America’s Next Major Financial Hurdle: Government Retiree Health Plans

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State and municipal governments have failed to put tens of billions of dollars into health plans for their retired workers. The Governmental Accounting Standards Board was set up to monitor the use of GAAP accounting by the these bodies and is also supposed to collect data on the size of the funding deficits. Its work is only beginning and may not be done for another two years.

The US Government Accountability Office is not waiting for the results and has already sounded an alarm that most of these government retirement health plans are under water, but very few people seem to be listening.

According to the GAO, "For retiree health benefits, studies estimate that the total unfunded actuarial accrued liability for state and local governments lies between $600 billion and $1.6 trillion in present value terms. The unfunded liabilities are large because governments typically have not set aside any funds for the future payment of retiree health benefits as they have for pensions."

Where will that money come from with the economy moving into a deep recession and the tax revenue for many states and cities falling sharply? The answer is that there is no way to bring in enough capital to properly fund retirement health plans and handle the day-to-day operations of government. The credit markets have shut down and demand for municipal paper is dead as a tack.

The Paulson plan allows the Treasury to use capital to buy municipal bonds. According to Barron’s, "Sen. John Kerry, the Massachusetts Democrat, and at least two members of the House have written Treasury Secretary Henry Paulson asking that he use the Troubled Asset Relief Program to buy state and municipal bonds."

Paulson can almost certainly see a municipal retirement plan deficit causing Treasury to have to move to aid another failing part of the US financial system.

He just does not have enough money to go around. Health benefits are not guaranteed, even for government workers.

Douglas A. McIntyre