Surgeons have operated on Wanda Riley’s hands and replaced both her knees, one of her hips and both her shoulders.
“That’s it,” the 85-year-old retired state employee recalls saying after the latest surgery. “I’m not doing any more operations. Of course, there’s hardly anything left to operate on.”
Yet, Riley considers herself lucky. Her health insurance covered the procedures and never sent her a bill. The state helps with her monthly premiums.
That leaves more of the Olympia retiree’s state pension and Social Security income for spending money. Riley can hire out the household chores and yard work she no longer can physically manage, go out to eat with friends once in a while, “and still have a little bit of money left over just to put away. But it’s getting thinner and thinner.”
During the Legislature’s last session, retired state and school employees successfully defended their health-insurance benefits. But they are likely to have to stay on defense against cuts as the estimated future cost of the benefits swells.
Unfunded liability for retiree health-care benefits has grown 58 percent since a 2012 independent report expressed “serious concerns.”
Now at more than $10.8 billion, it grew because people are living longer and the state adjusted its estimates to take those longer lifespans into account. The same calculation is responsible for added pressure on the state’s pensions.
The cost might be adding red ink to the state’s financial disclosures, but it isn’t likely to be a budget buster any time soon, as long as the state keeps a tight per-person cap on its main type of subsidies. Instead, it’s retirees who stand to pay a growing share of their medical costs if the cap doesn’t budge.
The hole on the balance sheet hasn’t fazed Wall Street. Credit ratings agencies give Washington their second-highest rating and one, Moody’s, describes the portion of the health-care liability assigned to state government as “modest.”
Even though they aren’t as costly or well-known as pensions, retiree health benefits have a larger funding gap — more than twice as big when the two shortfalls are counted the same way.
Unlike many states, Washington hasn’t set aside any money to pay for the benefits in the future.
And with good reason, state officials contend. Unlike pensions, State Treasurer Jim McIntire said, health benefits aren’t a contractual obligation to employees.
“If we can’t afford it, we can cut it out,” Democrat McIntire said.
Indeed, the state coped with recession-era budget shortfalls in part by lowering the maximum subsidy to Medicare-eligible retirees from $182 a month to $150 a month starting in 2012. Life-insurance subsidies for retirees were canceled around the same time. The moves lowered the liability for awhile.
It would be politically difficult to end or further slash the benefits, however.
Groups that lobby on behalf of the more than 90,000 retirees in the health-care system sound the alarm when cuts are proposed, with help from unions representing some of the 260,000 active state and school workers.
An outcry this year persuaded Republicans to drop a $40-a-month reduction they had passed through the Senate as part of a proposed budget.
Senate budget writers had tried to cut the benefit two years earlier, too.
“There’s not a legal obligation to the money, but there’s a moral obligation,” said Peter Diedrick, legislative coordinator for the Washington State School Retirees’ Association. “That’s their grocery money.”
Diedrick noted that, apart from the health-care cut, older retirees took a hit in 2011 when lawmakers permanently canceled cost-of-living increases for most members of closed pension plans. Retiree groups want lawmakers to restore pension and health benefits in the coming years.
MORE COSTLY PREMIUMS
Retired state and school-district employees pay more for state health insurance than employees who are still in the workforce.
Active employees enrolled in the state’s most popular plan pay $84 a month, $178 for a couple or $241 for a full family, rates that are based on employees paying 15 percent of premium costs and the state covering the rest.
School-district benefits are bargained locally but tend to be generous for individual full-time employees and costly for families. In 2013, the average full-time school employee paid $41 a month; the full family rate was $477.
For retirees on Medicare and their families — more than 80,000 people — the state offers supplemental plans through the same companies that cover active employees. The state pays half of premiums for the supplemental insurance up to $150 a month.
That leaves an older retiree who chooses the state’s most popular plan to pay $235 a month, or $463 for a couple.
For a smaller group of retirees who are too young for Medicare and their family members — more than 10,000 people — there’s no direct subsidy. But they do pay lower premiums because they are pooled with younger people still in the workforce and with fewer health problems. It’s the equivalent of a roughly $300-a-month subsidy.
A younger retiree in the most popular plan ends up paying $579 a month, or $1,151 for a couple.
The state pays the subsidies as they come up, shelling out between $135 million and $185 million a year in recent years. Payouts are expected to stay fairly flat in the short term.
School districts pay much of the bill — largely, though, with money that ultimately comes from the state.
Washington was one of 17 states with a pay-as-you-go strategy, the Pew Charitable Trusts said in a 2012 report that reviewed 2009 and 2010 payments. The report said only one state, Arizona, paid the full amount needed to address its liability.
The Pew report expressed serious concerns about 21 states’ health-care obligations, including Washington’s.
Since the report, at least one state, Hawaii, has ended its pay-as-you-go policy and started paying down its liability.
Meanwhile, Washington and several other states have reduced benefits. Combined with U.S. health-care costs increasing less sharply, the cuts reduced states’ collective liability, according to a forthcoming Pew report.
However, the new report’s figures precede the sharp increase in Washington’s liability because of planning for longer lifespans.
SOCK AWAY MONEY?
Making the full catch-up payment — now $1 billion a year — would cost more than the state added to schools last summer to comply with a state Supreme Court order looming in the McCleary education-funding case.
The price tag makes a full payment politically unlikely. What’s more, opinions vary on whether setting any money aside would be fiscally wise.
Today’s taxpayers should pay to compensate a future retiree who is working today, said Sheila Weinberg, a critic of funding shortfalls as the founder and CEO of Chicago-based Truth in Accounting.
A pay-as-you-go strategy leaves the bill for tomorrow’s taxpayers.
“Future taxpayers are going to have to pay it, and they are not going to receive any benefits, services, from the person they are going to pay,” Weinberg said.
In a report last summer revealing the increased obligation, the state actuary’s office said charging taxpayers for benefits earned in the past is “in conflict with the principle of intergenerational equity, which requires that a member’s benefits be funded over the member’s working lifetime.”
Pew’s new report will make distinctions among states based on the generosity of their benefits, said Greg Mennis, who leads the nonprofit group’s work on public-sector retirement systems. He said Washington is in a middle tier.
As Washington considers whether to set money aside, Mennis said, “It may not be as important a priority as it might be for the states that have more significant benefits.”
McIntire, the treasurer, said setting money aside would make a judge more likely to interpret retiree health insurance as a contractual promise. The state might be locked in.
“We don’t want to create an entitlement by funding against them,” McIntire said.
The actuary’s office says the state could avoid the problem of creating a contractual obligation by putting money aside without placing it in a trust fund.
Some question whether the health-care liability is really a liability.
Mike Watson, president of the Retired Public Employees Council of Washington, said counting the subsidy of under-65 retirees by active workers as part of an unfunded liability doesn’t make sense, any more than it would to count the degree to which 20-year-olds in the insurance pool are subsidizing 35-year-olds.
As for older retirees on Medicare, the state gets roughly $20 million in federal money for maintaining its subsidies, which Watson noted it would lose if it made deep cuts.
“The state’s facing no doomsday because of this,” Watson said.
Lawmakers shouldn’t set money aside for benefits, he said.
Diedrick was less certain. The state has “a lot of obligations right now” that would take priority over creating a new fund, he said. But money set aside could be invested and grow over time.
“Any time you can have Wall Street pay for something instead of the taxpayers, they should do it,” he said.
Both retiree advocates will be watching for attempts to cut benefits.
“With the McCleary issue, there’s a hunt for money,” Diedrick said, “and retiree and social services have been hit in the past. So it’s just a constant concern.”