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Across the U.S., retirement plans in big cities and small ones are underwater. In Philadelphia, the city's three big pension funds were short $2.6 billion at the end of 2003. The police plan had enough assets to cover only 59% of promised retirement checks. That was after the city had sold $1.2 billion in pension-obligation bonds in 1999, the equivalent of paying your mortgage with a credit card. At the other end of the state, Pittsburgh was in even worse shape. In 2003, the police pension plan had enough assets to cover just 33% of promised retirement pay. That, too, was after Pittsburgh peddled $302 million in pension-obligation bonds between 1996 and 1998. In the end, taxpayers in both cities will have to pick up the tab. The place with the biggest problem is the state of Illinois, whose unfunded liability was estimated last year at $43.1 billion, or nearly double the state's budget.
And everywhere, the worst is yet to come: health-care obligations. A 2004 study by Workplace Economics Inc. found all 50 state-government employers offered health-care benefits for retirees under age 65. Many who work for state or local governments may retire in their 40s and collect a pension as well as receive subsidized health care. Although future pension costs are well known because contributions and estimates of potential liabilities must be accounted for, such is not the case with health care. Governmental entities pay the bills out of current revenue. As is the case with everyone else's, those bills are exploding. So, too, are future obligations, as the baby boomers prepare to leave their government jobs. This year New Jersey's State Health Benefits Program will cost taxpayers $1 billion for active workers and an additional $900 million for retirees, according to Fred Beaver, director of the Division of Pensions and Benefits. By 2010, the state will spend more on health care for retirees ($2.3 billion) than for active workers ($1.8 billion).
Come 2007, state and local taxpayers everywhere will get their first full picture of current and future health-care costs of public employees. That's when new accounting rules go into effect requiring governments to itemize health-care spending and forecast costs for coming years. The change in bookkeeping will either set off a wave of tax increases, reductions in government services or both. Lest anyone think state and local retirement-plan sponsors may emulate those in corporate America and simply walk away from the promised health-care benefits, think again. More than once, courts have ruled that health benefits promised to government workers (among them judges and legislators)--unlike those promised to workers in private industry--must be honored.