The Center for State and Local Government Excellence has issued its first issue brief on retiree health benefits, “The Crisis in State and Local Government Retiree Health Benefit Plans: Myths and Realities.” The brief, written by Robert L. Clark, examines the current financial status of state retiree health plans.

Funding rules and expectations for pension plans are clearly defined, liabilities are recognized, trust funds have been established, and state constitutions and laws limit or restrain changes in the plans that would reduce retirement benefits. In contrast, retiree health plans are a more recent employee benefit, typically, no trust fund has been established, and the extent of the unfunded liabilities has only recently been recognized in conjunction with Governmental Accounting Standards Board 45 (GASB 45).

This Issue Brief has identified some of the most important perceptions concerning retiree health plans in the public sector and has shown some to be fact while others are merely myths based on a lack of data or understanding of key aspects of these plans.

Myth: All states face a funding crisis in their retiree health plans.

Reality: Many states face substantial future liabilities associated with these programs; however, for many other states, the unfunded liabilities are relatively small, should be easily manageable in future years, and do not require any major new policies to cope with these plans.

Myth: GASB 45 requires public sector employers to establish irrevocable trusts for their retiree health plans.

Reality: GASB standards do not require the establishment of trusts nor do they require full funding for those with such trusts. To date, relatively few states have established trust fund legislation to help finance these future costs and even fewer are making use of laws that allow funding. A more interesting public finance question is whether, in light of the GASB 45 requirements, governments should move toward full funding of their retiree health plans.

Myth: The explicit recognition of the unfunded liabilities reported in the GASB 45 statements will have an adverse impact on the bond rating of governments and investors will exert market pressure for state and local governments to begin to prefund these plans.

Reality: The key determination of whether this perception is fact or fiction depends on whether the retiree health liabilities were already known to market analysts and had previously been factored into the bond ratings. If so, one could argue that these liabilities do matter but that the GASB 45 statements do not matter because investors already were aware of them.

The reality of the impact of GASB 45 statements will become more apparent in the next few years.

Myth: Retirement benefits are protected by state laws and provisions in their constitutions.

Reality: In general, no such protection exists for retiree health plans* and public sector employers have been constantly making changes to some plans that reduce the generosity of the benefits and raise the cost to retirees. However, political realities limit the ability of government to reduce compensation for public sector employees and promised benefits to retirees.

To read The Crisis in State and Local Government Retiree Health Benefit Plans: Myths and Realities in total go to http://www.slge.org/.

*The minimum medical services, which must be provided to Plan 1 members pursuant to RCW 41.26.030 (22), are contractual in nature, and may not be taken away or diminished by the legislature or a local disability board. (See Bakenhus v. Seattle)