The Vesting, Modification, And Financing of Public Retiree Health Benefits In Light of New Accounting Rules

Source: John Sanchez, John Marshall Law Review, Summer 2008

New accounting rules being phased in between 2006 and 2008 will require state and local governments, for the first time, to report the full cost of public retiree health benefits (“PRHBs”) for both current employees and retirees. … While strictly speaking the case narrowly involves public pension plans, any decision is likely to influence all public employment retirement benefits, including health benefits that offer different benefits packages for different age groups. … On the minus side, some public employers fear that pre-funding will change the nature and status of retiree health benefits from unvested to vested. … But in the public sector, what if a statute forbids the vesting of PRHBs but the contract includes a promise of lifetime retiree benefits? … An oversight board arbitration award aimed at altering retirees’ medical benefits was challenged as: 1) a breach of contract; 2) an ultra vires act; 3) a taking under the state and federal constitutions; and 4) an impairment of contract rights in violation of the federal constitution. … While nothing in the new accounting rules forces states to switch from pay-as-you-go financing, several factors will exert pressure on states to increasingly pre-fund PRHBs: (1) failure to pre-fund may result in a downgrading of a state’s creditworthiness, making it more expensive to borrow money; (2) the decreasing ratio between the numbers of active employees to retirees will increase the cost of PRHBs; (3) the aging workforce and financial incentives to retire at younger ages will increase the cost of PRHBs; and (4) if recent trends in the development of medical technology continue, the costs of healthcare will continue to outstrip inflation for the foreseeable future.

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