The numbers are huge, the kind of numbers that make “people sweat.”

Erie County’s liability? Nearly $1 billion. Buffalo’s price tag? At least that much. Probably more.

For the first time, taxpayers are learning the bottom line: long-term costs they will pay to provide health insurance to government retirees, a public employee benefit that has come under increasing scrutiny in recent years.

And that’s just for city and county government.

Add in local towns, villages and school districts, as well as colleges, hospitals and libraries, and the cost of retiree health insurance balloons into the billions. New York State alone has a liability of $47 billion.

Governments and authorities across the country are being asked for the first time to forecast and disclose the long-term cost of health insurance for retirees. The numbers are eye-opening.

“The public will be astonished when they learn the real cost of these benefits,” said Kenneth Vetter, executive director of Erie County’s control board. “When the cost of the county’s retiree health insurance benefits is virtually equal to its annual budget, yeah, those are big numbers.”

Even more important, perhaps, are the short-term cost increases staring taxpayers in the face.

Erie County now knows its annual bill for retiree health care will triple in just 10 years. By 2016, the annual price tag will have jumped from $12 million to $37 million.

“These promises have been out there for a while,” said Doug Benton, a senior credit officer at Moody’s Investors Services. “What we’re talking about now is the measurement and disclosure of the cost of those promises.”

For years, government doled out generous retirement benefits, most notably health care, to teachers, firefighters, police and others.

Few, if any, of those employers ever tracked the true cost of those benefits. Until now.

Thanks to an obscure nonprofit group called the Government Accounting Standards Board, state and local governments now have to estimate and disclose how much it will cost to completely fund health care for retirees.

The liability amounts to the cost of covering two sets of employees — those already retired and those still working — from the time they retire until they die or no longer are eligible for insurance.

In Erie County government, that translates into 10,000 current and former employees. In Buffalo, the number of city and school employees is even higher — 13,800 active and retired workers.

“I’m expecting a number north of $1 billion,” said Gary M. Crosby, chief financial officer of the Buffalo schools.

The city is awaiting two separate liability estimates, one for city government, the other for schools — and each comes with a huge downside.

“The question is: How will the financial markets and rating agencies react?” Crosby said last week. “It remains to be seen how much damage might occur because of these new disclosures.”

‘Better understanding’

The goal behind the new standard is to increase transparency in government finances so that policymakers, taxpayers and investors know the real cost of providing retiree benefits.

And the result has, indeed, been transparency. For the first time, management and labor are seeing the real cost of what they agreed to provide retirees.

“Every municipality will have a number that makes people sweat,” County Personnel Commissioner John W. Greenan said. “No one is going to be able to fund their liability.”

Erie County, Buffalo, Amherst and a handful of suburban school districts will be the first in this area to disclose their liabilities. That is because each has a budget in excess of $100 million. Municipalities with smaller budgets have another year to meet the new accounting standard.

“We have time, but no time to waste,” Deputy State Comptroller Thomas Sanzillo told lawmakers during a recent Assembly hearing.

Until now, governments operated under a pay-as-you-go strategy when it came to health care for retirees. Each year, they budgeted an amount they knew would cover the cost but with little knowledge of how that cost would increase. That is about to change.

Erie County, for example, now knows that its retiree health care bill will triple in just 10 years. That estimate is part of a draft report by its actuary, Harbridge Consulting Group of Syracuse.

“We now have a better understanding of our long-term costs,” said County Comptroller Mark C. Poloncarz. “This puts all municipalities on notice as to what’s coming down the line in terms of costs.”

Poloncarz said he was not surprised by the county’s total liability — Harbridge’s draft estimate is $952 million — but he was shocked by the sharp increase in costs over the next 10 years.

How will county pay?

The question is: How will the county pay for those big increases?

Fortunately for officials, there is nothing in the new standard that requires they fund their liabilities at this point.

There is, however, an expectation among credit-rating agencies that governments develop a long-term strategy for dealing with these huge unfunded liabilities.

“Cost containment,” Greenan responded when asked how the county will deal with its liability. “Our strategy is to negotiate with our unions.”

Publicly, elected officials like to express hope that the new accounting standard and everything it reveals will give them leverage in gaining health care concessions from employees.

Privately, they acknowledge that unless the state’s Taylor Law is changed, their ability to bargain cost reductions is very difficult, even with revelations about the long-term cost of those employee benefits.

Union leaders know that the huge liability numbers won’t help their cause, especially among taxpayers. But they argue that retiree health insurance came with a price to their members, as well.

One county union, made up mostly of lower-paid blue-collar workers, gave up a pay raise and agreed to a single-insurer health plan as part of a deal in 2004 that gave them better health care benefits in retirement.

“The saving from that alone was $17 million that year,” said John Orlando, president of Local 1095, American Federation of State, County and Municipal Employees. “My question is: Where did that money go?”

Buffalo teachers have been the target of scrutiny and criticism over the rising cost of health care for retirees.

“Obviously, employers are going to use whatever they can against us,” said Philip Rumore, Buffalo Teachers Federation president. “But these aren’t real numbers. They represent an absolute worst-case scenario.”

Rumore’s point is that not all Buffalo school employees end up retiring from the district. On top of that, the estimates don’t account for possible health care reforms and concessions down the road.

If there is an impact on government finances, it may come from Wall Street. And with the lower credit ratings come higher interest rates and borrowing costs.

“Communities are working under the assumption that there may be a credit-rating impact,” said Peter Baynes, executive director of the New York State Conference of Mayors.

That is especially true among older Northeastern communities where property, sales and income taxes already are high. Baynes sees the state, with its deeper pockets, as a likely savior. “I can’t see how our communities can do it without a partnership with the state and an increase in state aid,” he said of a remedy.

Benton thinks Wall Street will be patient, but only if localities exhibit the political will and financial ability to continue funding their liability. “It’s one of a multitude of factors,” Benton said of the liabilities’ impact on individual credit ratings. “It will depend on the size of the liability and how it relates to a municipality’s resources.”

So far, most governments are taking a wait-and-see approach to the problem.

One of the few exceptions is New York City, which created a trust fund last year that can only be used to pay health care costs. The city put an initial $1 billion into it with plans for an additional $1.5 billion this year and next. The city’s total liability is $50 billion.

Erie County, of course, doesn’t have that type of cash on hand. “We don’t have money to set aside right now,” Poloncarz said, “but we also can’t continue to pay as we go.”

Copyright 2007 - The Buffalo News