-of-pocket healthcare costs before they die on average 17
years later for men and 20 years later for women. The savings
for state and local governments could be much higher because
many public employees retire in their 50s, long before they're
eligible at age 65 for Medicare.
In addition, retiree health insurance is relatively
low-hanging fruit for government budget cutters because there is
no legal obligation for coverage, sparing governments from the
type of lawsuits filed by labor unions over cuts to pension
benefits for workers such as teachers, police officers and
"There is no guarantee for retiree health, there never has
been," said Paul Fronstin, senior research associate at the
Employee Benefit Research Institute in Washington, D.C. "It is
not as simple to cut as it is in the private sector, but it's a
target and it's unfunded."
Accounting rules only require governments to report but not
set aside funds in advance for future healthcare obligations. As
a result, most states typically use a pay-as-you-go method.
On average, states have set aside only about 5 percent of
what is estimated to be their retiree health care and other
non-pension benefits such as life insurance. At the end of 2010
that left a $627 billion gap, not far from the $757 billion hole
seen for public pensions, according to a report by the Pew
Center on the States.
Seventeen states had saved nothing and only seven states -
Alaska, Arizona, North Dakota, Ohio, Oregon, Virginia and
Wisconsin - had funded 25 percent or more of these obligations.
The report said states should have set aside almost $51
billion for these obligations during 2010, but they contributed
only $17 billion.
Most states have cut back on their commitments. Almost 60
percent of state and local governments have changed the health
insurance they provide to current and retired workers, according
to a survey released in April by the Center for State and Local
Government Excellence. Almost 11 percent had shifted more costs
"It's the smaller changes where you're shifting a lot of the
costs," says Daley of North Carolina State University. "It's the
nickel and diming - your co-payment goes up from $20 to $25."
For example, beginning in 2014, the Ohio Public Employees
Retirement System will change eligibility requirements for
retiree health care coverage, restricting coverage to those at
least 60 years old with at least 20 years of service, up from 10
years of service. Retirees will also face higher premiums and
out-of-pocket expenses and will lose spousal coverage.
Ohio, with 986,000 members and about 184,900 retirees and
beneficiaries, spends about $1.5 billion a year on retiree
Without the changes, the retiree healthcare fund would be
zero by 2020, said Julie Graham-Price, the system's spokeswoman.
"People are living longer, which is great for the retirees, but
a little tougher on the pension," she said.