- The Washington Times - Sunday, September 24, 2006

ANNAPOLIS (AP) — Maryland added $100 million to this year’s budget to help pay future health care costs for retired teachers and state employees, but it was little money toward solving what could be a $20 billion problem.

New rules imposed by the Government Accounting Standards Board will require state and local governments across the country to change the way they account for health care costs in their employee-retirement systems.

The rules do not require governments to come up with the money immediately. But starting in 2008, they will have to estimate the current value of health benefits and how much money will be needed to pay for them in the future.

An actuary hired by Maryland to assess its liability came up with an estimate of $20 billion that could be paid off over 30 years under the new rules. With inflation and other charges, the state might have to kick in $1.5 billion a year or more to comply with the rules change. For comparison purposes, the total state budget this year is about $30 billion.

“Where in the world is Maryland going to get over $1 billion a year to put toward health care for retirees?” asked state Sen. Edward J. Kasemeyer, a Baltimore County Democrat and co-chairman of a legislative committee established to prepare for the changes.

Maryland is hiring a second actuarial firm to determine whether the $20 billion figure is accurate. The firm also will work with the special legislative committee on how the state can put more money into the retirement system to eliminate what is called an unfunded liability.

Maryland has about 87,500 state employees and about 100,000 retirees and their spouses in the pension system who are eligible for health insurance. In addition to retired state employees, the pension system encompasses public school teachers and a small number of local police and fire department retirees.

JP Morgan Chase & Co. projects an unfunded liability of $600 billion to $1.3 trillion for retiree health care and other non-pension benefits for retired government workers. Those are not new benefits but reflect the future cost of providing health insurance for retirees and current employees once they retire.

State and local governments generally have not shown those future costs as a liability on budget balance sheets.

Maryland pays medical bills for its retirees as they occur at a cost of about $300 million a year. The state could continue to operate that way under the new rules, but beginning in 2008, the annual state budget will have to begin reflecting the future costs as a liability.

Warren G. Deschenaux, the state legislature’s chief fiscal adviser, said failing to address the unfunded liability could lower the state bond rating. Maryland is one of a small group of states with a AAA bond rating from the major New York bond-rating houses, which allows those states to borrow at a preferred rate.

If the state does not begin to reduce the liability, the bond rating could be lowered, increasing the interest the state pays when it borrows hundreds of millions of dollars each year in the bond market.

“We can fund the liability just as these accounting rules would have us do, which would cost us a billion and a half dollars,” Mr. Deschenaux said. “Or we can start looking at the structure of our program, the benefits we provide, the ease or difficulty with which people qualify for those benefits.”

Mr. Kasemeyer said one way to reduce costs would be to scale back benefits. Under the current system, someone who retires after 16 years gets the same insurance coverage as an employee who worked 30 years. One option for saving money would be to reduce benefits for shorter-term retirees, he said.

Sue Esty, a lobbyist for the American Federation of State, County and Municipal Employees, said health care for retirees “is the top priority for us as public employees.”

“It’s one of the benefits that really helps compensate for low pay that public employees have had over many years,” she said. “Public employees have traded off other things in order to have their health insurance when they retire.”

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