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Orlando Sentinel: Health insurance burden

Tuesday, June 07, 2011

Taxpayers could get soaked paying for health insurance promises to retirees.

May 27, 2011

The Florida Legislature made headlines this year by requiring members of the state’s relatively well-funded retirement system to contribute to their pensions.

But they did less — actually, nothing — about another growing but stealthy financial burden for local governments and their taxpayers: health benefits for retired workers.

State law requires local governments in Florida to offer their retirees health insurance at the same cost as coverage for active employees, which amounts to a discount for retirees. And many local governments are committed through contracts with their employees to continue paying some or all of their health insurance premiums after they retire.

Yet governments typically have failed to reserve enough money to keep up with the mounting cost of these promises. A significant majority haven’t put any money aside.

This might seem like arcane stuff, but it could easily end up affecting how much you pay in local taxes or how many cops your city puts on the street.

The problem is this: Instead of building a nest egg to cover the future cost of health care for their retirees, some local governments have basically been paying the bills for their current retirees.

This pay-as-you-go approach leaves the rapidly escalating cost of health coverage for future retirees solely to future taxpayers, who will end up paying dearly for it.

Imagine what would happen if a government guaranteed its employees pensions, but didn’t contribute to the eventual payout while employees were still working? It would have no separate pot of money to draw on once they benefits came due. The costs would be staggering.

Lawmakers have been warned. The LeRoy Collins Institute, a nonpartisan research organization based in Tallahassee, reported on the problem in February. The institute found that Florida counties, on average, were $30 million short of what they needed to adequately fund health benefits for future retirees. Among the state’s 100 largest cities that year, the average unfunded amount was $7.5 million.

Some cities were in much worse shape, according to the institute. Tampa was $86 million behind. Jacksonville was $137 million in arrears; Miami, $480 million. Again, this doesn’t mean that those cities aren’t paying whatever health benefits they owe to retirees. It means they don’t have nearly enough set aside for future retirees.

Cities can dig out of these holes, but it’s expensive. Four years ago, Orlando started chipping away at some $200 million worth of unfunded health-care promises to future retirees. Although it’ll take 30 years to catch up, at least Orlando has a plan. It already has roughly doubled the annual amount going into retiree health benefits, from $10 million to $20 million.

Orlando has taken other prudent steps to reduce its future costs for these benefits. New employees are no longer guaranteed health insurance coverage after they retire. Instead, the city is contributing to a 401(k)-style fund for them to help pay for their health expenses in retirement. Smart.

Even though many local pension funds are in trouble, at least state law requires that they be overseen by local boards. There is no comparable oversight required for local retiree health benefit programs, nor does any state agency monitor these programs. These are flaws that could be fixed with a new state law next year to protect taxpayers.

But cities don’t have to wait on Tallahassee. As Orlando has shown, they can — and should — start taking steps on their own to pay for whatever health benefits they promise to retirees.

Or they could continue ignoring the problem until we have yet another expensive crisis on our hands.

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