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Retired Health Care Liability
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FY09 House 2 Budget Recommendation:
Issues in Brief
Deval L. Patrick, Governor
Timothy P. Murray, Lt. Governor
In August of 2004, the Government Accounting Standards Board (GASB) issued Statement 45, which directs government entities to identify future costs of providing post employment benefits other than pensions (OPEB) to their workers. The accounting change reflects increasing recognition of the rising costs to provide these benefits, primarily health care insurance, and the need for adequate reserves to meet this expense. This liability is similar in nature to the Commonwealth's liability for paying retiree pensions, for which the Commonwealth has already adopted a funding schedule to eliminate the unfunded future pension liability by 2023.
An actuarial valuation completed in June 2006 shows the Commonwealth's unfunded OPEB liability currently stands at $13 billion, and the rising cost of health care suggests that these obligations are likely to increase. If the Commonwealth takes proactive action to pre-fund these benefits, the liability could be cut to $7 billion.
Progress in 2008
The Executive and Legislative branches have been working collaboratively this year to develop a short and long term strategy for addressing the Commonwealth's OPEB liability.
The State Retiree Benefits Trust Fund was created this year, and in FY08, spending for current retirees' healthcare will occur from the trust fund, helping to consolidate the state's retiree funding efforts and better project future liabilities. In FY08, the Trust Fund will benefit from a one-time transfer of approximately $400 million from the former Health Care Security Trust, which will be abolished on June 30, 20081. Any monies in the trust fund will be managed and invested by the Pension Reserves Investment Management (PRIM) Board. The Administration anticipates that the Trust Fund will enjoy the same generous return that other PRIM investments achieve.
The FY08 GAA established the Special Commission to Investigate and Study the Commonwealth's Liability for Paying Retiree Health Care and other Nonpension Benefits (Special Commission). The Special Commission, including representatives from the Executive, Legislative, and Constitutional branches, has worked to better understand the Commonwealth's long-term liability and is preparing to offer recommendations to appropriately fund the obligation.
Note - The recommendations of the special commission may include some clarifying language for the items previously proposed.
Governor Patrick's FY09 budget recommendation continues the Commonwealth's efforts to address its OPEB liability.
FY09 H.2 recommends continuing funding current retiree healthcare costs from the State Retiree Benefits Trust Fund, transferring $382 million to the Trust to meet projected expenses. While funding current retiree costs from the Trust does not directly reduce the Commonwealth's OPEB liability,
consolidating retiree spending will help the Special Commission and other stakeholders to better project the Commonwealth's long term obligation.
While continuing to fund current retiree liability from the Trust Fund, the Governor's FY09 H.2 recommendation proposes changes in active employee premiums while continuing to offer comprehensive coverage to 80,000 state employees. The proposal, which reflects employee contributions tied to annual salary, saves the Commonwealth over $50 million in FY09. Reducing the state's obligation for active retirees will reduce the Commonwealth's OPEB liability.
The Governor's budget recommendation again proposes a phased-in approach to direct tobacco settlement funds to the State Retiree Benefits Trust Fund. Under the plan, by fiscal year 2012, 90% of all tobacco settlement funds (approximately $255 million annually) will be directed to the Trust Fund. The remaining 10% of the settlement funds will be deposited in the General Fund to support ongoing smoking cessation and health care initiatives.
The Administration is anticipating that the Special Commission will release its report shortly that outlines options and the Commission's recommendation for addressing the Commonwealth's obligation. Governor Patrick is committed to working with the Commission and other experts to implement the recommendations.
Recognizing that the Commonwealth would continue to benefit from the Commission's analysis and input, the Governor's FY09 H.2 recommendation includes $200,000 to continue to fund the Special Commission to Investigate and Study the Commonwealth's Liability for Paying Retiree Health Care and other Nonpension Benefits. The Administration anticipates that the Commission will be an invaluable resource in continuing to identify strategies for funding the liability, and determining the appropriate process for revaluation.
1 Ch 61; Section 54 Acts of 2007 (FY08 GAA)
Prepared by the Executive Office for Administration and Finance • Rooms 373 & 272 • State House
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