In New Hampshire, a New Way on Retiree Health Costs
By John Gramlich, Staff Writer
A funny thing happened recently when New Hampshire looked for a new way to pay for the health care of thousands of retired state and local government workers.
Democrats came to agree with Republicans. Labor representatives agreed with employers. Municipalities agreed with the state. And everyone now seems satisfied that they've come up with a workable solution to a thorny problem faced by governments around the country.
"Hard to believe, isn't it?" says Harold Janeway, a New Hampshire state senator who headed a commission on retiree health care benefits. Janeway and the rest of the Legislature recently endorsed the commission's findings, making New Hampshire the first state in the nation to formally support a strategy known as a " retiree medical trust."
Under the plan — which is not yet in effect — government workers would have the chance to make tax-free contributions from their paychecks to accounts managed by their unions. The employees' money would be pooled together and invested. And both the investment returns and the monthly distributions paid to retirees for health care expenses such as insurance premiums, doctor co-pays and prescription drugs would be tax-free.
Janeway likens the plan to a "supercharged health savings account" that rewards public workers by giving them tax advantages and allows them to pool their resources together to maximize their returns. The arrangement is good for the fiscal health of the state and local governments, too: It lets them eventually remove from their books some $60 million per year in health subsidies paid to retirees.
The strategy won't solve all of New Hampshire's problems when it comes to retiree health costs. For example, it does nothing to erase New Hamspshire's existing unfunded obligations for retiree health care — which are at least $2.9 billion and a huge cause of concern, as they are in most states. But the trusts do provide a new funding model for the future. And some see them as a key first step in getting the state out of the retiree health care business altogether, both in New Hampshire and possibly in other states wrestling with many of the same fiscal problems.
An emerging strategy
New Hampshire's idea is modeled on retiree medical trusts already being used by local unions representing firefighters and police officers in California, Oregon, Washington and elsewhere. It is the brainchild of Shana Saichek, a California attorney who says she discovered the savings scheme two decades ago while she was "burrowing around in the Internal Revenue Code" for a tax-friendly way to help public workers gain post-retirement medical benefits. Most of the unions and municipalities that have signed up for the plans are in Western states that do not have a strong tradition of paying for their retirees' health benefits, Saichek notes. New Hampshire is the first state to endorse the strategy statewide, although it's up to individual state agencies, cities and counties to negotiate terms with their unions.
What is most noteworthy about New Hampshire's plan — besides its broad bipartisan appeal — is that it has the potential to take taxpayer money completely out of the retiree health care equation. Instead, contributions come from government employees themselves. The model differs sharply from the generous, taxpayer-funded health care subsidies that New Hampshire has been paying to its retired state and local workforce for years, and which it is trying to phase out. Currently, the state pays a $375 monthly stipend for eligible retirees' health insurance through the subsidies.
If successful, New Hampshire's experiment is sure to attract attention from other states and municipalities, particularly those facing a retiree health care funding crisis — as many are.
A study released earlier this year by the Pew Center on the States, Stateline 's parent organization, found a $1 trillion gap between what states have promised their retired workers and the assets they have on hand to pay for those obligations. Retiree health care, the study found, makes up more than half of that deficit, and the problem is only likely to become more severe as baby boomers retire.
What's in it for unions?
New Hampshire's proposed switch in retiree health care funding raises an important question: Why would public-employee unions embrace a model that shifts the funding burden from the governments to their own members?
Simply put, unions in New Hampshire had little choice. The state already was planning to eliminate its health care subsidies for retired workers when it formed its study commission. So unions had an interest in getting the best deal they could.
"The reality of the situation was that there was no money there unless we stepped up and did something," says Rhonda Wesolowski, a commission member and president of the New Hampshire chapter of the National Education Association, a teachers' union. "This will meet the needs of our members."
The retiree medical trust model does allow state and local governments to make contributions to their retirees' health care: The details are worked out during contract negotiations between each union and its bargaining partner. Another advantage for workers is that unused sick days can be rolled into the savings accounts as cash deposits, if government employers agree. But the biggest selling point for unions is the fact that the medical trusts are never taxed, making them different from pensions or other common retirement savings accounts, such as a 401(k).
"The minute a firefighter decides he's going to put $100 in, the whole $100 is going to go in," Saichek says. "He doesn't need to earn $120 to get back $100." The trusts are tax-free as long as the money goes to health care expenses, Saichek says.
Public-employee unions in New Hampshire now must convince their own members to sign off on the changes before any retiree medical trusts can go into effect. Once a union agrees to the change, it is mandatory for all members.
Making the case for the trusts could be tricky, labor leaders acknowledge, especially given the stagnant economy and the fact that many workers don't have much in the way of disposable income these days. But most believe their members will accept the idea of the trusts once they understand its long-term benefits.
Will it catch on?
For cash-strapped state and local governments, the advantage of retiree medical trusts is obvious: It takes a nagging fiscal burden off their backs. Some officials in New Hampshire view retiree medical trusts as a long-overdue way to put ample benefits for public-sector employees in line with what private-sector workers get nowadays. Fred Keach, a Concord, N.H., city councilor, likens government retirement promises to the generous pension plans that helped drive Detroit automakers into bankruptcy.
The key question is whether labor unions beyond New Hampshire will warm to the idea of paying for their post-retirement benefits.
If anything, the recession seems to make that more likely. Public workers and retirees around the country have watched nervously as huge state and local budget shortfalls have emerged and the value of government pension funds has plummeted on the stock market.
New accounting rules for governments have added to the uncertainty, forcing states to disclose exactly how big their liabilities for pensions and retiree health care are. In many states — New Hampshire included — the shortfalls are breathtaking. Contributing to workers' sense of uneasiness, retiree health care obligations aren't like pensions; they can be scaled back after-the-fact by governments looking for savings. All of that may build a perception among unions that retiree medical trusts are a safer bet in the years ahead.
"The employees intuitively get this one," says Dennis Kinnan of the New Hampshire State Employees Association, which represents more than 8,000 state workers. "They clearly understand what the larger problem is here."