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State retiree medical obligations: Georgia is underfunded

The media often reports about the funding problems of state and local pension plans, such as the plans maintained by Illinois, California and New Jersey. Georgia’s pension plans have also received significant press as well, although most of it has been positive. Regularly overlooked are liabilities relating to post-retirement medical obligations.

In a Feb. 28, 2006 press release titled “Georgia Named One of Top Five Best States for Pension Funds,” Gov. Sonny Perdue boasted: “I am proud of Georgia’s high pension fund ratio.” The article stated the state’s pension funding ratio was 101 percent, trailing only Florida and North Carolina.

Like most pension plans, Georgia’s plans have been hit hard by the recession and the stock market drop that accompanied the recession. According to the state’s June 30, 2010 financial statements, the overall funding ratio for the state’s two major plans, the Employees’ Retirement System of Georgia (ERS) and the Teachers’ Retirement System of Georgia (TRS) had dropped to 86.9 percent on a combined basis. This figure is still well above the GAO minimum recommended funding ratio of 80 percent. So, with respect to pensions, bravo!

To complete the post-retirement employee benefits analysis, “other post-employment benefit” (or “OPEB”) obligations must be considered. OPEB benefits are benefits provided to employees outside pension plans. The vast majority of OPEB obligations relate to post-retirement medical coverage.

In a Governing article by Girard Miller dated Feb, 3, 2011 and titled “Misplaced Pension Hysteria,” Mr. Miller states that while the state and local pension funding deficiency hysteria is overblown, the “OPEB cancer continues to metastasize, unabated and untreated.” Mr. Miller states:

“For perspective, the pension deficits accrued to date will cost every man, woman and child in America about $2,000 over the next 15 years (about $10 per month per capita), based on current funding ratios. For OPEB, where half the nation’s public workers receive a substantial retiree medical benefit and half do not, the $2 trillion national liability works out to six times that number for the unfortunate 75 million taxpayers who bear the burden of these bills.”

Mr. Miller has proposed three steps for dealing with the problems. Step one is ramping up employer contributions over the next five years. Step two is charging employees up to half the normal actuarial costs of the benefits. Step three is to adopt new policies for surplus funds.

How does Georgia’s OPEB liability situation stand? According to the state’s financial statements for the fiscal year ended June 30, 2010, as of June 30, 2009, the funding ratio was 4 percent. Thus, considering OPEB on its own, Georgia is doing very poorly in terms of funding.

The Pew Center on the States examined underfunded state health care obligations in its March 2010 national study, “The Trillion Dollar Gap.” Pew reported the latest available numbers showed Georgia with a $19.1 billion retirement healthcare liability and nearly all of that, some $18.3 billion, was an unfunded liability using actuarial assumptions. Pew said Georgia would need a $1.58 billion annual required contribution to meet the obligation.

However, state funding has declined. From 2008 to 2010, funding of OPEB obligations was cut from $242.5 million to $19.5 million. Perhaps the state’s recent financial crunch justifies a reduction in funding. However, the reduction is drastic considering the funded status.

In dollar terms, the state’s two main pension plans combined (ERS and TRS) had assets and liabilities of $68.4 billion and $78.7 billion, respectively, as of June 30, 2009. For OPEB obligations, assets were $810 million and liabilities were $20.3 billion as of such date.

Combining the pension and OPEB figures, the total assets were $69.2 billion and the total liabilities were $99 billion. Thus, the combined funded ratio is 69.9 percent — well below the GAO’s recommended 80 percent funding ratio.

It must be realized that the federal government’s unsustainable and imprudent path will, absent substantial changes, necessitate substantial tax increases in the near future (i.e., within the next decade). Does Georgia wish to be adding to the tax burden it will place on Georgians at that time? Funding now means the need for less taxation later.

The question is whether now is the time to follow Mr. Miller’s advice, and begin acting to eliminate the deficiency by substantially increasing funding.

It would seem prudence requires, at a minimum, some plan to cause the combined pension/OPEB liability to be on track to hit the 80 percent funding standard sometime within the next decade. It must be done without doing what we see at the federal level — fiscal debauchery now with promises of prudence later.

[Allen Buckley is an Atlanta attorney and CPA, with a specialty in tax law and employee benefits. The Georgia Public Policy Foundation is an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians.]

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