Reform 4.7: Retiree Health Care Liability

Reform Retiree Health Care Liability.

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In general, city employees hired before July 2005 are slated to receive free taxpayer funded health care coverage for life. This benefit has not been properly funded by the city as an employer or city employees - resulting in a massive unfunded liability. The actuarial valuation for the City’s retiree health care liability at June 30, 2009 revealed a funded ratio of only 3.05%, and an Unfunded Actuarial Accrued Liability (UAAL) of $1,317,880,746.8 Worse, city taxpayers face an ever-escalating liability due to the fact the city continues the practice of intentionally underfunding the cost of this benefit package. In FY 2011, the city’s annual required contribution to service the current cost and future debt of this liability was over $120 million, yet the city only budgeted $57 million for this expense. The Roadmap to Reform comprehensively reforms this debt facing taxpayers – and generates significant savings for taxpayers starting in FY 2012. Under the Roadmap to Recovery, we propose that the City implement “Option 12” modeled by Buck Consultants for the “Joint Study” conducted by the Joint Committee on Retiree Health. This option freezes the City’s retiree health contribution at $0 for current employees, while leaving the benefit unchanged for employees already retired. Reforming retiree health care benefits in this manner is appropriate for two reasons. First, as already well documented, city employees impacted by this change can expect pension benefits “that are generous by any standard applied.”9 Those pension payouts can be used by these individuals to pay increased costs for health care. Second, this reform has already been implemented for new employees. Safety Members hired after July 1, 2005, currently have no retiree health benefit. General Members hired after July 1, 2009 receive a modest defined contribution health care plan. Without Retiree Health Care Reform, City Fiscal Outlook Is Bleak -- The unfunded portion of the City’s annual retiree health care payment represents part of the City’s structural deficit, even if it is not acknowledged in the official deficit figure. As a result, any reform of the retiree health care liability up to a level that reduces full annual costs (the ARC) to currently funded levels does not produce any real budgetary savings, per se. Such reform would significantly reduce what has been a relatively unrecognized component of the City’s structural deficit, but does not help to balance the City’s recognized budget deficit. Past and current practice of underfunding the retiree medical benefit has perpetuated a generational inequity among taxpayers. By not adequately ”pre-funding” retiree medical costs in previous years, the practice has forced today’s taxpayer to foot the bill for the costs associated with providing yesterday’s taxpayer with services. The Joint Study explains this past practice, noting that: “The City followed the custom of most other public entities in paying for retiree health benefits on an annual “pay-as-you-go” (PAYGO) basis…The PAYGO expense is the actual cost of providing retiree health benefits to all eligible retirees each year and does not include any amount to “pre-fund” the cost of paying this benefit in future years.” While the City began to pay expenses in addition to PAYGO costs (“pre-funding”) in 2008, dealing with the unfunded liability associated with retiree health care has proven to be an unsustainable and massive drain on the City’s finances, to the detriment of today’s taxpayer. 10 The Joint Study also depicts the detrimental impact that the retiree health care liability has on a sizeable portion of the City’s workforce, noting that “…unions must also understand that the current retiree health benefit will preclude or substantially limit the City’s ability to increase employee wages or benefits for the foreseeable future.” (Emphasis added) Budgetary Impact of Reforming Retiree Health Care -- The reduction in General Fund retiree-health care expenses (thus, savings) in the General Fund can be seen in the charts below. The charts progress from the scenario projected in the Five Year Financial Outlook to a freeze of benefits at $4,000 per year, $1,000 per year, and $0. In the “Status Quo” chart, the General Fund retiree health care payment is underfunded significantly in each year projected in the Outlook. The charts progressively show the budgetary savings available from reducing the benefit at various increments. [Charts omitted.] To recap, eliminating the benefit for current employees provides the following benefits to the City financially: * It represents a legal means to reduce overall retirement packages afforded to current City employees to more sustainable levels in a way that is different from the City’s ability to affect pension benefits. * It achieves significant annual General Fund budget savings. * It reduces one of the somewhat unrecognized components of the City’s structural budget deficit by an even greater amount. * It helps to undue a generational inequity imposed on taxpayers because the benefit was not funded adequately in the past. * It helps to eliminate a generational inequity currently imposed on approximately one-fifth of the City’s work force (more than one-fourth of police and fire employees) by removing a significant impediment to the City’s ability to increase salaries for the foreseeable future.

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