State's retiree benefit liability shrinks

Different assumptions, not Maryland's actions, cut figure by $5.5 billion

January 27, 2007|By Andrew A. Green | Andrew A. Green,Sun reporter

The good news is Maryland's long-term liability for retiree health benefits might not be nearly so big as the $20 billion lawmakers thought last year.

The bad news, actuaries told legislators yesterday, is the state is still on the hook for about $14.5 billion in benefits.

The change isn't because of any action the state has taken since a first set of consultants estimated a $20 billion liability last year, but rather because a new set of actuaries from Buck Consultants made different assumptions about how many retirees will be enrolled in the plans.

"This issue is a moving target, and I think we still don't fully understand and appreciate the implications for what this means to the state," said Sen. Ulysses E. Currie, the chairman of the Budget and Taxation Committee.

A decision three years ago by the nonprofit Government Accounting Standards Board means Maryland, along with state and local governments nationwide, will be forced for the first time to list the liability for the retirement health benefits it has promised current and former workers in the budget that begins July 1.

The state is not required to do anything beyond listing the liability on its balance sheet, but Wall Street bond rating agencies have indicated that they will treat the liability like any other debt and could downgrade the credit-worthiness of states that don't address their obligations.

Maryland is one of a handful of states with a AAA bond rating, a distinction that saves taxpayers millions in interest costs. The state put away $100 million last year as a down payment on addressing the costs, and Gov. Martin O'Malley has proposed setting aside another $100 million next year.

Some of the new assumptions the Buck actuaries made corrected what they thought were errors in the previous analysis, and in other cases they simply reflected different guesses about how many current workers will take advantage of the benefits.

Legislators who attended the briefing said they came away with a sense that the way states need to look at these liabilities isn't settled.

For example, a large part of the liability stems from prescription drug benefits, but the current standards do not take into account the Medicare prescription drug plan the federal government enacted in 2003.

"There's an awful lot of assumptions and rules we have not been advised of that we'll be able to work through and find creative ways to deal with this," said Del. Mary-Dulany James of Harford County, co-chairwoman of a committee that examined the issue. "We're going to have to stand up for ourselves and push back on some of these things."

Lawmakers and fiscal analysts said that if the state's ultimate goal is to maintain its bond rating, all it needs to do is handle the liability at least as well as other states do.

State Treasurer Nancy K. Kopp, who attended the briefing, said Maryland's liability does appear on a per-capita basis to be larger than in many other states. Some don't offer health benefits to retirees at all. Maryland got an earlier start in dealing with the problem than many states, Kopp said, but now they are catching up, meaning Maryland will have to take further action to maintain its fiscal position.

"I believe we are in good shape in terms of our bond rating," Kopp said. "But a lot of other A or AA [rated] states don't have programs, or don't have programs like ours, so it does mean [rating agencies] are going to be looking at us perhaps more critically than they have in the past."

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