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
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
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
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
"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
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