Looming Liabilities

Maine taxpayers owe public employees more than $2 billion for promised retirement health benefits that Augusta legislators have not funded.

According to Maine’s State Controller, Terry Brann, only $0.1 billion of a total $2.3 billion liability has been set aside to meet future obligations. That means that if every state employee and teacher retired today, Maine would only have enough money to cover 5% of costs.

With 585,000 non-farm workers in the state of Maine, each gainfully employed resident owes the government $3,760 to pay for state retiree health care benefits.

The PEW Center on the States released a report earlier this spring that outlined these looming liabilities. Catherine Barrett, a senior adviser who helped to write the report, said:

“The problem is that if you are going to offer retiree benefits, you really need to pay for them as people earn them. Otherwise, when people get to the point of retirement, you’ll have money due that you haven’t set aside.”

She said the state had offered these generous packages because they didn’t need to be paid until later: “It doesn’t cost anything to offer it to a current employee. The money comes due down the road.”

Founder and CEO of the Institute for Truth in Accounting, Sheila Weinberg, reiterated the point:

“State officials knew they were circumventing the balanced budget requirements by using deferred compensation tricks to reduce the costs they had to include in the budgeted expenses.”

She said balanced budgeting is like a checking account: money that goes in or out has to be accounted for. But in the case of future payments promised to state employees and teachers, it’s like promising to write a check in the future without accounting for that expenditure today.

According to research by PEW, 377% of current payroll would be needed to fully fund non-pension benefits for recipients today.

That could be problematic, according to Charles Lawton, Chief Economist at Planning Decisions, a Maine-based public policy consulting firm. Future unfunded obligations may compromise future budget health.

“There are serious potential drags on both the provision of government services and on business growth. Meeting the debt obligations is going to compete with current services. It may increase critical decisions, such as cutting current services to cover unfunded liabilities.”

“It’s a ticking time-bomb in the sense that people can kick it down the road, but eventually it will have to be addressed,” he said.

Previous to new reporting requirements, governments had been using a pay-as-you-go system, where current payroll deductions were used to cover retiree health care costs, but the Government Accounting Standards Board determined that the pay-as-you-go system needed to be replaced because it failed to “recognize the cost of benefits in periods when the related services are received.”

In the absence of standards, Maine had been treating these future promises as non-existent in their financial reports.

Now that the $2.3 billion liability has been identified, the state is acting to rectify the under-funded promises.

“It’s definitely a problem we take seriously,” said Terry Brann, Maine’s State Controller. “It is the debt of the future. The minute you hire an employee, you are accumulating costs. That liability kicks in the day they get hired.”

He says that Maine is trying to resolve the issue through a trust fund mechanism. Maine has made contributions in recent years to meet the state’s full liability. If the trust fund continues to be funded at the current rate, the liabilities could be paid off within thirty years.