Fuzzy math blurs pension, health care calculations

mlee@macon.comAugust 16, 2013 

ATLANTA -- Detroit is testing new ground for a city its size by entering bankruptcy. It’s a place Macon is nowhere near going. Indeed, Macon, Bibb County and Georgia all look fairly healthy when it comes to calculating what they will need to pay in employee and retiree benefits.

But in accounting, even the best math leaves room for drama.

Georgia is set to spend $3 billion dollars out of its total $19 billion dollar budget on a single thing: health care for some 670,000 state employees, teachers, other school staff, retirees and dependents during the year ending next June.

It’s true that schools, colleges and Medicaid cost more, but all those tap into major federal funds.

The State Health Benefit Plan is just starting to rebuild its reserves after spending them down when the state Legislature cut funding. Officials have tweaked benefits, raised employee contributions and squeezed more out of the state.

And it’s still going on.

“Some employer contributions to the plan were increased for fiscal year 2014,” the current year, said Pamela Keene, a spokeswoman for the Department of Community Health, which administers the health plan. “This is bringing employer contributions to funding levels that more accurately reflect the typical 75 percent employer to 25 percent employee contribution levels.”

They’re also switching insurance vendors from United and Cigna to Blue Cross Blue Shield of Georgia, trying to save more cash.

But Kelly McCutchen sees a fundamental challenge.

Pension funds usually grab headlines, but on Georgia’s state level, “the primary challenge is not pensions -- the real challenge is health care benefits,” said McCutchen, president and CEO of the free-market-leaning Georgia Public Policy Foundation. “The state, instead of paying into a trust fund, they pay the bill on a cash basis every year.”

That means the state pays hospital and doctor bills annually. Those medical professionals depend on the state Legislature to put enough money in the account to keep the debit card solvent.

So if health care costs go up faster than the state budget, that $3 billion would grow and muscle money out of other programs.

The setup is similar in most cities and counties.

In Macon, retired city employees will eventually draw about $28 million in health care benefits after they leave the city, according to the latest estimate, said city Chief Administrative Officer Dale Walker.

And “it’ll probably keep growing,” Walker said.

(Bibb County is unusual: Its employee health care comes out of a protected fund. County Chief Administrative Officer Steve Layson said it will be fully funded soon if the county commission keeps up its trend of payments.)

Besides retiree health care, governments also have to think of pension funding.

Pension piggy bank

Pension deals are unbreakable, a titanium piggy bank instead of a plastic promise.

That is, unless a federal bankruptcy court in Michigan allows Detroit to write down some of its pension promises as it struggles out of bankruptcy. Plenty of cities are watching the case closely.

Unlike Detroit, which is suffering an exodus of industry and population, Macon can handle its bills.

Macon’s two pension funds, one for police and firefighters, the other for general employees, have lost some weight since the early 2000s but they are still healthy by accounting standards. The police and fire pension was 99.5 percent funded as of June 2011. The general employee fund was 84.8 percent full as of June 2012. It’s also improved since then, Walker said..

Macon paid more than usual into its pensions in the two years ending in June 2012 to help catch up an unfunded liability of some $4 million between its two funds.

“City council has always been eager to fund the retirement systems,” Walker said.

In Bibb, “our actuaries tell us what the (county’s) contribution should be every year,” Layson said. And though the decision is up to the county commission, “we never do less. That’s a no-no,” he said.

Once cash is in those piggy banks, the managers must fatten up the hog enough to pay down decades of promises.

Once a year, managers must publish what’s inside the piggy that very day. The snapshot changes as fast as the stock market.

Government accountants must also update calculations on how much pension promises will cost -- and if the piggy bank will be able to cover it.

They use a piece of math called “smoothing” to spit out a sort of composite picture of the piggy. It says a lot about possibilities, but there’s calculated wiggle room.

Another big assumption is that investments will grow at 7.5 percent a year.

Macon, Bibb and the state all count on 7.5 percent returns over decades, which Walker called “reasonable.” And it’s a dip from the old 8 percent assumption.

The market has been pokey in recent years, but when it’s bullish, “people say 7.5 percent is conservative,” Layson said.

But Bob Williams, head of the State Budget Solutions think tank, is skeptical.

“Tell me where I can invest my money at 7, 8 percent,” Williams said. Some credit rating agencies, he said, are looking at more like 4.5 percent. Williams said Georgia should move more staff to 401(k)-type defined contribution plans, not promise some sum based on final salary.

If the growth rate is going to be low, governments and future pensioners have to set aside more today to reach some certain heap in 30 years. Under defined contribution plans, the risk and the investing work is the employee’s job, not Georgia’s.

When Macon and Bibb merge, existing employees will keep their benefit plans. New hires will join a new pension program similar to Bibb’s. The consolidation task force is set to hear health care proposals by the end of August.

Assuming a 7.5 percent return rate, Georgia’s pension fund for general employees was 76 percent funded in the middle of 2011. The teacher pension fund was at 81.2 percent. Together, those make up the bulk of state pensions.

But Moody’s, the credit-rating agency, tried sliding a straitjacket on all state governments’ numbers this year just to see what would happen. They made a few tweaks such as disallowing smoothing and assuming a rate of return of about 5.4 percent.

In that squeeze, using June 2011 numbers, Georgia’s teacher and general employee pensions together would be about $14 billion short.

It could be worse. In Illinois, Moody’s says the hole is about $133 billion, almost 2 1/2 times operating revenue. There, Gov. Pat Quinn vetoed state lawmakers’ pay until they passed a pension fix. House and Senate leaders responded with a lawsuit.

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