Building on the success of municipal health reform, the Legislature has an important opportunity in 2013 to address the issue of retiree health care liabilities that threaten to strangle the finances of cities and towns in Massachusetts.
Unfunded municipal retiree health care liabilities total approximately $30 billion statewide, dwarfing the $13 billion in unfunded local pension liabilities. These unaffordable obligations are the direct result of Massachusetts cities and towns providing some of the most generous retiree health care benefits in the country without setting aside money to pay for them. While the vast majority of private sector workers in Massachusetts have no access to employer-sponsored retiree health care at any age, municipal employees are eligible for full, lifetime benefits at age 55 after just 10 years of service. Furthermore, virtually all municipalities contribute at least 50 percent toward premium costs, with many contributing 75 percent or more.
If not for the enormous success of the 2011 municipal health reform law, these liabilities would be even higher. Scores of communities have taken advantage of the law to save $200 million statewide during just the first year of implementation, with more savings to come. While municipalities can achieve modest retiree health care savings through this reform, it fails to address many key cost drivers, such as eligibility and the share of premiums paid by the municipality.
Recognizing that the existing retiree health care system is unsustainable, the state created a commission to examine retiree health care reforms. The commission recently released a set of recommendations endorsed by the governor that would lower unfunded municipal liabilities by approximately $5 billion, from $30 billion to $25 billion. This is an important first step, but only the most affluent communities will be able to afford retiree health care benefits without additional reforms.
The strongest recommendations change eligibility for benefits from age 55 with 10 years of service to age 60 with 20 years of service and pro-rate benefits based on years of service. As such, an employee with only 10 years of service would no longer receive the same benefits as one with 30 years of service. In addition, part-time workers would receive only part-time credit toward minimum-years-of-service requirements, unlike now when a part-time employee is eligible for lifetime benefits after just 10 years of part-time service.
The commission recommends applying these changes to a large share of current employees and all future hires, but protects current retirees and those active employees close to retirement. Even with these adjustments, municipal employees will enjoy far more generous benefits than their private sector counterparts, who in most cases have no employer-sponsored retiree health care benefits.
However, the commission also made a troubling recommendation to prohibit municipalities from adjusting how much they contribute toward premiums once an employee retires. This would strip municipalities of their primary tool to control costs for retirees, and any provision that permanently binds municipalities would be shortsighted. Municipalities have power under existing law to change their contributions for existing retirees, and this authority is critical for many municipalities that otherwise would be forced to make cuts in services. Furthermore, current and future retirees already receive major protections through other commission recommendations.
Underscoring the urgency of retiree health care reform is the fact that municipalities are facing a long-term fiscal squeeze, with their personnel costs growing faster than revenues. Unlike previous recoveries, the state will not be in a position to increase local aid in a significant way for the foreseeable future. Just as the Legislature and governor acted on municipal health care and pensions in 2011, they must act to address retiree health care in 2013 to help ensure the long-term stability of the state’s 351 cities and towns.
Michael J. Widmer is president of the Massachusetts Taxpayers Foundation.