Maryland taxpayers owe roughly $2,792 each in health benefits to thousands of current and future retirees, while Virginia residents each owe roughly $368, according to funding estimates from each state.
Maryland has underfunded state retirees’ health benefits by roughly $16 billion and is now proposing that employees work longer for fewer benefits.
| Code red | |||
| State | Unfunded liability for retiree health benefits | Funding level | Unfunded liability as a percentage of covered payroll |
| Maryland | $15.9 billion | 1.1 percent | 344 percent |
| Virginia | $2.9 billion | 9.2 percent | 51 percent |
| District of Columbia | $201 million | 68 percent | 27.5 percent |
| *Source: Maryland, Virginia and D.C. 2010 Comprehensive Annual Financial Reports | |||
Meanwhile, across the Potomac, Virginia chose not to subsidize retiree health care for workers once they are eligible for Medicare, and instead provides monthly stipends equal to $4 times retirees’ years of service. Workers must serve at least 15 years to receive the credit.
As a result, Virginia’s unfunded health liability is roughly $2.9 billion — including $1.7 billion in promised stipends and $1.2 billion for health benefits until retirees are Medicare-eligible — according to the most recent data available from fiscal 2009. Virginia’s network of current and future retirees adds up to nearly 600,000 people, about twice the size of Maryland’s. Retired teachers’ health care is not covered by the states, unlike their pension benefits.
The District of Columbia’s retiree health account is slightly healthier than Virginia’s, with D.C. residents each owing $336 — for a total $201 million — in health benefits to current and future retirees.
Maryland pays more into employee health plans than 28 other states, including Virginia, according to the National Conference of State Legislatures.
The state pays 83 percent of retirees’ health plan costs, while the retirees themselves pay 17 percent. By comparison, current employees pick up 23 percent of their health plan costs, according to state budget documents.
The retiree plan cost Maryland $333 million in fiscal 2010.
Maryland Gov. Martin O’Malley has proposed scaling back some health benefits, increasing prescription drug costs and requiring retirees to work longer and pay more in contributions to help alleviate the state’s dismal funding situation.
Until 2004, states were not required to report the funding status of health benefits for upcoming retirees, so most failed to set aside money for the future.
“They didn’t have to recognize it as a liability,” said Paul Fronstin, director of the health research and education program for the Employee Benefit Research Institute. “They didn’t have to prefund it because they didn’t have to account for it.”
Now, as the population grays and health costs skyrocket, states are unable to pay what they owe. So they are cutting back on their promises, since health benefits are not legally protected — unlike state pension benefits.
“Before the economic downturn, there were signs that many state and local governments were adopting, or at least seriously considering, ways they could prefund their retiree health care liabilities,” said Joshua Franzel, vice president of research for the Center for State and Local Government Excellence, a nonprofit that researches state retirement issues. “Now, as state and local governments juggle a range of competing needs and budget challenges, their focus has shifted almost completely to altering eligibility requirements, eliminating or decreasing retiree health benefits and shifting more costs to the retired employee.”
Fronstin says the states are playing catch-up with companies, which were required to begin reporting unfunded health liabilities 20 years earlier than the states — and began capping their contributions to their retirees’ health programs.
“That change triggered a movement away from companies offering [retiree] health benefits,” Fronstin said. “There is no reason to expect the same thing won’t happen in the public sector.”
