Md. benefits loom large

State's health care bill for retirees now estimated at $20 billion

October 22, 2005|By ANDREW A. GREEN | ANDREW A. GREEN,SUN REPORTER

Maryland has promised its current and future retirees $20 billion in health care benefits, a staggering figure that could put leaders in Annapolis under intense pressure to divert as much as $1.9 billion a year from other programs or risk losing the state's coveted AAA bond rating, according to a report due out Monday.

Warren Deschenaux, the longtime chief fiscal analyst for the General Assembly, who has written a summary of the report for legislators, said yesterday that those costs are significantly larger than initial estimates of a $3 billion liability. Other legislative staff who read the report confirmed its contents.

State Budget Secretary Cecelia Januszkiewicz and a spokesman for Gov. Robert L. Ehrlich Jr. declined to comment until the formal release of the report, which the administration commissioned to prepare for an accounting change that goes into effect in 2007.

The $20 billion liability is nearly twice as large as the state general fund budget, and the cost to fully prepare for these long-term expenses would more than wipe out the current surplus and deepen the deficits projected for coming years.

"That is a huge number," said Sen. Ulysses E. Currie, the Prince George's County Democrat who chairs the Budget and Taxation Committee. "With Medicaid growing about seven or eight percent a year, K-12 education going up, higher education going up, the dollars are just not there for the state, and I don't believe for any state, to take on that."

Deschenaux said, however, that the state could take steps to mitigate the impact on the budget by setting aside money now.

Maryland, like most other states, now pays for those benefits on a year-by-year basis, but increasing life expectancy, the retirement of baby boomers and the rapid growth of health care costs mean that those annual contributions, now about $300 million, are likely to go up drastically in the future.

To make sure states' balance sheets reflect their promises to retirees and workers now employed by the states, the non-profit Government Accounting Standards Board decided last year to require governments to report the size of their commitments, starting in 2007. The figures count costs not only for current retirees but also for future retirees.

An actuarial analysis of Maryland's commitments is scheduled to be formally released to legislators on Monday, and state budget leaders said they are just beginning to grapple with its implications, which are magnified by the fact that the state is also considering increasing its set-asides for future pension benefits.

If the state begins setting aside money for health care now, the costs could become somewhat less daunting, Deschenaux said. By establishing a trust fund, the state could earn substantial investment income and effectively reduce its long-term liability to $13 billion and the annual cost to pre-pay for the benefits to about $1.4 billion instead of $1.9 billion, Deschenaux said.

"The difference is between twice our general fund revenue and one time our general fund revenue in our liability," he said. "It's very sizable in any event, but when you get in the realm of one time our general fund revenue, you can begin to put your head around it."

Similar financial pressures have crippled private employers such as Bethlehem Steel and General Motors as they have tried to keep their promises to an ever-expanding number of retirees. Advocates for the state government's 42,000 eligible retirees said they worry that Maryland will react the way private sector employers did when faced with similar costs - by cutting benefits.

"The size of it is astounding. It's about twice or three times as large as I thought it would be," said Steven Kreisberg, a collective bargaining director for the American Federation of State, County and Municipal Employees who has been following the issue nationally.

Wall Street's bond rating firms have already signaled that they will look at those liabilities as debt and could downgrade states' credit ratings if they don't act to set aside money or contain costs.

Maryland is one of just seven states with an AAA bond rating, the highest awarded, a recognition of the state's strong financial position that saves taxpayers millions in interest costs on the bonds used to pay for new roads and schools.

"$20 billion, by any measure, is a large number," said Parry Young, a director in the public financing department of Standard and Poor's, one of the major bond rating agencies. "And $1.9 billion to fund it, that's another big number. ... When we get the actual results of the valuation, then we'll have to study it and see how it fits into the rating."

The demands of bond rating agencies are likely to be taken seriously in Maryland, where politicians consider the AAA bond rating a sacred trust.

"A primary concern has to be that we have a AAA bond rating," Senate President Thomas V. Mike Miller said. "We don't want to do anything to jeopardize that."

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