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November 22, 2014

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Snowballing price tags threaten budgets, but cuts would cost, too:

State retirees’ health costs loom large

$14.3 million

Cost to the state to subsidize health benefits for retired state workers four years ago.

$36.6 million

Expected cost for benefits this fiscal year.

$3.3 billion

Total cost to continue subsidizing health benefits over the next 30 years.

For the past quarter-century the compact between Nevada taxpayers and government employees has been this: Work long enough for the state and when you retire, the taxpayers will subsidize your health benefits, often completely, for the rest of your life.

But with medical costs soaring and people living longer, that deal could have dire financial consequences for the state in the coming decades, deeply cutting into funds that pay for education, transportation and other basic services.

To continue subsidizing health benefits for retired state workers, Nevada will need to come up with $3.3 billion over the next 30 years, according to the state’s Public Employee Benefits Program.

Former Gov. Kenny Guinn calls the state retiree benefit plan “the leading item to be focused on in the next legislative session, due to the magnitude of the financial consequences it has on the state of Nevada.”

Four years ago the state spent $14.3 million to subsidize retirees’ health benefits. This fiscal year, the state expects to spend $36.6 million, and the cost will rise to $40 million next year.

That’s still a small percentage of the state’s overall $7.8 billion budget this year. But if nothing is done, the cost for retiree benefits would hit $200 million (in today’s dollars) annually in 15 years and $600 million a year in 30 years — money that could otherwise go to roads, schools, prisons and other programs.

Put another way, the $3.3 billion is nearly the amount of money the state estimates is needed to complete 10 major transportation projects in Nevada.

Recruitment problems

Possible reforms of the Public Employee Benefits Program face formidable political hurdles. Legislators say it already is difficult to recruit state employees and regard the benefit as a binding promise made to workers — even though they are legally allowed to change it.

But unless taxpayers want to spend more and more each year on retired workers’ health benefits — coverage that many nongovernment retirees are unable to afford for themselves and their families — experts say change is necessary.

Namely, the state will either have to start putting aside massive amounts of money for the future costs or consider reducing retirees’ benefits.

Nevada is not alone in grappling with retired government workers’ health benefits, a fact made clear by new accounting rules that compel governments to reveal those programs’ future costs.

“The vast majority of other states are in bad shape regarding those obligations,” said Richard Greene, co-author of a study conducted for the Pew Charitable Trusts’ Center on the States.

In Nevada local governments and their employees also face a question about retirement health care benefits. Legislation passed in 2003 allowed local government workers to join the state retirement system, and about 6,000 have. Legislation passed last year, though, cuts off that benefit for local government employees who do not retire by the end of 2008.

Most local governments have no plans to offer a subsidy, but will have to continue reimbursing the state for any of their employees who join the state retirement plan.

“At this moment, we’re headed to a national pressure point,” said Jane McAlevey, executive director of the Service Employees International Union Nevada, which represents Clark County employees.

She said losing the ability to let employees retire with health benefits could cause Southern Nevada governments to “face a serious brain drain.”

All of this underlines a central public policy debate: What do employees who work for government deserve when they retire?

Private sector makes cuts

The private sector has been slashing health benefits for retirees for at least two decades. In 1988, 66 percent of employers with more than 200 workers offered health benefits to retirees. By 2007 that number had dropped by half, meaning only about one in three large private companies now offers health benefits to its retirees, according to the Kaiser Family Foundation.

In contrast, 80 percent of state and local governments last year offered health benefits to retirees, according to Kaiser.

So while private sector workers have seen their benefits cut even as costs rise, Nevada state employees who retire after 20 years pay little or no premium for their health benefits.

“At some point, citizens will be asked to pay more taxes to provide these benefits, and these citizens won’t have the ability to pay for these benefits themselves,” said Carole Vilardo, president of the Nevada Taxpayers Association.

The state subsidizes retired workers based on years of service. An employee who retires after 20 years, for example, pays nothing for health insurance, but one with 15 years’ service must pay $125 a month for a health plan.

Private companies long ago foresaw the increasing costs of providing benefits for retirees. Beholden to shareholders and the bottom line, the companies began rolling back that benefit, said Katherine Barrett, co-author of the Pew study.

“There has been a very gradual ebbing of health benefits from companies,” she said.

Market forces pressing in

Until recently governments did not have to report future health coverage costs. And because governments are not in the business of making money, they are often slow to respond to market forces such as rising health costs and people living longer, said Jonathan Williams, director of tax and fiscal policy for the American Legislative Exchange Council, a think tank that favors limited government.

“A lot of folks in government service don’t think they need to respond,” Williams said. “But government ought to share in the sacrifice during economic downturns, the same as businesses. They should not be exempt from sharing the pain.”

State workers, unions and their legislative allies acknowledge that the divide between public and private benefits has been widening. But with an already high number of uninsured in the state, they reason, government shouldn’t contribute to the problem.

“It would not be in the state’s interest to cut off people’s health insurance,” Sen. Dina Titus, D-Las Vegas, said. The uninsured are forced to go to high-cost providers such as emergency rooms to get health care.

“If you squeeze the balloon in one place, it has to come up someplace else,” she said. Nevada’s predicament, she said, highlights why there should be a “national solution” to address health care.

Many retired state employees, however, could buy their own private insurance or rely on Medicare once they qualify. Currently, when retirees qualify for Medicare, the state plan supplements that coverage.

But state workers say their salaries are, in some cases, lower than those in the private sector. Health benefits and pension plans give employees an incentive to take government jobs and stay.

Indeed, the health insurance subsidy was born in 1983, when the state could not afford to give state employees a raise, said Roger Maillard, president of the retiree chapter of the American Federation of State, County and Municipal Employees Local 4041, which represents state workers. Instead, the state offered to subsidize health care when employees retired.

Changing those benefits now, Maillard said, would be changing the rules midgame.

“If you give something up, you never get it back, and in about five minutes the public will forget employees ever gave something up,” said Maillard, who retired more than a decade ago after working for 30 years for the state.

Maillard, a database administrator, said he could have made more in the private sector with his work in computers. But he stuck with the state job for the stability and the benefits. Without those benefits, he and others said, the state would have a hard time recruiting workers.

State employees earn significantly less than city and county employees, said Dennis Mallory, chief of staff of the state workers union.

Sen. Bob Beers, R-Las Vegas, a frequent critic of government employees’ compensation, said the state has an obligation to provide health benefits for retirees who don’t qualify for Medicare. State employees hired before 1987 did not pay into Medicare and don’t qualify.

“They worked for us, and very clearly, they’re dependent on the good will of their employer, who are the people of this state,” he said. “After that, it gets murkier.”

So far, he said, there is a lack of awareness about the growing financial strain to the state among constituents that would force legislators to take action.

“There’s probably a disbelief that we are going to be held accountable,” Beers said. “Really, it was little more than an arcane budget committee item in the last session. At some point, we’re going to have to have a public policy debate.”

Some ideas already are out there.

Proposals going nowhere

In 2005, Guinn proposed cutting off the promised subsidy for new hires, but that idea has not gained traction in Carson City. Senate Majority Leader Bill Raggio, R-Reno, said although the Senate was inclined to consider that option, the Assembly, which has a Democratic majority, was not.

Assemblyman Marcus Conklin, D-Las Vegas, the assistant majority leader, said he is worried about how changing retirees’ health benefits might affect Nevada’s ability to recruit workers.

“If you take the benefit out all the way, for the lowest-paid government employees in the state, you’re going to have recruiting costs, training costs,” Conklin said. “It’s already tough to find people to fill jobs.”

So what should the state do with the 26,500 employees, including those at universities, and the 7,100 state retirees already in the benefit system?

Legislative leaders from both parties have failed to present specific proposals to address the state’s unfunded liabilities.

Recently, troubling signs have emerged for governments that have failed to address the retiree questions.

‘Difficult choices’ ahead

Vallejo, Calif., outside San Francisco, was on the brink of bankruptcy in part because of ballooning costs for police and firefighter retiree benefits. A last-minute deal averted bankruptcy, but the city of 120,000 still faces service cuts.

In New Jersey, Gov. Jon Corzine has proposed eliminating 3,000 state workers and drastically raising tolls on highways, in part because of health benefits and pensions promised to retirees.

And federal auditors presented a report to Congress this year that warned many states have failed to set aside enough money for retiring employees’ health costs. It urged changes that will require “difficult choices” in public policy.

States across the country have promised at least $2.73 trillion in pension, health care and other retirement benefits for state employees, according to the Pew survey.

Only recently have new rules required governments to account for the bills for health care costs for retirees. Some think that if questions about how to fund the future costs are left unanswered, Wall Street lenders could take notice and borrowing money could become more expensive.

“It’s important to put into perspective that this is a national dilemma,” Pew study co-author Greene said.

State setting money aside

Nevada is among the state governments that have begun to set aside money for their retiree plans. Last year the Legislature accepted Gov. Jim Gibbons’ proposal to set aside $28 million this fiscal year and $25 million next year to pay for future costs. That money will be invested and used i to reduce yearly costs.

“Gov. Gibbons did that with the understanding we’d have to come back and look at the benefit package,” said Andrew Clinger, the state’s budget director. “We’ll be looking at this from a policy standpoint, to see if this is something that we can continue to afford to provide.”

The Idaho Legislature is considering legislation that would remove retired state employees from the state plan once they become eligible for Medicare.

Nevada state staffers, led by Leslie Johnstone, director of the Public Employee Benefits Program, have prepared detailed analyses on the potential effects of policy changes. The possible changes being reviewed include eliminating benefits for new hires, requiring more years of service before government employees qualify for the health coverage and reductions in or caps on the subsidy.

Assemblyman Conklin said “everything is on the table.” Beers, like others, expects decisions to be made by the 2009 Legislature.

Today, however, it is easier to find people against possible remedies than it is to find anyone advocating specific fixes. Still, experts say one thing is clear: Something will have to be done.

“If you don’t do anything, eventually the costs of supporting these post-retirement health care benefits will drive out the capacity to pay for other things citizens hold important, like education, highways, bridges,” Greene said.

“And the longer you let the bill sit on the desk, the more expensive this is going to be.”

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