Unfunded liability could be costly for state taxpayers

By Steve Kanigher

Saturday, July 2, 2005 | 12:01 p.m.

Lost in all the talk this year about a state budget surplus and the need for a taxpayer rebate was the revelation that Nevadans may have to spend an additional $200 million a year for 30 years to settle an accounting problem.

That cost, the equivalent of eight new middle schools annually, would be borne without any new or additional government services.

The problem is the unfunded liability for health care premiums for current and future state and local government retirees in the Public Employees' Benefits Program.

An unfunded liability occurs when a promise is made to fund a program in the future -- in this case paid health care benefits for retired government employees -- without setting aside money to cover those future payments.

The state has only set aside enough money to help pay for retirees' health care premiums for the next two years. Because the 8,241 currently enrolled retirees and 24,223 current state government employees have been promised health care benefits through the state program, the unfunded liability is the money taxpayers will have to pay beyond the next two years.

A report prepared for the state by Aon Consulting of San Francisco estimated in April that the unfunded liability over the next 30 years would total $1.75 billion to $4.44 billion, depending on how retiree benefits are funded. The report has been used by Gov. Kenny Guinn's administration to argue that measures must be taken to reduce the liability.

"The unfunded liability is cumulative, and a 1 percent change in health care inflation over 30 years could add a half-billion dollars," Michael Hillerby, Guinn's chief of staff, said. "When these health care plans for retirees were created years ago people weren't living as long and health care didn't cost as much.

"This is the single largest liability we have ever had on our books. When you're in a hole this deep, we believe you should stop digging."

Not convinced

But Danny Coyle, a state Transportation Department retiree from Carson City, said he wasn't convinced of the accuracy of Aon's calculations, which relied on factors such as mortality rates and projected health care cost inflation. Coyle's take is that while an unfunded liability exists, it may not be as bad as the state implies.

"Those actuaries always pretend they have a crystal ball, but how do they know for sure what the unfunded liabilities will be?" Coyle said.

To significantly reduce the unfunded liability over a 30-year period while also paying current retiree benefits, Aon estimated that taxpayers would have to spend $119 million to $223 million a year, again depending on the funding method.

Nevada taxpayers are spending only $23 million on retiree health care payments this year, meaning they would have to cough up an additional $96 million to $200 million annually to continue making those payments while also reducing the unfunded liability.

Retiree Bea Levinson of Las Vegas, who was an appeals referee in the state employment security division, has no complaints about her health care plan but worries about the cut in benefits that could occur because of the unfunded liability.

"How they try to follow up will depend on the makeup of the next Legislature and who the next governor will be," Levinson said.

State officials say the unfunded liability is already one of Nevada's most serious financial dilemmas.

It is an issue that a legislative committee intends to address later this year, and it has become so worrisome to Guinn that he is preparing to tackle it through a separate task force.

A legislative committee, formed in 2003 by Assembly Concurrent Resolution 10 and chaired by Assemblywoman Chris Giunchigliani, D-Las Vegas, has been studying ways that the state can improve its group health insurance programs for public employees.

The bipartisan committee, which includes six lawmakers plus union officials, retirees and insurance experts, plans to make recommendations to the 2007 Legislature.

"We want to make sure that everyone has access to health care and that there is competition among the providers," Giunchigliani said. "We want to make sure that the plan provides good, preventive-based health care and also reduces the unfunded liability."

The state has known about the unfunded liability for years. But it hasn't made any progress toward reducing the liability because of the treacherous politics involved.

On one side are taxpayers who either don't want to spend more money or don't want a reduction of government services.

Tax dollars

"There is only 'X' amount of tax dollars, and most people who pay taxes expect to see goods and services," Carole Vilardo, Nevada Taxpayers Association president, said. "It's not that people don't want to provide benefits to workers, but the way we have provided these benefits will have to be changed.

"There will come that time when the unfunded liability will have to be faced square in the eyes. If it isn't addressed, the state won't be able to provide the same level of goods and services without raising taxes."

On the other side are unionized public employees who are fighting against reduced health care benefits. This is particularly true of state employees who have said that government-funded health care benefits help make up for the fact they receive less pay than many equivalent city or county workers.

"It is a very serious issue, which is one of the reasons we pushed for the ACR 10 committee," member Scott McKenzie, Nevada Employees Association executive director, said. "We saw this unfunded liability problem coming. But we don't want to see benefits cut altogether. We want to see if there is a reasonable solution."

As it is, John Van Vactor of Las Vegas, a UNLV emeritus professor of education who retired in 1995, is having to withstand a big spike in the amount of money he must pay each month so that he and his wife can continue to receive health care under the state program.

In 2000 he was paying $83 a month. Beginning Friday, his monthly payment became $358.24 for the couple to be enrolled in a Preferred Provider Organization plan.

"When I retired I was under the assumption that the cost to me would remain about at the level it was, but the prices have gone up quite a bit," Van Vactor said. "The amount I pay this year will probably cost us a trip to California or a piece of artwork."

Closer attention

Nevada and the other 49 states must pay closer attention to their unfunded future health care expenses for retirees because of a rule adopted last year by the nonprofit Governmental Accounting Standards Board of Norwalk, Conn.

The board, which is hugely influential among state finance decision-makers, establishes accounting standards for the annual financial reports that state and local governments file for auditing purposes.

The new rule will require the states beginning in fiscal 2007 to report unfunded future liabilities for retiree health care benefits. But Forrest "Woody" Thorne, Public Employees' Benefits Program executive director, said the rule's effect on Nevada remains unknown.

"All states will be in the same boat," he said.

The reports are read on Wall Street by bond-rating agencies to determine the financial health of state and local governments. A state with a healthy financial outlook will earn a high bond rating.

That means that when the state wants to borrow money for a public works project through bonds, it will pay the lowest interest permissible at a savings to taxpayers. A state with a lower bond rating is forced to borrow money at higher interest rates, making projects more expensive.

If a state shows that it has large unfunded liabilities but is doing little to address them, a bond-rating agency may downgrade its rating. At least that's the fear among Nevada officials.

"That's by far and away the biggest potential impact of this," James Wells, Thorne's accounting officer, said. "But because a lot of governments have problems with unfunded liabilities, the impact on Nevada will be relative."

The state has had an AA rating from Standard & Poor's for decades, below the top-notch AAA rating but still considered very good.

"What bonding agencies will do is to ask, 'What have you done to deal with the liabilities?' " Hillerby said. "They'll ask, 'What have you done to quit digging a hole?' "

Guinn attempted to address the unfunded liability issue this legislative session through Senate Bill 484. The bill wouldn't have reduced the unfunded liability for current retirees or for future retirees who are currently employed by state or local governments.

But it would have saved taxpayers an estimated $500 million over the next 30 years by providing that any state or local government employee hired after July 1, 2006, would not receive paid health care benefits when they retire.

"We supported SB484 because new state employees still would have been eligible for group health insurance rates when they retire," Vilardo said. "We don't believe in changing the ground rules for current employees who were hired with the expectation that they would receive health care benefits when they retire."

SB484 passed the Republican-controlled Senate on a party-line vote, with Democrats complaining that the bill would make it more difficult to recruit individuals to work for the state. The measure died in the Democratic-controlled Assembly.

The state employees union, which has 4,000 members, cheered SB484's demise. Coyle, past president of the union's retiree chapter, said it was looking out for future employees because they are potential union members.

"We wanted to protect them," Coyle, also northern regional director, said. "If we don't offer benefits to these employees, they will go somewhere else."

The bill's defeat clearly disappointed Guinn.

"I don't think taxpayers will sympathize when we say that the state can't make ends meet because of the unfunded liability," Hillerby said. "This was an attempt to not make the unfunded liability any worse.

"The argument that this bill would have put the state at a recruiting disadvantage was just a knee-jerk reaction. People aren't going to get this benefit in the private sector, and it has all but disappeared elsewhere in the public sector."

Potential solution

Another potential solution is a private health insurance account, where a future employee can defer and invest a portion of his paycheck so that he can afford health care when he retires.

A variation proposed by McKenzie would be for the state to create a retirement health care account by putting one-time state money into a fund, letting the fund accrue interest, and allowing future employees to opt into the program voluntarily through paycheck contributions.

Consideration has also been given to lumping as many state and local government employees as possible into a new program that would attempt to get more competitive bids from health care providers.

"The idea is to put all public employees under one fund so that the more participants you have, the more you can spread the insurance risk," Coyle said. "Putting everybody into one plan would mean more buying power when it comes to pharmaceuticals."

Fellow retiree Jeanne Adams of Las Vegas said a big problem with the health care program is that it is not equipped financially to handle spikes in retiree claims to cover major medical expenses. Adams is southern regional director of the state union's retiree chapter.

"What they need is a rainy-day fund so that if you get hit with big claims, the fund will stabilize the program," Adams said.

Some local governments already participate in the state plan. The difference is that when a local government retiree participates in the state plan, the local government agency -- not the state -- helps pay for his health care premium.

Some local government employees, such as police officers and firefighters, have gained separate retiree health care benefits through their collective bargaining agreements.

Retired professor Van Vactor said he has no problems with the health care programs the state offers.

But he does not believe it will be as easy for retired clerks and janitors as it will be for him to afford potential future out-of-pocket increases in health care costs that could occur as the state deals with its unfunded liability.

"I question some of the planning that has led to this, but there is nothing I can do about it," Van Vactor said.