BY JACOB SZETO

PORTLAND – An Oregon Capitol News study found that Oregon governmental entities owe more than $3 billion for past health care expenses for government workers.

So far these units of government have set aside only $237 million to pay for the expenses, leaving a $2.8 billion debt. Broken down by Oregon full-year income tax filers in 2008, each taxpayer would have to forfeit $1,758.36 to pay off the debt. As this unfunded liability climbs and goes unaddressed, the stage will be set for a showdown, undoubtedly involving government unions, government managers and taxpayers.

The result likely will involve a tradeoff between cutting either government services or government worker benefits. One thing is clear: Retiree health care spending will continue to take a larger share of most government budgets unless concessions are made by public unions.

These retiree health care benefits will have a larger effect on some governments than others. In particular, TriMet is facing down a hard reality and something or someone is going to have to give in the near future.

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TriMet has past health care related expenses that have accumulated to a staggering $817 million. Add to that the approximately $61 million in debt being amassed every year, and the picture begins to look grim.

It’s not too hard to see how TriMet has accumulated such massive debt from retiree health care expenses when such benefits are valued at more than $1 million for a married retiree if they retire by 55. Of course, the debt could have been avoided if TriMet had paid for the expenses as they occurred; but at a cost of $75.4 million for last year alone, finding the money can become difficult.

TriMet may be an extreme example, but it is not alone in this dilemma. In fact, most Oregon governments are accruing debt for retiree health care benefits by not paying for the full cost of current workers. In effect, this results in the costs of current government services being passed to future generations.

According to reports, a total of $286 million annually would be required to pay for current, new and past expenses. Similar payment would have to be made for the next thirty years to pay off past debt. Last year, only $138 million was paid, leaving a deficit of $145 million and failing to pay for all of the expenses and debt payments.

Off-book Debts

If you think you could find the full extent of the debts on government balance sheets, you would be wrong. Until recently, the liabilities were not required to be accounted for at all. A new standard by the Government Accounting Standards Board, GASB 45, implemented over the last few years, has now required that governments at least recognize part of the liabilities.

The standards do not require the full amount of the past debts to be added to balance sheets. Instead, the $3 billion in past debts are relegated to the footnotes, only to be added to the balance sheet in increments if annual required contributions are not met. In Oregon, the gap in annual required contributions (ARC) to actual contributions in 2010 was $145 million.

The annual required contribution consists of related expenses for work being performed by current employees, payments for health care premiums for retired workers and debt payments amortized over a 30-year period.

The only expense in the annual required contribution that requires immediate payments are payments for retired workers’ health care premiums. The expense of current employees can be added to the debt, and the debt can be avoided until it has to be paid out in the form of premium payments in the future.

Most of the governments in the study do exactly that. They only pay the current premium payments, allowing the debt to accumulate and be paid for at a later date. This is what they call in the accounting profession “pay-as-you-go.” This practice has long been abandoned by the private sector due to accounting regulations but continues in the public sector.

Typically, when this financing scheme is used, current expenses are pushed off into the future. Oregon is no exception to the rule and as a result has accumulated $2.8 billion of unfunded liabilities.

Clear Outliers and Million Dollar Benefits

When the data is charted, it is clear that the distribution of debt is not evenly based on any one measure. While some governments have minimal liabilities, others have extraordinary liabilities.

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TriMet is literally off the charts. In 2010, TriMet had an annual required contribution of $75.4 million but only contributed $14.26 million, leaving a deficit of $61 million, the highest of all 125 plans in the study. The next highest deficit (Multnomah County) was only $9.23 million in comparison, only a fraction of TriMet’s deficit.

The $61 million deficit was added to TriMet’s already staggering unfunded liability, now totaling $816.54 million. For each year that TriMet fails to make the full contribution, the unfunded liability continues to climb. TriMet has yet to save a single penny to make the payments on their $816.54 million debt.

The size of the liabilities is not so much a result of the size of their work force, as it is their generous benefits. In fact, TriMet covers 100 percent of medical, dental and vision insurance premiums for retirees and their spouses. Although this is not unheard of, the plans themselves are top notch.

TriMet has estimated the value of their medical benefits to be worth more than $1 million for a retiree with a spouse of the same age, if the employee retires by age 55. If the employee retires at age 60, the benefit would be worth almost $700,000, at age 62 $570,000 and at age 65 $410,000.

Compared to the Portland Police and Fire plan, a plan covering the most similar payroll size, TriMet’s unfunded liability and annual required contribution are both 160 times larger.

An Updated Study and Old Numbers

The study, conducted by Oregon Capitol News, is a continuation of a similar study conducted last year that found comparable liabilities. The overall payment deficits and unfunded liabilities didn’t change much from the previous study, but that may have been a result of how often governments are required to update their numbers.

More than half the plans are reporting liabilities last measured before or during their 2009 financial audit, likely resulting in an underreporting of liabilities. GASB states that governments must update their liabilities every two years, and as a result 50 plans were reported using numbers from 2008 or earlier.

There were two notable shifts in liabilities since the previous study. The state government employee plan (PEBB) shed about $160 million in liabilities due to a new valuation with updated methods, while TriMet added about $184 million.

In total, while there are approximately 1,700 units of government in Oregon, the study only covered what was determined to be the largest 100, resulting in 125 individual plans. The study was designed to catch most of the liabilities but discovered that the size of the government does not always determine the size of the debt. In the case of TriMet this was certainly true, but there are plenty of other smaller-scale examples. In particular, several smaller school districts had some surprising liabilities.

If you don’t see your local government on our list and are curious what their liability is, you can find it in their annual audit or comprehensive annual financial report (CAFR) under the notes to the financial statement. Contact Oregon Capitol News if you find anything surprising.

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