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Report: Healthcare for government retirees a ‘hidden’ threat to taxpayers

By David Smiley  02/24/2015 10:24 PM  02/24/2015 10:24 PM

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Every year, Miami officials have to make a choice: invest tens of millions of dollars into a trust to finance decades worth of healthcare subsidies owed to retirees, or pay only the healthcare bill coming due now, at a fraction of the cost.

And every year, like so many other South Florida municipalities, the city takes the cheap way out.

Coming off the heels of a prolonged recession, it’s a decision that hasn’t been all that difficult. Two years ago, it saved Miami $38 million — about the cost of running the parks and recreation department. Around South Florida, a number of other cash-strapped governments have done the same, taking a pay-as-you-go approach to retirees’ health benefits instead of financing long-term costs that can top $100 million.

But following a recent change in government accounting standards, elected officials and administrators around the nation are facing pressure from credit agencies and policy advocates to pay down healthcare debts instead of foisting ballooning bills onto future generations of taxpayers. Answering the call could prove costly, but proponents of the change say it could avert a fiscal disaster.

“There are considerable costs associated with [retiree health benefits],” said Carol Weissert, director of Florida State University’s Leroy Collins Institute, which has studied public pension obligations. “They are another ticking time bomb.”

On Tuesday, the non-partisan Collins Institute released its latest report on public pensions, this time focusing on the “hidden” cost of retiree healthcare benefits, referred to in the public sector as Other Public Employee Benefits (OPEB). According to University at Albany professor David Matkin, the author of the report, the total OPEB burden in Florida is more than $8.5 billion.

But he said most governments are doing little to pay down their debts. And they’re not talking about it, either.

“There’s very little transparency on these issues,” he said during an online conference with the media.

Retiree healthcare liabilities for government institutions have existed for decades. Many governments offer their employees healthcare benefits that might pay a percentage of their premiums or completely subsidize their coverage. In Florida, all local governments are also required to give retirees the option to purchase health insurance coverage offered active employees, and at the same rate.

But it wasn’t until the mid 2000s that governments were required to list their longterm OPEB liabilities on their financial statements and pushed to fund those debts on the front end rather than the back.

Coral Springs, Davie, Miami Beach and Orange County are among the entities that have created funds. Many Florida governments, however, have chosen to continue paying only their actual costs on an annual basis. Using financial reports from 2011, Matkin found some of the largest liabilities in South Florida, including $541 million in Miami and $433 million in Hollywood.

Put into perspective, that’s more than four times Hollywood’s payroll, and double Miami’s.

“Most governments are avoiding making that hard decision by choosing the short-term, easy solution,” said Matkin.

But choosing to forgo OPEB trust funds is for some as much a risk-reward decision as it is a decision to avoid hefty bills. Jose Fernandez, Miami’s finance director, noted that OPEB liabilities — which, like pension costs, are determined by weighing money owed with expectations of how long retirees will live and whether they’ll get sick — include hypothetical debts that won’t ever come due. In addition, the city, like Miami-Dade County and the Miami-Dade School Board, is self-insured, so the city is essentially paying itself.

Fernandez said Miami taxpayers should probably be more concerned if the city were raising taxes or cutting services to pay down hypothetical liabilities.

“If I was a city resident, I wouldn’t be losing any sleep over an OPEB obligation,” he said. “You’re not really looking at a hard dollar liability.”

Like Miami, Hollywood officials, who are still grappling with employee pension costs, were faced last year with a $9 million pay-as-you-go bill for OPEB, versus a $29 million cost to fully fund their program.

“I’m pretty sure we don’t have an extra $20 million,” said Hollywood financial services director Matthew Lalla.