Bloomberg News

Health Care Bigger Worry for States Than Pensions, Millard Says

November 09, 2011

(For more news from the Bloomberg State and Municipal Finance Conference, see EXT2 <GO>.)

Nov. 2 (Bloomberg) -- The cost of health care for public employees surpasses unfunded pension liabilities as a financial worry for states, said Charles Millard, managing director for pension relations at Citigroup.

“There’s no way they will be affordable with health-care costs continuing to explode,” Millard said today at the Bloomberg State and Municipal Finance Conference in New York.

Millard joined Michigan Treasurer Andy Dillon and Richard Raphael, head of public finance for Fitch Ratings, on a panel discussing government pension costs. All three said that more states will push to replace traditional pension plans with defined-contribution plans, such as a 401(k), which don’t guarantee a set return.

Such conversions, however, could leave employees with too little for retirement if they fail to pay enough into their accounts, they said. Dillon said he would favor a requirement that Michigan state employees put a certain percentage of their pay into their 401(k)s.

Defined Contributions

Michigan converted from a pension to a 401(k) for all new state hires in 1997. The state pays 4 percent of employees’ salaries into the fund and will match what workers contribute, up to an additional 3 percent. The average savings for Michigan employees under the 401(k) plan is $100,000, not enough for a comfortable retirement, Dillon said.

Last year, Michigan changed pensions for all newly hired public-school teachers to a so-called hybrid plan that combines a less generous traditional pension with a 401(k). Other states with hybrid retirement systems for public employees are Utah, Georgia, Indiana and Oregon.

Dillon said he is looking at dedicating the $800 million the state receives each year from its lottery to pay health care for public school employees. He said the revenue could be effectively sold to investors to set up a permanent fund, like a Voluntary Employees’ Beneficiary Association, to cover what he said is a $14 billion liability. The lottery income wouldn’t cover the entire cost, Dillon said in an interview at the conference.

The fund, Dillon said, would replace money that school districts now pay for employee health care. Michigan’s lottery revenue is dedicated solely to public education, and accounts for about 8 percent of state appropriations to schools, he said.

Pension Returns

Fitch recently lowered assumptions on investment returns for pension plans to 7 percent from 8 percent to analyze their fiscal health, in order to better reflect the markets, Raphael said at the conference. Dillon said he is considering a similar move for Michigan’s pensions.

Raphael said pension systems are “a big factor in our ratings” of states. He said pension-plan solvency is a bigger problem for local governments that have fewer financial resources than states.

“It’s a severe issue for locals and will continue to be a pressure on budgets as a liability,” Raphael said.

--Editors: Stacie Servetah, Stephen Merelman

To contact the reporters on this story: William Glasgall in New York at; Chris Christoff in Lansing at

To contact the editor responsible for this story: Mark Tannenbaum at -0- Nov/02/2011 15:33 GMT

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