Renegotiating Retiree Health Care Plans After New Supreme Court Guidance

Abstract

Although many commentators have criticized the underfunding of public pension plans, relatively few have focused on the huge underfunding of retiree health care plans of states and cities. At the time of Detroit’s bankruptcy, for example, its pension plan was underfunded by over $3 billion, but the unfunded deficit in its retiree health care plan was close to $6 billion.

The good news is that retiree health care plans can legally be revised more easily than pension plans. In specific, the US Supreme Court has recently issued an opinion setting forth principles of contract interpretation that will lead local governments and public unions to reach explicit agreements on the scope of such plans. Those agreements will probably have to include some cost reductions because the health care plans of many local governments will otherwise be subject to the Affordable Care Act’s 40 percent “Cadillac” tax starting in 2018.

This post will be divided into four parts. It will explain

1. the reasons why retiree health care plans have stayed under the radar screen and how that is changing;

2. the magnitude of underfunding of retiree health care plans and the implications for state-city budgets;

3. the principles of interpreting collective bargaining agreements recently enunciated by the US Supreme Court; and

4. the various ways local governments are now trying to manage down their health care obligations over time and strategies that governments and public-sector unions can use to address this challenge.