A Health Benefit We Can't Afford: Retiree Medical Expenses Are Busting the City's Budget
Mayor de Blasio has touted his 2017 budget as a mix of “targeted investments in the city’s fiscal health” and the maintenance of “reserves that will help insulate us against uncertainty.”
But the city’s commitment to provide health care for retired public employees, now valued at $85.5 billion over the long term, runs counter to improving fiscal health and reducing uncertainty. The mayor’s plan is to focus on bolstering reserves for retiree health care. The more prudent course would be to work on phasing out the benefit entirely.
“De Blasio has not seriously tried to rein in health care benefits for retired workers. He has, however, increased the size of the city’s Retiree Health Benefits Trust Fund.”
Compared with private-sector norms, city employees get a far richer deal on health care in retirement. If city employees retire before 65, when Medicare kicks in, they remain on their existing plan and, in nearly all cases, pay zero premium costs. Once on Medicare, the city enhances retirees’ coverage through supplemental insurance and other subsidies.
Outside of the public sector, employer-sponsored retiree health care is fast disappearing. Over the last three decades, Kaiser Family Foundation surveys have registered a more than 40-percentage-point drop in the share of large U.S. companies that provide health coverage to active workers that also offer it to retirees.
To put the size of the city’s $85.5 billion liability in perspective, consider that you could eliminate the city Housing Authority’s maintenance backlog ($18 billion), build a new Port Authority Bus Terminal even at the grossly inflated estimate ($10 billion), a new Hudson tunnel ($10 billon) — and still have almost $50 billion left over.
In operating costs, the annual bill is more than $3 billion, surpassing the budgets for most city departments.
De Blasio has not seriously tried to rein in health care benefits for retired workers. He has, however, increased the size of the city’s Retiree Health Benefits Trust Fund. This was a pot of money set up under Mayor Michael Bloomberg to finance retiree health care on a “prefunded” basis, similar to how pension costs are managed.
The Great Recession prompted Bloomberg to drain that trust fund and spend the money elsewhere. Improved economic conditions have allowed de Blasio to bring funding levels up to $3.4 billion, a move that some have cited as evidence of our progressive mayor’s fiscal conservatism.
But debate over the wisdom of increasing the fund’s size has eclipsed the far more important question of why the city should be offering retiree health care in the first place.
It doesn’t need to offer the benefit to attract and retain a qualified workforce. If corporate employers can compete in the labor market without it, government employers should be able to do so as well. (City jobs are already in extraordinarily high demand: in 2014, more than 90,000 people applied for 500 Sanitation Department openings.)
Prefunding amounts to doubling down on a perk that has long outlived its justification, and repeating the mistakes of pensions. New York has been prefunding pensions for decades and still remains $52 billion short in what it has promised to workers and retirees.
Furthermore, this approach will expose city budgets to the caprices of the stock market. Because the city’s pension funds earned only 3.15% last year, the city must spend an additional $730 million over the next four fiscal years.
Serious reform could start with the longstanding practice of reimbursing retirees for the premium costs associated with Medicare Part B. Requiring retirees to pay just half of their Part B premiums would yield $150 million in savings in 2019, according to the Independent Budget Office. This change could be enacted outside of collective bargaining simply through an act of the City Council.
Shifting premium costs for pre-Medicare eligible retirees would take time and likely need to go through collective bargaining. But exchanging raises for reductions in this outmoded benefit might make working for city government even more attractive for many younger employees who put a higher value on take-home pay now than health care far in the future. It would certainly strike a blow for fiscal transparency, since the cost of salaries is far clearer than a benefit promise that won’t come due for 30 years.
De Blasio is right to warn that even more turbulent economic times could lie ahead. Accordingly, he should reject the false economy of saving money for a benefit most New Yorkers don’t get and shouldn’t be asked to pay for.
This piece originally appeared at the New York Daily News
Stephen Eide is a senior fellow. His work focuses on public administration, public finance, political theory, and urban policy.
Daniel DiSalvo is a senior fellow and an associate professor of political science in the Colin Powell School at the City College of New York–CUNY.
Photo: Eduardo Munoz Alvarez / Stringer
This piece originally appeared in New York Daily News