GAO: Retiree Health Spending Remains Underfunded in Many States

Janice Simmons, for HealthLeaders Media , December 29, 2009

Health-related spending represents the fastest growing component in state government budgets throughout the United States. And, while Medicaid will remain the largest health-related expenditure component among state governments for now and the near future, spending on state and local government retirees' health benefits is projected to more than double as a share of total operating revenues to 2.1% by 2050, according to a new report from the Government Accountability Office (GAO).

GAO said that according to its model, by 2050 the number of state and local government retirees is likely to grow by about 70%—from the current level of 3 million to 5.1 million retirees. However, the cost of retiree health benefits is projected to grow more quickly, at an annual rate of 6.7% over that same period. Retiree health benefit liabilities of state and local governments currently amount to more than $530 billion, GAO estimated, with liabilities heavily dependent on projections of healthcare costs.

According to its model, GAO said this means that current spending of $15.8 billion on retiree health benefits will grow to $237.3 billion by 2050, in current dollars. However, much of this is will remain an unfunded liability for many of those states and local governments. Many of these governments have not set money aside to pay for these benefits.

But some state and local governments have taken actions to address liabilities associated with retiree health benefits by setting aside assets to prefund the liabilities—before employees retire—and by reducing these liabilities by changing the structure of retiree health benefits. Approximately 35% of the 89 governments that GAO reviewed reported having set aside some assets for retiree health, but the percentage varied.

Among the 10 selected governments that GAO reviewed in more detail, officials from the governments that were prefunding at least a portion of their retiree health liability reported using irrevocable trusts. However, these governments varied with regard to the source of the money used to prefund their retiree health liabilities and how they determined the level or amount to commit to prefunding each year.

To address their retiree health liabilities, the governments GAO selected made three key types of changes to their retiree health benefits: changes to the type of retiree health benefit plan, to the level of government contribution, and to the eligibility requirements employees need to meet to qualify for retiree health benefits.

Changing the level of government contribution, such as reducing the amount or proportion of health insurance premiums paid for by the government, was the most common benefit change reported. Some of the selected governments made more than one change to their retiree health benefit structure. The changes were most often applied to the retiree health benefits of newly hired employees or currently active employees.

"This report clearly demonstrates the effect that rising healthcare costs are having on state and local governments," said Sen. Herb Kohl (D-WI), chairman of the Senate Special Committee on Aging, who requested the study.

Janice Simmons is a senior editor and Washington, DC, correspondent for HealthLeaders Media Online. She can be reached at

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