Monday, February 28, 2011

Retiree Health Care and the Struggle in Wisconsin

The struggle over Governor Walker's attack on public sector unions in Wisconsin sent me to a report - "Retiree Health Care: The Brick that Broke Municipalities' Backs" - recently issued by the Massachusetts Taxpayers Foundation.

I'm entirely with the protesters in Wisconsin with regard to the Governor's effort to curtail the process of collective bargaining. I compare his assault on bargaining rights to the major ethical accomplishment in health care in the past decades - heightened respect for patient autonomy, embodied in informed consent and the quest for a collaborative patient-doctor relationship. When it works well, collective bargaining can advance the interests of workers and management, just as patient "empowerment" can advance the physician's interest in better health outcomes.

But in all too many venues, the outcome of public sector collective bargaining has been destructive. The fault lies with both sides of the bargaining process. The Massachusetts Taxpayer Foundation report examines the implications of agreements about retiree health benefits in the 50 largest communities in Massachusetts. Their findings are horrifying!

The 50 communities have an aggregate liability of $20 billion, 99% of which is unfunded! For most of the municipalities, the health care liability is greater than liability for pensions. The report concludes:
"the Legislature and municipalities face a clear and critical choice: cut back retiree health care benefits to an affordable and sustainable level or see cities and towns sink farther and farther into debt while decimating local services."
What's happening in Wisconsin (and other states) reflects the public sector version of changes that have been going on in the private sector since the Financial Accounting Standards Board (FASB) ruled, in 1990, that employers had to report retiree health liabilities in their annual financial reports. This requirement had a dramatic effect on a company's reported profits and losses. The result of the reporting requirement is clear. Among private employers with 500 or more employees, health benefits to Medicare eligible retirees fell from 40 percent in 1993 to 21 percent in 2009.

In 2004 the Government Accounting Standards Board (GASB), which establishes accounting standards for state and local government promulgated a similar reporting requirement. The aim is transparency - to make taxpayers, state and municipal governments, and public sector employees, aware of the financial commitments being made each year. Trading reductions in current wages for future retirement benefits has seemed like a good deal for employees and an appealing kick-the-can-down-the-road approach for government. But now that the true cost of this Faustian bargain are becoming clearer it is rapidly becoming much more difficult to use accounting flim flam to balance budgets.

The second recommendation made by in the Massachusetts report is similar to the Wisconsin proposal, though presented in more moderate language:
"One of the most important steps to control the costs of municipal health care for both employees and retirees is to give local officials the authority to change plan design outside of collective bargaining. Unlike the state and private sector employers, municipal officials' hands are tied by having to go through collective bargaining to make even minor plan changes. The result is overly rich plans..."
In my view, municipalities should not be in the business of providing retiree health benefits. We have an excellent, and highly popular federal program to do that. Neither municipalities nor unions are experts in insurance management, and requiring each venue to manage retirement insurance creates avoidable administrative overhead. Retiree care is the business Medicare is designed for, and we should let it do its job.

(My information about FASB and GASB comes from Paul Fronstin's excellent report - "Implications of Health Reform for Retiree Health Benefits" - published by the Employee Benefit Research Institute.)

1 comment:

jamzo said...

a lot of energy in the political narrative is gained by using raw numbers to incite fear, doubt and uncertainty

re: public pensions you ought to check out dean baker paper (

WAPO columnist ezra klein says " Baker warns that the dire talk of trillions in unfunded liabilities mainly confuses people. "The relevant context is the size of the projected shortfalls relative to the size of the state economies," he writes. Using data from the National Association of State Pension Fund Administrators -- which show a shortfall of about $650 billion over the next 30 years -- he calculates that the states are looking at funding gaps that range from 0.2 percent of their economies to 0.5 percent. Not nothing, but not an unmanageable crisis. The only way it becomes an unmanageable crisis is if the economy never recovers and thus the rates of return end up lower than we would expect and state economies end up smaller than we expect. But in that case, state pensions will be the least of our problems.: