... threatens the benefits you've earned

Your retirement benefits have been called “America’s pension time bomb,” “the unspoken deficit” and a “huge burden for state and local governments.”

If those headlines have not caught your attention, how about this one: “Taxpayers could bear cost of pension plans’ ‘noncrisis.’ ”

You would never know it from what you read or hear in the media, but public employee pension systems actually are in pretty good shape. “As a group, state and local [defined-benefit] pension systems have nearly 90 cents for each dollar they owe in liabilities,” according to the National Association of State Retirement Administrators (www.nasra.org ).

Unfortunately, elected officials in the position to overhaul your retirement benefits—which are deferred compensation for the work you are doing today—may not be listening to the experts about the overall financial health of pension systems.

Since 2005, public discourse over the affordability of retirement benefits for state and local employees has expanded to include other post-employment defined benefits. Healthcare is the most significant of these—and it is the costliest.

Accounting rule changes the bottom-line liability

The Governmental Accounting Standards Board (GASB), an independent organization that establishes generally accepted accounting principles for state and local governments, now advises states and localities to account for the present value of the future costs of post-employment benefits for both active and retired employees, and to amortize that liability over 30 years.

It’s a marked shift. Most states and localities have been paying their share of post-employment benefits on a pay-as-you-go basis—covering the costs for current retirees but putting no money aside for future retirees.

The accounting change, combined with the escalating cost of healthcare, is producing eye-popping numbers that have grabbed the attention of elected officials and the media.

At a forum sponsored by the AFT, the International Association of Fire Fighters and the National Conference on Public Employee Retirement Systems, Karl Johnson, GASB project manager, said that the new standard “was not developed to oppose or support any public policy.” (See related story.)

Nevertheless, it has generated controversy.

Public policy solutions vary widely among states, localities

The public policy solutions being offered today range from the responsible—fulfilling an employer’s commitment to its workforce—to the irresponsible—making workers pay for the employer’s mismanagement.

In Kentucky, for example, there is a battle of competing wills. The Republican-led Senate “passed a bill to move the retirement systems from a defined-benefit to a defined-contribution system,” says Kentucky Association of State Employees (KASE) president Lee Jackson, vice chair of the AFT Public Employees program and policy council, noting that the “bill does nothing to address the real problem of the unfunded liability, which is health insurance” for retired employees.

Meanwhile, in his State of the Commonwealth address, Republican Gov. Ernie Fletcher recommended dedicating no less than $50 million of the state’s budget surplus to the healthcare benefit component of the state employees’ and teachers’ retirement plans.

“The state made a promise to these employees and teachers and we must keep that promise,” Gov. Fletcher said in a statement.

Gov. Fletcher also established a commission charged with making recommendations to address the unfunded liabilities in a manner that will fulfill the state’s obligations to current retirees and employees.

KASE president Lee Jackson will sit on the 23-member commission, which is scheduled to report to the governor no later than Dec. 1, 2007.

Jackson says the two systems, which include a pension component and a healthcare component, have a combined $16 billion unfunded liability.

“It is very important that an in-depth study be done to make recommendations to address and fix this huge debt,” Jackson says. “KASE stands fully ready to do everything possible to protect its current and future members.”

In Baltimore County, Md., on the other hand, officials are using the new GASB accounting standard as its justification at the negotiating table for increasing health insurance premiums and raising retirement eligibility requirements for current and future employees. County Executive Jim Smith estimates the county’s accrued liability is $2 million, according to the Baltimore Examiner.

Specifically, the county wants to raise the retirement age from 60 to 65, or require 30 years of service, for general employees starting July 1. For corrections employees, the county wants to raise the service requirement from 20 years to 25 years. The county is offering current corrections employees a 2 percent credit for each year they work after 20 years, which would boost their pension benefits from 50 percent of annual salary to about 60 percent.

By making people work longer for full retirement, the county will save money on retiree healthcare, says James Miller, president of the Baltimore County Federation of Public Employees. Medicare eligibility starts at age 65.

“The county’s proposal is bad for everybody,” Miller says. “Once they change the eligibility requirements then nothing is sacred.”

Lawmakers in New Mexico are also talking about changing retirees’ benefits, including raising their premiums, the Albuquerque Journal reported. New Mexico’s retiree healthcare liability over the next 30 years is an estimated $5 billion.

And in Texas, legislation has been introduced that would make the new accounting rule inoperable.

The real issue is the skyrocketing cost of healthcare

Dispelling the myths about the new accounting standard is essential because misinformation can be used to justify benefit cuts.

Common myths about the new standard are that it requires full funding; it threatens government bond ratings; and it creates new mandatory spending that will bust budgets if elected officials don’t raise taxes or make deep cuts to public services.

The AFT, at the national, state and local levels, has been working hard to keep retirement benefits—both pensions and other post-employment benefits—intact. But the union’s efforts can only go so far. Elected officials need to hear that you—their constituents—have every expectation that the promises made will be honored.

“The real issue is the skyrocketing cost of healthcare,” says AFT president Edward J. McElroy. “Even people with insurance, whether they are working or retired, are finding it harder and harder to afford.

“The exponential increases are creating a cycle that is pricing consumers and public health programs out of the market. The cycle can only be broken by national healthcare reform that provides universal coverage and access at a reasonable cost.”

See related story: Accounting method changes the bottom line