Some U.S. localities could go bankrupt; cuts in services likely

Richmond Times Dispatch (Virginia)
September 25, 2006 Monday

SAN FRANCISCO

The bill is coming due for years of generous benefits bestowed upon the nation's public employees, and it's a stunner. The amount is hundreds of billions of dollars over the next three decades, threatening some local governments with bankruptcy and all but guaranteeing cuts in services such as education and public safety.

This staggering burden is coming to light because of new accounting rules issued by the Government Accounting Standards Board. They require public agencies to disclose the future cost of health care and other benefits - such as dental, vision and life insurance - promised alongside traditional pensions to the nation's estimated 24.5 million active and retired state and local public employees.

Retiree health-care costs have been quietly mounting for decades while agencies have passed out generous retirement benefits during labor talks, often in lieu of salary increases. But government negotiators rarely considered the long-term consequences of such perks, according to Brian Whitworth, a retirement benefits specialist with JP Morgan Chase and Co.

"A surprising number of public entities didn't even make informal estimates of long-term costs," he said.

Many cities and state agencies already are struggling to fully fund their pension obligations, but experts say those liabilities pale in comparison with the debt accumulated for other retirement benefits.

Last month, JP Morgan released what it considers the most comprehensive preliminary estimate. It projects the present value of unfunded health-care and other nonpension benefits at between $600 billion and $1.3 trillion.

By comparison, the debt rating agency Standard and Poor's estimates the country's total unfunded public pension debt at around $285 billion.

"There's a good chance some government entities are going to go bankrupt," said California Assemblyman Keith Richman, a Republican. "But the issue isn't just bankruptcy, it's governments dying of a thousand cuts in services."

Union officials say it's not their fault municipalities put themselves in a hole by promising more than they can deliver.

"This is a monumental problem, and government is going to have to deal with it," said Steve Regenstrief, head of the retirement division at the American Federation of State, County and Municipal Employees.

The Richmond school system is one of many taking steps to cut its benefit costs. This summer the system cut health-care benefits to 1,450 former employees, all 65 or older. The school system assisted the retirees with finding alternate coverage. School system officials estimated savings of $4 million in fiscal year 2006-07.

The Government Accounting Standards Board is an independent nonprofit that establishes accounting standards for public agencies. Seeing a need to bring public-sector disclosure rules in line with those of the private sector, the board unveiled the rules change in 2004 and gave governments several years to implement them.

The new rules, which take effect in 2008, don't require governments to come up with the money right away, just to disclose the present value of these future costs and estimate how much more money is needed to pay for them.

So far, California, New York and Maryland appear to have the biggest burdens, but that could change when estimates begin trickling in from Florida, Texas, Illinois and Pennsylvania.