Fiscal leaders recommend set-asides for state retirees

Extra for next two years would go toward health benefits liability


Annapolis fiscal leaders recommended yesterday that the state set aside an extra $349 million in the next two years to pay for retiree health benefits, a move that would keep Maryland's unfunded promises to its workers from getting worse but wouldn't put a dent in the state's $20 billion liability.

The Ehrlich administration was noncommittal about the plan, though Budget Secretary Cecilia Januszkiewicz acknowledged that Maryland faces a severe problem in figuring out how to pay for the benefits, which came to light this fall as a result of new accounting standards.

If the state does nothing, it could eventually lose its AAA bond rating, a coveted distinction of good financial management that saves taxpayers millions in interest costs on the bonds that pay for roads and schools.

Januszkiewicz, who abstained from the vote to recommend setting aside money, said making some extra payment for retiree health care "is certainly on the list" of things being considered by the administration as it makes final preparations for the fiscal 2007 budget. Tax revenues are coming in stronger than expected, but she said there are many demands on the budget, including school construction, education and possible changes to the state pension system.

"I can't tell you how it's all going to play out," she said. "It is under serious consideration, but that is not a commitment to do anything."

Starting in the fiscal year that begins July 1, 2007, all states will be required to list on their balance sheets the value of health care benefits they have promised to retirees, much in the same way that they account for pension benefits. The difference is that states, including Maryland, generally set aside money in advance for pension benefits but don't for health benefits.

Maryland pays for retiree health care on a pay-as-you-go basis, now a cost of about $300 million a year.

But, according to a study commissioned by the Department of Budget and Management, the state would have to spend $1.4 billion to $1.9 billion a year to cover benefits for retirees and those earned by current workers.

The plan approved yesterday by a committee consisting of legislators, Treasurer Nancy K. Kopp, Januszkiewicz and a representative of Comptroller William Donald Schaefer, would cover the costs of health care for current retirees as well as the benefits accrued by active employees each year. Because the reporting requirements don't kick in until the fiscal year after next, the state would only have to save half the usual amount for the next two years. In fiscal 2009, such a plan would cost $349 million, and the amounts would increase thereafter to keep pace with growing health costs.

Even so, it would do nothing to address the liabilities that have already built up. Essentially, it would prevent the state's situation from getting worse while a blue-ribbon panel that the committee recommended creating decides how to deal with the underlying problem.

"We have one of the higher liability numbers among the states, and we have more to protect than most of the states because of the AAA bond rating," said Warren Deschenaux, the General Assembly's chief fiscal analyst. "This doesn't by any means resolve the problem, but it is a way of getting a running start at it."

Parry Young, head of the public finance division of the bond rating agency Standard & Poor's, who spoke at yesterday's meeting, said analysts will consider a state's situation broadly, taking into account its financial plans for covering the costs as well as its legal flexibility to reduce or eliminate benefits.

"We're right at the beginning of this, and I think we need a lot more information, a lot more experience with what's going on with [health care] obligations before we take any action," Young said.

Few states have gone as far as Maryland in determining the size of their obligations, Young said. Most, though, appear to have much smaller liabilities than Maryland. Young said Maine has calculated its liability at $1.2 billion; Nevada, $1.8 billion; and Oregon, $400 million. He said Ohio's obligation is about the same size as Maryland's, but that state has prefunded about half of its liability. Michigan is in as bad or worse shape than Maryland, with a liability of $20 billion to $30 billion, he said.

Delaware conducted a study similar to Maryland's this fall and found an obligation of $3 billion, which is roughly comparable to Maryland's liability given the sizes of the two states' budgets.

Some states and local governments, which also are affected by the accounting rule change, are considering cuts to benefits to reduce their liabilities, and members of the committee discussed yesterday Maryland's legal ability to take such action.

Sue Esty, a lobbyist for the American Federation of State, County and Municipal Employees who attended the hearing, said she was concerned that the legislators were speaking openly about that option. But she said they also seem to take seriously their obligation to former employees.

Pay and pensions for Maryland government workers are low compared to their peers in other states, so benefits are crucial to attracting and retaining quality workers, she said.

"The promise of the health benefits is ultimately what gets people through the day," Esty said.

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