State to start addressing payment of retiree costs

$20 billion obligation revealed in report

October 25, 2005|By ANDREW A. GREEN | ANDREW A. GREEN,SUN REPORTER

Maryland's budget secretary said yesterday that the state's $20 billion obligation to retirees for their health benefits is far larger than she expected, but she said the administration will work with legislators, the treasurer and the comptroller to address the costs in a way that will safeguard the state's exemplary bond ratings.

Cecilia Januszkiewicz said a task force will begin meeting next month to plan how to address the costs, which states will soon be required to report on their balance sheets.

"The size of the number was a bit surprising to me, because the numbers I'd heard in the past were so much lower. People talked about this like a three- to five-billion-dollar obligation," she said.

"What we should do will be discussed at the task force, and I hope with all the good minds there we will come up with some good ideas," Januszkiewicz said.

Maryland's retiree health care liability was calculated for the first time in a report released yesterday by the Ehrlich administration in preparation for an accounting rule change that will force states in 2007 to list the benefits as liabilities on their balance sheets.

The report found a total obligation of more than $20 billion and projected an annualized cost of about $1.9 billion to fully fund the liability. If the state started setting aside money for these costs now, though, the totals would drop to a $13 billion liability and $1.4 billion annual cost because of interest earnings on the savings.

The report said nothing about whether inaction would hurt the state's good credit rating, but the major bond rating agencies have all issued advisories warning that if states do nothing to address these long-term costs, they could face consequences.

"An absence of action taken to fund [retiree health care] liabilities or otherwise manage them will be viewed as a negative rating factor," an advisory from Fitch Ratings Ltd. said. "Steady progress toward reaching the actuarially determined annual contribution level will be crucial to sound credit quality."

Maryland's liability, which depends mostly on the generosity of the benefits, is roughly comparable to Delaware's, but some states, such as Virginia, have far lower obligations. Other budget demands might make it harder for Maryland to handle the costs.

Pressure from credit rating agencies to start paying in advance for those liabilities comes at the same time that Maryland is considering greater pension benefits and a new method of funding them.

"All of them are big-ticket items, and all of them are really important," said Sue Esty, a spokeswoman for the American Federation of State, County and Municipal Employees, which represents government workers.

A report released this month by Delaware's secretary of finance, Richard S. Cordrey, found that state's liability to be about $3 billion. Per resident, that obligation is about $3,800, almost exactly the same as Maryland's figure.

But in an indication of how differently states will be affected by these costs, Virginia officials estimate their liability to be "substantially less than $1 billion," said Mike Salster, a spokesman for the Virginia Department of Human Resource Management. That amounts to about $141 per person.

Maryland has more to lose than most states. It is one of just seven with an AAA rating, which means that it pays among the lowest interest rates on the bonds that pay for schools and roads. Virginia and Delaware also have AAA ratings.

Stan Wisniewski, an economist who wrote a report on the issue for AARP, said retiree health benefits vary widely from state to state - and so will the liabilities states will have to report. Wisniewski said that although bond rating agencies have said they will pay close attention to these numbers, the liabilities shouldn't radically change how they view a state's finances.

"They may not have paid as much attention and they've not had all these numbers ... but it's not like all of a sudden it's going to be something they look at for the first time," he said.

andy.green@baltsun.com

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