City workers who qualify for pensions are also eligible for lifetime health insurance coverage — a retirement benefit that has almost disappeared in the private sector. The estimated value of retiree health benefits promised to current and future city government pensioners is now roughly $90 billion, tipping the city’s overall financial balance sheet well into the red.
Like pensions, retiree health benefits are a form of deferred compensation — earned now and paid later. Yet unlike pensions, retiree health benefits are not prefunded by employer and employee contributions to pooled investment trust funds.
The bill is treated as an annual pay-as-you-go expense, meaning it’s shifted from past to present and (mainly) future taxpayers.
The annual cost of health insurance premiums for former city workers has doubled in the past decade and now exceeds $2 billion, roughly equalling what the city has deposited into a trust fund that is supposed to cover the expense.
While the vast majority of city pols have been content to ignore this huge unfunded liability, Councilman Daniel Garodnick deserves a lot of credit for at least calling attention to it. Unfortunately, the remedy he proposed last week would represent little more than a symbolic nod in the general direction of fiscal responsibility.
Garodnick said he’ll propose a City Charter amendment that would require the city to put at least 5% of its annual retiree health insurance expense into the reserve fund. That would currently come to $105 million — which, Garodnick himself admitted, would amount to “spit in a bucket” but could grow over time.
He’d also allow the city to tap the reserve fund to prevent layoffs or service cuts “in times of city budgetary shortfalls” — which, experience suggests, can be expected to happen at least once a decade.
At this rate, the city would never catch up. Under current government accounting rules, reducing the unfunded liability with a truly “irrevocable” trust fund would cost billions of dollars a year that the city does not have. After all, the rising costs of pension fund contributions — up $7 billion since 2000 — already have been crowding out essential services.
There is a better way to strike a balance between preserving health coverage for municipal retirees while ultimately lifting an enormous burden off future generations of New Yorkers.
First, the city needs to restructure the benefits so future retirees pay at least half the premium, as is done in other major cities such as Chicago.
Second, instead of siphoning money into a city-controlled reserve fund that inevitably will be raided to balance the budget, New York should form a retiree medical trust, or RMT, run by and for employees.
An RMT would be similar to the voluntary employee beneficiary associations set up to provide retiree benefits to unionized autoworkers workers in the private sector. The public-sector variant has been increasingly popular in California, Oregon and Washington State, especially among police and firefighters.
For the city, it would offer predictable, affordable funding that eliminates long-term liabilities.
For employees, such trust funds are a way to preserve benefits that will otherwise be threatened by future fiscal stress.
Each RMT would be controlled and administered by its own board of trustees, which could be chosen solely by employees or their unions. Legally and financially speaking, the trust would be a separate entity from both the city and the unions.
The city and active employees would negotiate fixed-dollar contributions on behalf of active workers to the RMT, which would deposit the money in investment pools managed by advisers chosen by the trustees. Like a traditional pension fund, the trust would ensure regular benefit payments.
A truly innovative retiree health-care reform for city government will require courage and creativity. Now that Garodnick has broken the ice on this subject, will anyone skate on it?
McMahon is a Manhattan Institute senior fellow and president of the Empire Center for Public Policy.
