Who will pay for retiree medical costs?

8/7/2019 Who will pay for retiree medical costs?

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The Morning Call Archives

Copyright 2011 The Morning Call

ID: 4856410

Publication Date: January 30, 2011Day: SundayPage: A1Edition: FIRSTSection: NewsType: LocalDateline:Column:Length: long

Byline: Christopher Baxter and Jarrett Renshaw Of The Morning Call

Headline: Who will pay for retiree medical costs? ** Large, unfundedbenefits for area government workers come to light under a newaccounting standard.

The financial soup of numbers reported each year by your localgovernment contains a multimillion-dollar ingredient that soon mightspoil your tax bill and serve up one major headache for elected officials.

The Lehigh Valley's counties, cities and four largest school districts havepromised more than $364 million in retiree medical benefits, but most ofthem have not saved a dime to pay for it in the future, according to areview of annual financial data by The Morning Call.

Instead of upending their fragile budgets, officials in the Valley largelyhave elected to pin the bill on the next generation of taxpayers, who willhave to dig deeper into their pockets or surrender public services in return.

"I don't think there's any way you can responsibly say, 'I'm not going tofund this,' " said Vic Mazziotti, director of fiscal affairs for NorthamptonCounty, one of the few local governments tucking away money for futureretiree medical costs. "If you don't pay now, you'll pay more later. That'sjust a reality."

The sobering problem of retiree medical costs, which grew hidden frompublic scrutiny for years, has only recently come to light under a newnational accounting standard that requires municipalities to report the true


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cost of the benefit on their balance sheets, the same way they reportpension costs.

But unlike the rules governing public pension plans, which requirepayment each year to fund the current and future costs, the rules for

retiree medical benefits allow cities, counties and school districts to "payas you go," meaning they pay on the current cost each year and ignore thelong-term price tag.

"If you think about an aging population that is living longer, and peopleare retiring earlier, it's a problem. It's a crisis," said Richard Dreyfuss, asenior fellow and expert on employee benefits with the CommonwealthFoundation, a conservative think tank.

The nation's public sector is just now realizing the size and scope of theproblem of retiree medical costs, he said, something the private sector did

a decade ago or more.

The long-term cost of the benefits does not pose an imminent threat tobudgets. But at some point in the future, officials will be forced to findnew ways to pay for the coverage -- such as raising taxes, cutting servicesor requiring employees to pay more -- and might also need to phase outthe benefit altogether.

Government officials in the Valley have taken steps to pare the benefit orincrease retiree contributions, a way of discouraging participation. Butthose steps only go so far to trim the long-term cost, and will not solve the

problem of how to pay for it.

"There's a danger that you get people in office who are only worried aboutthe span of that term that they're in office," said Tom Muller, director ofadministration for Lehigh County. The county eliminated the benefit in1986 for any employee hired after Jan. 1, 1987.

But county taxpayers still face a $141.7 million unfunded liability forthose hired before that date, by far the largest bill in the Valley. As of theend of 2009, 696 retirees participated in the benefit plan, and another 211employees were eligible in the future.

The new accounting standard recommends, but does not require, thatgovernments establish a trust and contribute a certain amount each year,similar to that paid toward pensions. The trust can then be invested moreliberally than most other government funds.

A trust costs taxpayers more up front, a difficult case to make on the heelsof the Great Recession. For example, taxpayers in Lehigh County would


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have had to pay $9.7 million to fund a trust for the benefit in 2009,according to that year's audit. Instead, taxpayers paid $5 million to coverimmediate costs.

Muller said the county considered paying more into a trust fund three or

four years ago. But when the economy went south, cutting into pensioninvestments and increasing those contribution costs, the county could nolonger afford to also contribute to a retiree medical benefit trust.

Although retiree medical plans vary, they typically require an employee towork a certain number of years and reach a certain age. For example,members of Allentown's largest union can retire after 10 years and receivefull medical coverage until they are 65, when they become eligible forMedicare.

The city has an unfunded liability of $51.1 million for retiree medical

benefits, the total amount needed to cover the plan's 1,155 eligible activeand retired workers. The city's pension funds have a combined unfundedliability of $110.6 million, but they also have $237.5 million tucked awayin investments.

If Allentown decided to build a trust for retiree medical benefits,taxpayers would have to contribute $3.7 million annually, rather than the$1.8 million they paid in 2009. That would be difficult for a cash-strappedcity that just established a commuter tax to help pay for ballooningpension costs.

"It would be a great thing to do," Allentown City Controller Bill Hoffmansaid. "But where would we get the money? I don't know that answer in theshort term."

Unlike pensions, employees do not contribute toward the benefit whilethey work. When they retire, some plans, such as in Allentown andEaston, require participants to pay a portion of the premium cost. InNorthampton County, employees who retired before 1996 pay nothing;taxpayers pay all.

Employees who retired after that date pay various co-payments.

Monthly premiums in Bethlehem can be as high as $850, which dissuadessome employees from joining, city Budget Director Mark Sivak said. Anumber of employees also retire from the city and go on to other jobs thatprovide insurance, he said. Still, Bethlehem has a $14.3 million unfundedliability.


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"I don't think it's a big issue," Sivak said.

Local officials are also working to reduce long-term costs. The AllentownSchool District negotiated retiree medical benefits out of the currentteachers contract, signed in 2007, said Deputy Superintendent C. Russell

Mayo.

"The concern was the long-term cost and escalating medical costs," Mayosaid. "The retirement benefit was certainly one today that might have beenvery nice but the day for that is gone now."

The perk was grandfathered for teachers hired before the contract date,and administrators continue to receive the benefit, meaning costs totaxpayers are far from gone.

Post-retirement medical benefits are essential to attract and retain quality

employees, said Tom Costi, a state regional director for the AmericanFederation of State, County and Municipal Employees.

"It's vital, particularly to our older employees," Costi said.

Public employees are paid less than their private sector counterparts andthe additional perks help bridge that gap, he said. Costi expects thebenefits to come under fire, much as pensions have, but said his memberswill work hard to preserve them.

Officials in Easton said they are working to reduce the $10.6 million

unfunded liability for retiree medical costs, which they recognize as apotential future problem. Both fire and police union contracts set limits onthe benefits, and the issue is always at the forefront of negotiations.

To fund the retiree medical benefit, the cash-strapped city would havebeen required to pay $1.17 million in 2009; instead, it paid $328,523,according to that year's audit. The difference would have plummeted thecity budget into the red.

"At this point, I would like to continue on a pay-as-you go basis, let theactuary do a study and take a look at it," city Finance Director Chris

Heagele said. He anticipates an updated actuarial study due this year willdecrease the long-term liability because of the city's efforts to reduce thebenefit.

Easton has been building a medical benefits reserve fund, which is used topay medical costs for current employees, and that could be tapped forretiree medical benefits as well, Heagele said.


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Who will pay for retiree medical costs?