The City of New York has a $70 billion liability for retiree health insurance costs and other post-employment benefits (OPEB), not including pensions. These benefits are contractually owed to retired city employees and are largely unfunded. The City created a trust fund to begin to save funds for these obligations, and Mayor Bill de Blasio will increase it to new heights with his proposed budget, but far more needs to be done to ensure that funds will be available to pay these obligations in the future.
In 2006, Mayor Michael Bloomberg and the City Council created the Retiree Health Benefits Trust (RHBT) fund to amass resources to tackle the liability. Unlike pensions, retiree health benefits are paid from the city budget as bills come due, rather than actuarially funded over the long term to ensure adequate resources are available to support benefits offered in the future. The RHBT is a first step to moving away from the completely pay-as-you-go approach and having accrued funding available to pay health care expenses.
It's a crucial first step because of the eye-popping size of the liability. Second only to that of California, New York City's liability stems from the City's relatively generous provision of health insurance to retirees who qualify after ten years of service and are not required to contribute to insurance premiums for themselves or their spouses. The enormity of the obligation indicates costs will grow to ever-higher amounts, placing stress on the city's finances that could result in abrupt cuts to retiree benefits or reduction in necessary services.
Since the creation of the fund, deposits have been made in good economic times, but it has been raided for budget relief in bad times. The fund started with $2.5 billion, deposited in fiscal years 2006 and 2007 while the city's economy boomed. No further deposits were made after the recession struck, but the funds gained interest to bring its balance to $3.2 billion. Starting in 2010, the City used the RHBT as a de facto reserve fund, depleting it of $2.2 billion over the course of four years.
To his credit, Mayor de Blasio reversed course on a previously planned $1 billion withdrawal from the fund scheduled in 2014. Since then $1.8 billion has been added, and the Mayor's Executive Budget plans to add $250 million more in fiscal year 2017 to bring the fund's balance to the highest level ever: $3.7 billion.
This is a good start, but it is only 4 percent of the outstanding liability. Building the resources necessary to tackle the OPEB liability will require consistent contributions and a commitment to protect these gains. There should be explicit guidelines requiring annual deposits and limiting withdrawals only to special circumstances, such as when there are unexpected spikes in retiree health insurance premiums. Deposits should be calculated based on a share of the annual cost of retiree health benefits; for example, a 5 percent contribution would require a deposit of approximately $100 million in fiscal year 2017, a modest amount in an $82 billion annual budget.
Having such guidelines will allow the fund to grow steadily and predictably and will prevent withdrawals to support or increase other recurring spending. It is an important measure to begin to address the large looming liability for retiree health benefits.
Mayor de Blasio and the City Council have affirmed their commitment to the fund by replenishing and growing its balance, and these gains should be protected. They should now adopt explicit guidelines as part of the imminent budget agreement.