As the impeachment of President Trump continues and we gear up for the primary season to select a Democratic challenger, it’s worth remembering one of the biggest issues facing America that no one talks about: healthcare costs for state and local government retirees. You might be getting such a benefit as a retiree, or paying for it as a taxpayer. Either way, they’re important to you, even if you don’t think about them.

These aren’t pension costs, which occasionally we’ll hear someone say are out of hand. Once a year, the Pew Trusts or some other group will “tsk, tsk” states for not setting aside enough money to pay their pensions, and point out Kentucky, New Jersey, and Illinois as the states with the worst funding ratios – with 34%, 36%, and 38% of the assets they need to make good on the pension benefits they’ve promised, respectively.

Retiree healthcare benefits are different. Typically known as other post-employment benefits (OPEBs), healthcare costs for state and local government retirees can change along with healthcare costs in general, just like premiums change for the rest of us. This puts the governments who promised these benefits in a bind as they watch their costs march higher.

You’d think that our cities and states would fund OPEBs like they do pensions, or even more so because the costs grow faster than inflation. But they don’t.

In fact, 19 states don’t put away a single dime for OPEBs, even though their liabilities for benefits run into the billions of dollars. Only eight states have an OPEB funding ratio higher than 30%, and the total unfunded liability across the country is $700 billion. Which leaves many OPEB administrators hoping for the same thing: a Democratic win at the White House in November.

New Jersey, California, and New York essentially have zero dollars set aside to pay for retiree healthcare, while their unfunded liabilities sit at $85 billion, $78 billion, and $91 billion. Somehow, Illinois has managed to achieve a negative funding status of 0.2%, or -$106 million, against its $53 billion liability.

While each of these states lean Democrat anyway, a presidential victory in November will give them a better chance of some form of “Medicare-for-all” becoming the law of the land. With a new government healthcare option, the city and state governments could push their retirees onto the new program and hopefully reduce, if not eliminate, their OPEB costs.

Even if the governments were required to fund the premiums, the retirees would likely qualify for subsidies, which would significantly reduce the state and local government liabilities by transferring part of them to the national government. Otherwise, they’ll have to make some hard choices.

Just as with pensions, the fixes are easy to see but hard to implement. Cities and states must raise taxes to pay the benefits, lower the benefits to retirees, or some combination. But this is where cities and states have a little wiggle room.

Unlike pensions, in many states the governments can unilaterally change the benefits, which can lead to unwelcome surprises for retirees as those in Ohio are finding out.

The Ohio Public Employee Retirement System (OPERS) estimates that its healthcare program will go bankrupt by 2030. To stem, but not end, the flow of red ink, the program is dramatically cutting benefits to the more than 200,000 retirees in the system, as well as the way active workers accrue retirement healthcare benefits.

Among the changes, if a retiree is eligible for Medicare, he could lose between $600 and $1,200 in annual benefits. For retirees not yet eligible for Medicare, OPERS offer a group health program. In 2022, OPERS will eliminate that group program and instead give retirees a stipend of roughly $360, which they can use for healthcare they find on the open market. The average Silver Plan for a 55-year-old through the Affordable Care Act costs about $500, which will leave these retirees short by $140 per month, or more than $1,600 per year.

Just as with pensions, the longer we go without working on a long-term solution, the more expensive the fix becomes. But it’s political suicide to bring this up, so instead, state and local government officials sit back and wait, hoping the federal government will somehow bail them out.

P.S. In case you missed it, yesterday was a special day here at Charles Street Research with the broadcast of an unprecedented event, The Delta Profit Summit, where my colleague Michael Coolbaugh shared a wealth of extremely valuable knowledge and experience from his time on Wall Street. This includes letting viewers in on one of Wall Street’s very own algorithms and showing them how they can use it to generate impressive returns in 2020.

The content of our articles is based on what we’ve learned as financial journalists. We do not offer personalized investment advice: you should not base investment decisions solely on what you read here. It’s your money and your responsibility. Our track record is based on hypothetical results and may not reflect the same results as actual trades. Likewise, past performance is no guarantee of future returns. Certain investments such as futures, options, and currency trading carry large potential rewards but also large potential risk. Don’t trade in these markets with money you can’t afford to lose. Delray Publishing LLC expressly forbids its writers from having a financial interest in their own securities or commodities recommendations to readers.

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