NYC has been quietly accumulating unfunded liabilities that have now thrust the city into the “imminent bankruptcy” club. Here’s John Rubino to explain…
The “public pension crisis” is the kind of subject that’s easy to over-analyze, in part because there are so many different examples of bad behavior out there and in part because the aggregate damage these entities will do when they start blowing up is immense.
But most people see pensions as essentially an accounting issue – and therefore boring – so it doesn’t pay to go back to this particular well too often. Still, New York City’s missing $100 billion can’t be ignored:
(Bloomberg) – New York City faces future health costs for its retired workers of $103.2 billion, an increase of $40 billion over a decade. It has about $5 billion set aside to pay the bill.
The so-called “other post-employment benefits” liability was disclosed in New York’s comprehensive annual financial report released by the city comptroller’s office Wednesday. The city’s $98 billion unfunded liability for retiree health care exceeds the city’s $93 billion of bond debt and $48 billion pension-fund shortfall.
“The numbers are huge,” said Maria Doulis, a vice president at the Citizens Budget Commission, a budget watchdog group funded by the business community. “If you’re looking at the big three liabilities, this is the one that’s problematic, because there’s nothing set aside to address this and there’s absolutely no strategy on the part of the city.”
New York, the most populous U.S. city, has almost 300,000 current employees and is responsible for more than 230,000 retirees and their beneficiaries. City employees with 10 years of service qualify for free retiree health care.
The city’s post-employment benefits include health insurance, Medicare Part B reimbursements, and welfare fund contributions. Medicare Part B covers doctors’ services that are received from a federally approved facility or a medical practice. Welfare funds are administered by unions and provide supplemental benefits such as prescription drug, vision and dental coverage.
New York City should address its retiree health-care costs by requiring beneficiaries to share the cost of premiums for health insurance, eliminating the reimbursement for Medicare Part B and reducing contributions to the welfare funds, according to the CBC.
“Forget the private sector, this free retiree health insurance is not a benefit offered in the public sector,” said Doulis. “They’re not taking up that challenge. Limiting the growth and cost of retiree health insurance has not been on the agenda.”
Unlike debt, which is limited by statute, nothing restricts the level of retiree health liabilities.
Money set aside for retiree health benefits has been used as a rainy-day fund by mayors during times of fiscal stress, said Doulis. The $5 billion the city currently has set aside is projected to last until 2026. After that, the city will fund benefits on a pay-as-you go basis. The city paid $2.6 billion in retiree health benefits last year.
Let’s look at the highlights:
“The city’s $98 billion unfunded liability for retiree health care exceeds the city’s $93 billion of bond debt and $48 billion pension-fund shortfall.” Which means the retiree health care deficit is in addition to the pension shortfall. These are separate problems totalling nearly $150 billion – for one city.
NYC’s retiree health care unfunded liability rose by $40 billion in the past decade. But, “It has about $5 billion set aside to pay the bill.” So two years of just the increase in this liability wipes out the money on hand to pay it. That sounds like a cash flow rather than an accounting issue.
“New York … has almost 300,000 current employees and is responsible for more than 230,000 retirees and their beneficiaries.” There must be a ratio of employees to retirees where the numbers stop working and the system breaks down. 1-to-1, which NYC is approaching, has to be near that boundary.
“City employees with 10 years of service qualify for free retiree health care.” That has to be a typo, because if it’s not, public sector workers have cut themselves a deal that we in the private sector can only dream of. Historians will have a field day with this one.
The point? While Chicago and California hog the “unfunded pension liability” spotlight, it turns out that good old New York City has quietly been accumulating unfunded liabilities sufficient to make them members in good standing of the “imminent bankruptcy” club.