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UB Regional Institute Releases Policy Brief on Local Government Legacy Costs

By Rachel M. Teaman

Release Date: January 14, 2009

BUFFALO, N.Y. -- Local governments are reeling from the current recession, but not far off is another fiscal crisis of potentially catastrophic proportions. Over the next 30 years, nine of the region's largest local governments will have to come up with nearly $4 billion to cover their retirees' non-pension benefits, according to the latest UB Regional Institute policy brief, "The End of Local Government as We Know It?"

This massive financial obligation, precipitated by skyrocketing health care costs, an aging workforce, longer life spans for retirees and contractual health benefit packages, could potentially bankrupt those governments with the heftiest burdens unless drastic measures are taken.

The institute's policy brief reviewed the 2007-08 financial statements of nine local governments based on a new government accounting standard requiring state and local governments to report "other post-employment benefits," including health care.

"These figures reveal for the first time the sheer scale of the long-term benefit commitments faced by local governments," said Kathryn A. Foster, institute director, adding that before the new standards local governments in New York State were not required to estimate or publicly report these liabilities.

Commitments include $1 billion each for the City of Buffalo and the Buffalo City School District, a combined obligation of $7,500 per city resident. At the low end is Williamsville Central School District, with $1 million, or $16 per capita, in liabilities. Niagara Falls City School District's overall liability of about $264 million translates to $4,800 per city resident, the largest single per-capita obligation of all nine governments. Other governments reviewed were Erie, Niagara, Cattaraugus and Chautauqua counties and the Town of Amherst.

Annual set-asides could mitigate this long-term liability, but governments are putting away less than half of what they should, paying only for the benefits due that year and letting future obligations accumulate as retirees grow in number and health costs rise.

Yet the short-term cost of "prefunding" is significant. If these governments were to have met their required contribution for 2007-08 through property taxes only, levies would have jumped by double-digit percentages in seven of the nine bodies studied. For instance, City of Buffalo residents would have paid an additional $1,445 for a house assessed at $100,000 (93 percent hike for school district levy and 47 percent for city levy). Tax hikes would have reached 46 percent for Niagara Falls' school district levy and 23 percent for Erie County.

"There's a hard reality here, and repercussions to the taxpayer are inevitable," said Darren E. Kempner, finance policy analyst with the institute. "While prefunding these obligations is costlier in the short-term than the pay-as-you-go approach, the alternative could eventually overcome local governments to the point of insolvency."

Governments are not permitted to borrow to cover prefunding obligations. Local governments will need to set up irrevocable trusts to safeguard these funds from creditors or other obligations. These trusts are not yet explicitly authorized in New York State, although pending legislation may change this.

In addition to prefunding, cost containment measures will become increasingly important. These include entering into cooperative health care plans with other governments to enhance negotiating leverage (a local example of this is the Labor Management Health Care Fund in Erie County, which already has eight entities participating).

Increasing employee health contributions (premiums, deductibles and co-pays) or switching from defined-benefit to defined-contribution systems could result in substantial savings, but action is constrained by the collective bargaining process. Municipalities with the largest retiree liabilities are those offering lifetime health care coverage.

Chautauqua County has been able to keep its unfunded liabilities relatively low ($25 million or $189 per capita) by offering retirees basic health benefits for a limited time period, and setting aside nearly $12 million in prefunding since the early 1990s.

"Doing nothing is simply not an option," Foster said, adding that local government fiscal pressures are unrelenting, including not only the current recession and these liabilities, but also continued population decline and aging infrastructure. "Governments will need to consider real fiscal reform and, in extreme cases, radical, structural reform."

"The End of Local Government as We Know It?" is part of the institute's policy brief series, which informs regional issues with timely, reliable data and analysis. All policy briefs are available online at http://regional-institute.buffalo.edu.

A major research and public policy center of the University at Buffalo, the Regional Institute plays a vital role in addressing key policy and governance issues for regions, with focused analysis of the Buffalo-Niagara region. A unit of the UB Law School, the institute leverages the resources of the university and binational community to pursue a wide range of scholarship, projects and initiatives that frame issues, inform decisions and guide change.

The University at Buffalo is a premier research-intensive public university, a flagship institution in the State University of New York system and its largest and most comprehensive campus. UB's more than 28,000 students pursue their academic interests through more than 300 undergraduate, graduate and professional degree programs. Founded in 1846, the University at Buffalo is a member of the Association of American Universities.