Abstract

State and local governments have promised nearly $1 trillion in retiree healthcare benefits to public employees. Although retiree healthcare benefits represent a form of compensation, historically, state and local governments have not set aside any money to pay for the promised benefits. Compensating employees with promises of future benefits has enabled state legislatures to use public dollars for other priorities, while ignoring the growing liabilities associated with the healthcare promises. As these liabilities have come due, they have strained state and local budgets. Some public employers have simply cut the benefits, and public employees have had limited recourse to hold cities and states to their original deal.

At the same time, many public employers have actually begun to pay down their unfunded liabilities for retiree healthcare. In 2004, new disclosure requirements forced state and local governments to acknowledge the full scope of their commitments for post-employment benefits. By 2015, some 35 state legislatures had created irrevocable trusts to set aside assets for benefits due in future years. However, while some of the trusts—most notably some that cover state legislators and judges—have accumulated assets to cover the liabilities, other trusts have remained glaringly empty. Using newly collected data on over 100 state-administered retiree healthcare plans, this Article shows that stronger constraints on legislative control over funding decisions, as well as stronger measures of fiscal health at the state level, have been associated with better funding progress. Ultimately, this Article contends that although the trend toward prefunding is encouraging, the current legal framework regulating retiree healthcare benefits impedes serious funding efforts. Disclosure requirements and governance reforms can promote funding discipline and mitigate uncertainty in the short term. In the long term, any significant resolution requires a deeper rethinking of employer promises for post-employment healthcare benefits and of the institutions best suited to manage such promises for decades to come.

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