Unfunded Liability of Healthcare for Retirees (Updated)

It has recently been publicized that in addition to public pensions, the taxpayer is potentially on the hook to pay for retiree healthcare costs. Zerohedge

Other analysts are also raising the alarm about unfunded retiree healthcare costs. Mauldin Economics

Local governments often give retired police officers, firefighters, teachers, and other workers a pension plus healthcare benefits.

        That’s about to change. 

That’s on top of the estimated $1.1 trillion in unfunded pension liabilities they already had. In other words, this giant problem that no one knows how to solve is about to get 59% worse! 

Healthcare is expensive even in the best circumstances. Imagine your health insurer had promised to cover your medical expenses but hadn’t set aside any cash to pay for it. 

Remarkably, that’s exactly what has happened. Governments currently disclose their retiree healthcare liabilities only in footnotes to their financial statements. Many have saved little to no money to cover those future expenses. 

Starting in 2018, the Governmental Accounting Standards Board—the source of generally accepted accounting principles (GAAP) for state and local governments—will force officials to record healthcare liabilities on their balance sheets. Pew Charitable Trusts estimates the national shortfall will add up to $645 billion. 

Or, more accurately, it’s going to look 59% worse. The healthcare shortfall isn’t new. What’s new is that local governments have to stop obscuring it.

 Fortunately, Georgetown does not have large unfunded liabilities for retirees healthcare, but, it bears watching. There are several aspects of the retiree healthcare plan are are worth noting.

1. The post-employment benefits are funded on a pay-as-you-go basis.

2. The City is under no obligation, statutory or otherwise, to offer post-employment benefits to any retirees or their dependents. Update -  Local Government Code 175 states the City has to allow retirees the choice to elect to participate in the health plan.  Council votes, during the budgetary process, whether or not to subsidize the premium.

3.  Retirees currently pay their own healthcare insurance premiums.

4. The City uses actuarial methods to determine current obligations and unfunded liabilities which use many "assumptions", such as the initial discount rate of 7.5%, inflation rate and payroll growth.

5. The actuarial methods result in an estimated obligation of $972,877 in 2016.

6. The unfunded liability as of December 31, 2015 is estimated to be $1,565,706 with an initial discount rate of 7.5% declining to 4.25% after 14 years.

From experience we know that the unfunded liability is much greater than reported if the 30yr bond interest rate were used. The City would have to provide additional information to calculate a realistic unfunded liability than is available in the 2016 Comprehensive Annual Financial Report.

All-in-all the retirement healthcare costs for Georgetown do not seem to be currently a big issue. However, given the rate that healthcare costs are rising in this country, the unfunded liabilities need to be tracked to assure they do not become a problem.

The unfunded healthcare liabilities accrued by the school district and county also need to be examined as they also impact our tax bill.