By: Ted Dabrowski and John Klingner
Don’t be surprised if Illinois politicians say they want to pursue yet another bad borrowing idea in the near future. This time the excuse won’t be to pay off pensions. Instead, it will be for health insurance benefits owed to government retirees – benefits that are formally known as “other post-retirement benefits,” or OPEB.
S&P Global Ratings recently wrote about the increase in retiree health debts nationally. Most states have set aside little to nothing to pay for them, but there is increasing pressure to do so as accounting rules change. Consequently, S&P reports that states might try to borrow money to help pay down those retiree health debts: “…many governments are seeing large new OPEB liabilities on their balance sheets that are growing due to insufficient contributions. In response, governments are looking to OPEB obligation bonds (OOBs) as a way to address funding concerns. Depending on the circumstances surrounding the OOB, issuance could have rating implications.”
Illinois has $73 billion in health debts and it’s likely politicians won’t be able to resist the temptation to borrow money to pay some of that debt down. But they should be stopped at all costs. More borrowing will only allow them to kick the can, just as they’ve done on pensions time and again. Instead of more debt, lawmakers should pursue reforms that dramatically slow down the growth in benefits.
Illinois’ retiree health insurance debt is equal to more than half the state’s $134 billion in officially-reported pension debt. Add them together and that’s more than $200 billion in state retirement debt.
The $73 billion is how much the state owes, in today’s dollars, in health insurance benefits over the next three decades. The state has set nothing aside for that obligation, so it’s 100 percent unfunded.
State workers get a 5 percent discount on their retiree health insurance premiums for every year they work. And those that work 20 years or more get retiree health insurance benefits for free.
In total, the state will pay out over $166 billion in claims through 2055, according to the programs’ actuaries. The state has been paying out more than $1 billion a year to retirees recently, but that number will jump to nearly $6 billion in 25 years (see Appendix 1). That, along with ever-growing pension costs, will continue to crowd out spending on everything else in the budget.
For full details on Illinois retiree health debt, read: Illinois’ other debt disaster: $73 billion in unfunded state retiree health insurance benefits.
S&P warned about those growing costs in its recent report: “costs likely will increase rapidly as the medical cost trend has been approximately 6.1% for each of the past five years, far outpacing the consumer price index…Also, baby boomers are expected to retire at an increasing pace for the next 10 years, placing a further burden on providers of retiree health care. Escalating contributions present intensifying budgetary stress for municipalities and potential stress to overall creditworthiness.”
Illinois’ retiree health insurance debt is one of the biggest in the nation. Every Illinois household is on the hook for over $11,000 in health debt. Only households in six states owe more.
The debt is getting more attention as accounting rules get stricter and force governments to deal with them. It’s even more alarming in Illinois since the Supreme Court said in a 2014 ruling that these benefits can’t be reformed because of the state’s pension protection clause.
For a long time Illinois politicians have been able to ignore retiree health debts. They thought they’d have the option to change benefits if a cash crunch ever came.
But the court says they don’t have that option. And lawmakers refuse to consider the only real solution: an amendment to the pension and benefit clause in the constitution.
So, look for Illinois pols to try to take the OPEB bond idea and run with it.
We’d go into why those bonds are a bad idea, but we don’t need to. We recently explained why their identical twin, pension obligation bonds (POBs), are nothing more than a bad gamble with taxpayers’ money. We wrote extensively about Mayor Emanuel’s proposed Chicago POB in 2018. And we criticized Rep. Robert Martwick’s idea for the state to borrow over $100 billion in POBs early last year.
- Martwick’s reckless proposal to borrow $107 billion in Illinois pension bonds
- Rahm Emanuel’s latest can kick: Borrow $10 billion for Chicago pensions
- $125,000: The pension debt each Chicago household is really on the hook for
- How Emanuel is misleading you on the city’s debt
- Pension Obligation Bonds Are Like Big, Fat, Dangerous Margin Loans For Stock
- Chicago CFO’s Stupendously Bad Timing On Her Last Pension Obligation Bond
- Emanuel’s real motivations for Chicago’s $10 billion pension bond plan
- A plan to make “bad pension borrowing” good? Greg Hinz is mighty confused
- Liquidation Sale. That’s How To Think About Chicago’s Proposed Pension Bond
- Emanuel’s misleading pension bond presentation to Chicago aldermen
- Chicago’s bond scheme: What an honest press conference with Emanuel might look like
- If Emanuel won’t kill his $10 billion pension bond proposal, the markets might
The state has consistently paid far less toward its retiree health insurance obligations than its actuarially-required contributions (ARC) call for. Because the state only pays the insurance claims on a pay-as-you-go basis, its payment shortfalls have been $2.5 to $3 billion each year.