A good chunk of Detroit’s debt problem is a health-costs problem. The Detroit Free Press notes that the city has $5.7 billion in unfunded retiree health-care liabilities, nearly a third of the city’s debt.
For this problem, at least, Detroit appears to have a relatively straightforward solution, one that hasn’t been available to bankrupt cities in the past. It plans to transition its 19,389 retirees into the health law’s new marketplaces, saving the city somewhere between $27.5 million and $40 million annually.
This isn’t a policy that cities need to go into bankruptcy to execute; there are many that are struggling with the costs of retirees’ pensions and health benefits. One report from the Pew Center for the States looked at 61 cities across the country and found that, taken together, they had $126.2 billion in health benefits promised to retirees. Only 6 percent of that amount – $8 billion – currently has funding.
Sometimes it works out fine for cities to pay as they go for their retirees’ health-care costs, says David Draine, a senior researcher at Pew. This is especially true if they offer a small benefit, perhaps a few hundred dollars a month stipend. But other cities offer more generous benefit packages; a few Rhode Island cities go so far as to offer seniors’ exclusive coverage, rather than have them participate in the federal Medicare program.
Two factors have made it harder to pay for those bigger benefit packages. Baby boomers are starting to age into retirement, meaning their are fewer workers paying into the program. Second, health-care costs have grown more rapidly than the rest of the economy (although they have slowed a bit in the past few years). That means some cities, such as Detroit, have an especially large bill to pay for retirees’ health-care benefits.
“Atlanta has got an unfunded liability of $5,000 per household,” Draine says. “In Detroit, it’s about three times that.”
Cities have a few options for reducing their health-care commitments. Draine says a health-care program is actually a little easier to manage than a pension plan, where there are stricter rules about tinkering with the government’s commitment. Cities can change eligibility for the program or pare back benefits. Some that offer supplemental coverage for Medicare might just have the over-65 crowd rely solely on the federal program.
The Affordable Care Act created a new option: moving retirees onto the public health-insurance exchanges. There, state retirees could shop for coverage and purchase their own plans. And, if their salaries were low enough, they might qualify for federal assistance.
Chicago announced plans in May to phase out retiree coverage, either moving workers into the exchanges or, if they’re old enough, having them rely entirely on the Medicare program. Detroit included a similar plan in its debt-restructuring proposal last month.
The big benefit to moving workers into the state marketplaces is that it shifts the burden of paying for health care from the city to the federal government. That’s a benefit for the city, at least. For the federal government, more cities moving retirees into the marketplaces means a higher price tag for Obamacare, as it subsidizes more individuals’ coverage.
There are some drawbacks for states, too. Some city workers might not qualify for subsidies in the new marketplace because their household income is too high. Others might not be able to find an affordable plan in their area, leaving them in a bit of a lurch until they turn 65 and qualify for Medicare.
Detroit’s proposal comes with another interesting wrinkle, due to the fact that Michigan is still undecided about whether it will expand its Medicaid program. If it doesn’t, that would mean Michiganders below the poverty line would not have access to the health law insurance expansion. That would include retired city workers who, under Detroit’s plan, might not have an option for affordable coverage.