Please give a warm
Georgia Tech Welcome to our best for

our last guest Dr Bob Posen.

Thank.

You.

Well thank you for
that very lovely introduction.

You left out my high school
basketball career though.

And probably because a very short lived.

But.

I wanted to say that you
know the reason I'm here is.

I work for quite a few years
with the elder Tom Williams he

was a trustee of the Fidelity
funds when I was president and

we grew those friends from about two
hundred billion to a trillion and

he was really a great
trusty very smart guy

very tough question earth and
a guy of huge integrity and

also a really supportive person so

it's rare that you see a person
with all those characteristics and

I'm very happy to be giving
this lecture in his honor and

glad to see his son here.

So I was thinking about what
I should talk about and

I thought this is a subject that is
sort of below the radar screen and

it might be really of interest to you so

think about this Detroit went
into bankruptcy we all know that

it's underfunded pension liabilities
We're about three point five billion but

it's underfunded retiree
health care was six billion.

So everyone knows a lot about
the pension crisis that

we're having in lots of states and
lots of cities but really there's.

Very significant crisis
in most cities of most

states including Georgia on retiree
health care so that's what I'm going

to talk about today and I'll leave
plenty of time for questions and

quite frankly I am used to the Socratic
method so if anybody has any questions or

comments in the middle just raise
your hand we can debate it so

please I love questions
I love interaction so

let's see let's start to
see if I could do this.

Good start.

Not there it is OK so
what are we going to cover today

we're going to first understand
defining what the problem is and

the accounting rules which are very
important in this area then we're

going to look at some numbers in terms
of the problems in various states and

cities including Atlanta Georgia
we're going to compare retiree health

care issues to pension issues and then I'm
going to give you some of my ideas about

possible changes and going to talk
about the relationship to the A C.

A better known as Obamacare so
how to get one of these so

let's begin with the question
of what are these post

there often call other
post employment benefits.

Just another acronym but
what they really are are when

public employees retire and
many of them can retire after twenty or

twenty five years so they're retiring at
forty five or fifty in most states and

most cities the public employees
are promised virtually free health care

until Medicare until sixty five and
so usually the state or city pays.

Eighty to ninety percent of the premiums
of these people are retired and

sometimes even in Medicare they continue
to get retiree health care benefits and.

This is a very substantial
number as will see so

these are people who are getting
essentially free retiree health care from

say age fifty to sixty five and
then they're getting subsidized

even when they're in Medicare because part
of Medicare you do pay some premiums so

when you see this phrase OPAP
ninety nine percent of opens

our retiree health care so there
are a few other things stuffed in it but

they're not very important now.

So I get that.

OK.

So one of the questions
you might ask is how is it

yes.

I

mean.

I feel like it was my.

Problem.

Or.

I think that scares me is if
you get asked a question.

I think.

We've.

Reached.

OK well I still haven't
heard the question but

here's here's here's you're
right you're right to say.

That most corporations had retiree health
care and they're no longer paying it right

but in the public sphere states and cities
eighty to ninety percent of states and

cities are still paying retiree
health care lenders and

it's being negotiated and being modified
and there's a big debate about it but

most are still pay less.

Well.

Yes I'm going to address that in my
proposals at the at OK OK I'll be there

a come back to.

OK So
one question you might ask is except for

this lady how did these large numbers
occur without your knowing it and

the answer is that accounting.

Until two thousand and six cities and
states were not required to disclose.

What they had promised in terms of retiree
health care so just think about it

if you're a city council member there's a
negotiation it's so much easier to promise

health care in twenty years than to
give a wage increase not because

it's below the radar screen
if you give wages wage

increase it's in the top of the newspaper
it's not in your financial state but

nobody knows about it so
this occurred below the radar screen for

many years now in two thousand and
six there's a board it's called the G.

A speak as me it's
the Government Accounting Standards Board

which sets the accounting standards for
government entities you may have

heard of Fazul be the Financial Accounting
Standards how many people heard of as B.

in this room OK well this is
the government acquittal end of it but

it doesn't have the power that
fast we have because fast.

SPE derives its power from the F.C.C.
which essentially says if you don't follow

fast you can't put your financial
statements into registration statements

and perspective says so
Gaz We started by asking for

footnotes and they want it to
have some footnote disclosure and

Currently these liabilities
are not on the balance sheet and

most importantly as we'll see
there is no requirement for

advance funding these
are Pay As You Go Live Billings now

right now we are having.

A debate because hasn't
gaspy as proposed new

standards and if these standards
are adopted which I hope they will be will

have a lot more information about these
rehired retiree health care obligations

one of the most important questions is
what's the discount rate how many you guys

deal with discount rates so
OK so discount rate the the look

the the lower the discount rate the higher
the liability the higher the discount rate

the lower the liability so.

Lots of cities and states have played
games with the discount rate and

while the discount rate should
be representing what you can for

certain Get on a long term
investment something like three or

four percent most cities and states
are using seven and eight percent and

that's much too high so
guys beat is saying let's

get a uniform and reasonable discount
rate and that will give us a much

better sense of the liabilities here
remember discount rate means you

project your liabilities over fifty seven
years whatever it is and then you do.

Count them back to see what you
would have to invest now to for

sure get to that number in the future so
I don't know if

someone can guarantee me can someone
guarantee me eight percent here return for

the next forty years please
raise your hand I'll take it.

So in fact that's what's happening
the other thing that's been proposed

is that these liabilities should be on the
balance sheet of every city and state so

not just in these obscure footnotes
that a lot of people don't read but

actually on the balance sheet count
as a liability this will have

a big political impact and I think it's
already starting to have an impact

in the rating agencies who are looking
at the bonds of cities and states and

thinking about not only the pension
liabilities but the retiree health care.

Now.

Let's look at the scope of the problem
just to give you some numbers

outside of Georgia and
then we'll look at Georgia OK so

here what's the unfunded Opeth per capita

here the highest states New York
through its total Open is over

sixty billion New Jersey over
sixty million Texas fifty five

million Illinois thirty three
billion Those are huge numbers and

if you look at it per capita there
are still huge numbers New Jersey which is

New Jersey has the most
unfunded liabilities for

retiree health care of any state
think about that seven thousand two

hundred dollars per person and
liability that's a lot now

interestingly there are a number of states
that don't have very big liabilities here

they are they tend to be in the West
they tend to be in smaller states.

And states that somehow never got into
this routine and they have very managed.

All situations.

Now this is a chart that was done by J.P.
Morgan and

they're saying if you were to prefund this

obligation what should you be
putting into your retiree health

care fund every year and
what's actually being put in.

And as you can see in each of these states
what they're putting in is way below

what you would need if you wanted to
amortize this if you wanted to actually

advance fundis over thirty or
fifty or seventy years so

this is a problem that's growing every
year because each year the liabilities

are growing and
each year we're underfunded.

So let's take a look at Georgia so
the total liability in

Georgia as a state is
fifteen point four billion

so I don't know in Atlanta
it's a very wealthy city but

fifteen point four billion is real money
and what's the total advance funding

eight hundred eighteen thousand it's
trivial There is no advance funding and

so what's the open per capita
in Georgia one point four

one thousand four hundred seventy four for
every person in Georgia so

it's serious it's serious at let's take
a look at cities New York leads the way

New York City has seventy
billion in unfunded

retiree health care think about that even
in New York City that's a lot of money and

Austin where I live has four
point five five billion but

in Boston they just reduced the number to
three billion you know how they did it

they increased the discount rate.

Abracadabra went down from four and
a half billion to.

Three big Atlanta has
underfunded liabilities of

about one billion and this again you
get to these numbers here there is

no funding you know we think about pension
funds and we say it only has sixty or

seventy percent for MC It's really not
very well funded well these are zero

percent funded so
that's a pretty low number.

And again we see some cities
have done a pretty good job and

again many of them tend to be the West but

this is not something that you can't
do it's a political issue about

whether you're going to do it I'm going
to hold off on your question OK so

if we think about OPEC's versus
pensions This is an important

distinction because in
the pension we're all.

It is required under a reso for
companies and

under jazz before cities and
states it is required that there be

a separate trust set up and
that there be contributions be made

with the employer and
sometimes employee contributions and

pensions therefore have a lot of advance
funding the best places have like ninety

percent advance funding meaning that they
don't have to be putting in a lot of money

over the next ten twenty thirty years
the worst place to state is Illinois and

out but even that is fifty percent
funded it's only in this or

we have zero percent funding
the other thing about pensions that

is really tough is if you
try to change of pension.

Scheme often you will find
that the state constitution.

I don't mean a statute I mean
the Constitution of the state protect.

And essentially prohibits any
reduction in accrued pension benefits

how do I know that I was the secretary
of economic affairs in Massachusetts for

several years when we had a budget crisis
and we tried to make a really small change

in the way pensions four calculated
to reduce the liability and

the court said in Massachusetts this
is constitutionally protected so

you can't change it that's also true I was
just teaching in California that's also

true in California and California in
the San Jose they had a referendum and

the public voted to reduce some
of these pension costs not for

people who are already retired but
for people coming down the line and

the courts said no you can't do it so
this is a big problem with pensions and

this is the saving grace of retiree health
care retiree health care is not protected

by constitutions in any state and it's
easier therefore to negotiate changes and

to sort of slowly manage this down.

So just to give you some detail
from Massachusetts where

is this money coming from and I've
tried to think about how can you drive

this home to people that this is a problem
when you say to them Well it's a two

billion dollars problem or five billion
problem the most people it's to extract so

what I've been trying to do is translate
it into things that really hit home and

one of them is the property tax how much
property tax you pay because that property

tax in most cities and counties is
the main source of revenue and if more and

more of that has to go to retirees health
care that just means there's less for

schools for police for
parks for all those things so

here if you look at for cities and masses.

Since you can see that between two
thousand and nine and two thousand and

thirteen there was a substantial
increase in the retiree

health care liabilities
the most being here six and

Bedford said so
we see the numbers here and

then we see what the increase
in property tax was and

we can see that a large part of
the increase in property tax in

these cities was being devoted to retiree
health care in the case of Springfield

over one hundred percent in the case
of New Bedford fifty one percent so

if people start to realize that this
is not an abstract issue put it really

impacts their property taxes I believe
they will start to be alert about this and

think about what should we do here and
here's another set of numbers.

The town of Newton is about sixty thousand
people to Little's it's a nice suburb of

Boston and they spent twenty one
million dollars on total retiree

health care last year that represented
seven hundred forty seven dollars

of each households annual
property tax bill so this is not

a theoretical issue this is a big issue
in Massachusetts you're not allowed to

increase the property tax beyond a certain
level it's called Proposition two and

a half without a vote of the citizens and
so in Newton they had a vote and

they improved an increase in property
tax of eight point four million but

no one told people that eight million of
that was going to retiree health care

that's why they had to increase
the property tax what is one million

eight point one million translate into
seventy nine additional teachers so

this is what I want you to understand

that if we don't deal with this problem
the number will get higher and higher.

Or in this were we going to pay for

how to tax revenues out of
property tax revenues but

it's going to compete against all the
other needs that we think are important.

Now.

Let's think can go to this question of.

What we could do about this and so
this goes to the point you're making so

so one thing you could do is to modify
benefits and premium subsidies so

what does that mean well a lot of if
you look at a lot of these policies

many of them have no co-payments and
no deductible Now we know

that that incents bad behavior
if we want people to go

to doctors when they need it we need
modest co-payments and modest suppose

another question is as people
new people come in the system.

Are we going to make as generous
promises as we've done for the people or

reading tired and
a third question is what's the scope here

most company plans now you have
to pay separately for dental and

I care in many of these states and
cities that's automatically covered so

these are certain certain things that
you could do to while continuing to

have a reasonable health care package but
it would be a little smaller a little less

costly for the city or
the state now another thing is

eligibility S standards this is something
we've been fighting real hard for

in Massachusetts because in
Massachusetts if you work for a state or

city government for ten years even
part time then you're eligible for

retiree health care for the rest of
your life and that's ridiculous if

we're going to have retiree health care it
should go to the long term municipal and

state employees who have dedicated
their life to that it should be.

For people in the short term.

And the big question is whether or not
the employee should be covered as well as.

Unison as well as spouses and
children and lastly

really screwing up.

OK And
what lastly the question is should we and

subsidies when people get to
Medicare most of Medicare

is financed by the federal government
there are premiums it's a progressive per

premium system that is if you make
more money you pay more premiums so

it's unclear why we should have
any retiree health care for

cities or states once people hit the tick.

Another thing that could be done is
changing what are called the COLA as

the cost of living adjustments many
many cities and states provide that

as the cost of health care goes up the the
premium subsidies automatically go up so

this can get pretty costly because health
care costs have been going up the good

news about that is that there are a number
of states that have been revising

their Cola's down many of them
have been challenged in court but

the courts have said it's OK.

It's OK going forward not for
people who are retired but for

people who are in the workforce or
new workers now this is the most important

probably slide is there was just a
Supreme Court case involving a collective

bargaining agreement and the Supreme Court
was faced with this situation.

If you looked at the contract
like a lot of contracts it's

a negotiated document and
isn't totally consistent part of.

The contract said we promise health care
to these people full health care for

their lives but another part of
the contract said the contract

ends in three years and
has to be renegotiated so

the court said basically that.

You can't look at the when
you look at the contract and

it's inconsistent you cannot infer.

What the intent of the parties were
you actually have to present evidence

as to what happened at the bargaining
table and what actually people that and

the court established two important
presumptive principles one is

that if we're going to award
lifetime benefits in health care.

Then it ought to be in the express
language of the contract.

And that's an important principle and the
second one is generally benefits do not go

the on the end of the contract that is
when the contract ends the benefits sense

so what's going to be the result of
this is that this whole the combination

of the accounting issues becoming on the
balance sheet these numbers on the balance

sheet with this Supreme Court decision
we're going to start to have this all out

in the open on the table we're going
to start to have negotiations about

what actually should be in these parts
of the contracts going forward and

the good news is that the courts
are saying that you can have reasonable

changes what the way I look
at it is this right now

all these unions have unfunded promises as
we saw in Detroit if the if the newness of

holiday goes bankrupt there's nothing
backing those promises so there is a.

Compromise to be made where the package
of benefits is narrowed and

made reasonable and those are actually
pre-fund that's the sort of deal

that you can sort of think of see now
the last point I want to make here is that

in the Affordable Care Act Even
in every state almost

every state has an exchange now many of
them are run by the federal government

some of them are run by the state there's
a lot of Supreme Court there's a big case

in the Supreme Court that will look
at this but I assume that one way or

another they'll continue to be
federal premium subsidies so

the question is if we have retiree
health care's get their retirees get

their health care policies through these
exchanges they are then eligible for

federal premiums which means
a lot less costs for the state so

this is what I ran for Massachusetts
if you look at exchanges they have

three levels of health care policy the
lowest is bronze The second is silver and

they have gold so this is a gold
policy this is very good policy and

if you look at this it
would cost one thousand

three hundred one thousand per month per
family fifteen of fifty thousand but

the federal government will pay one
hundred forty five dollars that

if you're in that income group so
merely by taking retirees and

saying gradually you need to move
over to these exchanges states and

cities can shift a lot of money and a lot
of subsidies the federal government now

I'm not saying that's overall going to
reduce health care it isn't it's cost

shifting but it does it would make a big
difference to lots of cities and states so

what are the buy conclusions here
the conclusions are that this

unfunded liability.

These.

Are rising quickly and

they're rising in many cases much faster
than unfunded pension liabilities

because pension liabilities have to
have a separate trust to be funded.

The new accounting rules are going
to force us all in the open and

once these unfunded liabilities get on
the balance sheet it's going to make a big

difference to the politicians and
to the bond rating agencies but

the good news is that these
retiree health care promises

have less legal guarantees
than pensions and

are not in the Constitution so this is a
subject for collective bargaining I don't

know what the right answer is but people
can negotiate figure out the cost and

see whether they can do it so hopefully
that's what we're going to have here

is a real vigorous public debate people
are going to see the real numbers and

then decide what's a reasonable policy for
that city or

that state relative to other.

Services that they want to get so
I'm going to stop there and

I will take questions OK I'm going to.

I'm going to I'm going to let us before I
give you a second question I want to yes

sir.

You can mix statements no not on my
statement as just that I want to have

before we have people ask a second
question I want everybody to OK.

The plug question is about rewarding bad
behavior take these Western studies and

got a good job sort of
controlling their unfunded.

Retiree health care cost of if
they're if indeed you do move.

The burden from the state to the federal
government all you're done to shift that

the tax obligation in this is this is that

there's a kind of screw
the states that into well Joe.

But your were absolutely right if you
if you take a state like New York that

has run up this big huge liability and
you allow them to shift half of it to

the federal government that's
really rewarding bad behavior and

indirectly forcing Montana and Minneapolis
to subsidize them I would agree so

that's a good point and.

I think that's very much true but
it's a good point.

I'm soliciting other questions yes.

Yes So is there any work being done

parallel to what you're speaking of
to reduce the cost of health care

overall hospitalization
prescriptions especially.

That well there is a whole this is like
a whole separate lecture that could be

given what we're trying to do
to reduce health care costs and

the answer is we're doing some things but
we could do a lot more what are we doing

while I was involved with the structuring
of rehospitalization penalties

which you saw is that some hospitals had
twenty percent of their people coming back

within sixty days other hospitals had ten
percent so there's a huge difference so

now the way the federal government
reimburses these hospitals they get

analyzed if people come back within
sixty days it turns out the reason why

a lot of people come back in sixty days is
because they don't have a list of their

medication or there's a bad handoff
from the hospital to the local

doctor this isn't high tech it's low tech.

Look at it and there are there are there
are lots of things that people are doing

in terms of trying to create
accountable health care

there are a lot of things that people
are doing but it's slow and you're.

Really talking about the change
in culture yes I want to tell

the tale of two companies I worked for
sprint from one thousand nine hundred

ninety four was covered by pension then I
worked for Nextel from one thousand nine

hundred seventy I hope there's a thousands
in here so I'm going to say I work for

next help from two thousand from one
thousand nine hundred seven to two

thousand and
six they were merged with fourteen years

I took a package from Nextel two
thousand and six got paid for

that layoff nine months salary nine
months pension start working on my own.

The Sprint pension was
cut off post merger so

if you had put into the Sprint pension
if you stayed with Sprint Nextel you got

nothing else Nextel we would
us with stock options stop

options also ended with play out
you were allowed sixty days to

sell you stock options and I got a little
bit now i'm not tell you a lot another

with you know let me tell you let me tell
you how this ties into what you're saying

we've got OK I neither of those know it
neither of those include any health care

I mean a CA I love it now
your party Republican Party

wants to end by the way I'm
not I'm not a Republican.

You don't work for and
you took a pay check or with that OK so

here's a there's a deal that Romney and
his state where there are basically only.

True true but they want to dismantle
the Romney care Obamacare AC Act and

the that that's that's patently unfair for
those of us who

are retiring before we
can get Medicare OK but

a CA turns out to be a blessing
because I happy man a platinum for

half white Cobra would
it cost in corporate

was a Republican bank OK so
I'm just saying that a.

You're saying is that a Z. A provides
a way for people before sixty five right

who get laid off or who Corporate a boy
are no longer are some of them offers

them health care to find a reasonable
way to get health care the benefit for

all of these eyes they're coming
out in the new economy and

they don't have to make it just so I make
OK Any other questions that we have yes

we have one here and
there and that young Tom.

I wanted to ask you as an investor.

In municipal bonds to you as
a former chairman of fidelity and

you miss as.

The bond to radiate the agencies and.

They carry triple double and so forth and

you invest in your fund best.

Techs for balance and so
forth how do how do we as investors

on an individual basis we
can go to somebody and

see the five because so so so the answer
is this at Fidelity I wasn't Chairman I

was vice chair at Johnson one
like that he was chairman but

I use a very good chairman but when we
look at a bought and at Fidelity or

any other good investment the rating
is just the beginning of the analysis

we don't assume that all those ratings
are correct God knows in two thousand and

eight we learned that lots of AAA
bonds weren't really that sound so

we go behind that to look at what the
liabilities are so there are really two

possibilities one is that you go into
a situation where an expert vets this for

you can be a funder something else or

the second is if you're willing
to do the research yourself

because now these liabilities will be on
the balance sheet but I can assure you.

You know that the rating agencies will
start to change their ratings and

lower them for cities and states that
keep running up these big unfunded

liabilities in pensions and health care
it's already happened in Illinois and

it's going to happen elsewhere so
hopefully the rating agencies which

are always a step behind will catch up but
ultimately and I say this generally

the rating is just the beginning of
analysis you can't rely on them to be the

answer.

Well you have to look at New Jersey's
situation in the overall

context of its revenue and so
I have not studied the overall

New Jersey situation but that surely
would be a significant factor but

it's not the whole ballgame we've
got to look at all the factors yes.

Bob a fun hearing you correctly there.

There's a market driven component
to uncovering the problem and

there is a public policy public engagement
aspect to the solution that a lot of folks

think that all solutions have to be market
driven Can you talk a little bit more

about with the rating agencies how you
believe that the market's going to make

this come to the fore well and not just
get swept under the rug while I think what

will happen is that the rating agencies as
these liabilities go on the balance sheet

will start to reconsider whether
these are really double A or AAA but

I couldn't agree with you more it needs of
both the needs of the political process

once we get these numbers out
there we need to not just have

the rating agencies look at them everybody
in Atlanta ought to look at them and

think about what sort of
liabilities we're building up here.

Can we afford them is
this the right policy for

us or not and I think that has
to happen in lots of cities and

lots of states until that happens
until the politicians feel that

they're being held accountable for these
promises and they're not just something

that can be below the radar screen it's
going to be hard to get things to change.

Other questions Yep we've got one
more question one more question and

then we'll all go for
drinks right they're serving beer.

Soup so one of the great ploy perks
I worked for the state of Georgia for

a living years came back to writing H.D.
is that you have that

net income reduction take it out before
your taxes for health care how does that

play into the some of the well I think
it's a very complicated question is and

it differs a lot from state
to state in some states.

The employees are making a contribution
in other states they're not.

That's also true of pensions so
you have to look if the states if

if the employees are making
contributions well then they should get

benefits that are appropriate for
I think the more complicated question is

how much of increase in
wages did your union give up

to get the retiree health care benefits
and that's a complicated question and

people on the union side would argue
that they gave up a lot of wages so

in some sense they're entitled to these
retiree health care's And that's really

a hard question very hard question
because it was all done below the table

well I hope all you guys
had a good time and.

I'll stay around to answer any
other questions of Pete thank you

doctor thank you.

Thanks.