TY  - JOUR
AU  - Lutz, Byron
AU  - Sheiner, Louise
TI  - The Fiscal Stress Arising from State and Local Retiree Health Obligations
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 19779
PY  - 2014
Y2  - January 2014
DO  - 10.3386/w19779
UR  - http://www.nber.org/papers/w19779
L1  - http://www.nber.org/papers/w19779.pdf
N1  - Author contact info:
Byron Lutz
Federal Reserve Board of Governors
Research Division
20th and C Streets, NW
Washington, DC 20551-0001
E-Mail: Byron.F.Lutz@frb.gov

Louise Sheiner
Brookings Institution
1775 Massachusetts Avenue  N.W.
Washington, DC 20036
E-Mail: lsheiner@brookings.edu
M1  - published as Byron Lutz, Louise Sheiner. "The Fiscal Stress Arising from State and Local Retiree Health Obligations," in Robert Clark and Joseph Newhouse, organizers, "State and Local Health Plans for Active and Retired Public Employees" Journal of Health Economics, Volume 38 (2014)

M3  - presented at "State and Local Health Plans Conference", August 16-17, 2013
AB  - A major factor weighing down the long-term finances of state and local governments is the obligation to fund retiree benefits.  While state and local government pension obligations have been analyzed in great detail, much less attention has been paid to the costs of the other major retiree benefit provided by these governments: retiree health insurance.  The first portion of the paper uses the information contained in the annual actuarial reports for public retiree health plans to reverse engineer the cash flows underlying the liabilities given in the report.  Obtaining the cash flows allows us to construct liability estimates which are consistent across governments in terms of the discount rate, actuarial method and assumptions concerning medical cost inflation and mortality. We find that the total unfunded accrued liability of state and local governments for the provision of retiree health care exceeds $1 trillion, or about ⅓ of total state and local government revenue.  Relative to pension obligations discounted at the same rate, we find that unfunded retiree health care liabilities are ½ the size of unfunded pension obligations. We also find that using assumptions concerning the growth in health care costs that are arguably more realistic than those employed by most states actually reduces the size of the liability in most cases.  Pushing in the opposite direction, we find that using plausibly more realistic mortality assumptions increases the size of liability.  The second portion of the paper places retiree health care obligations into context by examining the budget pressures associated with retiree health on a continuing, largely pay-as-you go basis.  We find that much of the projected increase in retiree health obligations as a share of revenue is the result of health care cost growth.  On average, states could put their retiree health obligations into long-run fiscal balance by contributing an additional ¾ percent of total revenue toward the benefit each year.  There is, however, wide variation across the states, with the majority of states requiring little in the way of additional financing, but some states requiring a significantly larger increase.
ER  -