According to reports published by Pew Charitable Trusts, unfunded liabilities pertaining to retiree healthcare for 30 biggest American cities now exceeds $100 billion. The Standard & Poor rating agency has pegged unfunded liabilities for 50 American states to exceed $500 billion.
Such retiree healthcare plans can be found only in the United States. They are in existence only as the United States has not provided universal healthcare prior to Medicare at 65 years of age. The latter is a national social insurance program.
A majority of employees of states and the cities retire any time between 50 to 55 years of age. Local governments thus offer such would-be retirees with a highly subsidized healthcare. This healthcare lies between retirement and the Medicare. Services are sometimes provided beyond that. The retiree healthcare plans run by local governments, however, on an average, enjoy much less than the 10 percent of funding required by them to meet future obligations. In contrast, if any public pension plan was advance funded by 60 percent or less, it would be considered to be in trouble.
This low quantum of advance funding forces a majority of the states and cities to pay healthcare expenses out of current tax revenues. With the rise of healthcare expenses, these funding will force the stopping of other important functions like police and schools. Overhanging unfunded obligations for the retiree healthcare will badly affect the bond ratings of local governments.
It is a good thing that developments in recent past has lead to considerable reforms in the US retiree healthcare plans. New accounting rules and new judicial guidance are issued on the plan liabilities and the collective bargaining agreements. A Cadillac tax is also to be imposed on expensive healthcare plans.
The Government Accounting Standard Board or GASB sets the reporting requirements valid for both local and US state governments. It has adopted a number of considerable improvements to the disclosure regime. The GASB rules will be effective from 2017. These new rules will state that both the city and the state governments include the liabilities for the retiree healthcare on the public balance sheets and not in the rarely read obscure financial footnotes as were previously done. This step should attract attention of voters on the unfunded healthcare obligations. The GASB also said that all the local governments must follow same discount rate. This is the interest rate imposed on the AA rated municipal bonds, present in calculating the unfunded healthcare liabilities.