Council to consider retiree health trust fund

Council to consider retiree health trust fund

Michele Ellson

City leaders want to start socking away some extra cash to pay down Alameda’s growing retiree medical debt.

Tonight, the City Council will consider signing off on a plan to set up a trust fund to pay future retirees’ medical bills. The city has squirreled away a little over $1 million over the last few years - money that was set aside to meet unexpected costs that didn't arise and is now slated to be put into the fund.

City Manager John Russo has called retiree medical costs the “largest threat” to Alameda’s long-term financial stability. The city’s retiree medical tab for the next 30 years exceeds $86 million, a bill that’s likely to grow as health care costs continue their rise.

The city has been operating on a “pay as you go plan,” making the minimum required payments toward retiree health costs each year without paying down future liabilities. In 2011-2012 the city paid $2.4 million toward retiree medical benefits, when the amount that would have needed to have been set aside to meet current and future benefit obligations was $7.6 million, city staffers had said; the minimum payment due is expected to rise to $4.1 million by 2015.

Money for the trust fund would come from the city's general fund, which covers salaries, benefits and some city services, Assistant City Manager Liz Warmerdam said in response to e-mailed questions; she said the council will decide how much to put into the trust fund each year.

Warmerdam said the city's actuary is studying the impact different savings levels may have on Alameda's future retiree health liability. The money the city has already set aside is to be deposited after city staffers receive a fresh accounting of what it owes for retiree health.

City leaders have been looking for ways to address Alameda’s unfunded pension and retiree health liabilities since 2008. The market crash that struck that year increased cities’ already-growing pension costs – Alameda’s unfunded pension liability has grown to about $107 million, much of it attributable to pensions that allow most police and firefighters to retire at 50 with as much as 90 percent of their top few years of pay – while annual, double-digit health care cost increases have helped drive up health care costs.

A task force made up of finance experts, concerned citizens and union members suggested in 2012 that the city find ways to reduce retiree medical benefits and also, to start putting away money to address future costs. Council members presented with a list of suggestions in July – most of whom have received campaign contributions and support from the city firefighters’ union – green-lighted the trust fund idea but were loath to consider steep benefit cuts for police and firefighters that would put their benefits on par with other city workers.

City Hall and its public safety unions eliminated retiree health care coverage for future workers’ spouses in 2011, and in 2013, all of the city’s workers agreed to shoulder a portion of any cost increases for their current coverage that the city may face. City workers also agreed to pay more toward their pensions, and future workers will see smaller pensions than their predecessors under a state pension reform law passed last year.

If approved as proposed, the city's trust fund will be set up through Public Agency Retirements Services, which handles more than 100 public agencies’ health care trust funds, instead of CalPERS, which manages the city’s pensions. City staffers said in a report that the PARS plan is more flexible.

The report says both the city and its workers can contribute tax-free to the plan, though the city has not yet struck any kind of deal for employees to do so, Warmerdam said.

"Right now we are not asking our employees to contribute, but we are in (informal) discussions with our labor groups to discuss possible solutions," she said.

City Treasurer Kevin Kennedy, who has long advocated for city leaders to address Alameda’s unfunded pension and retiree health costs, said setting up a trust fund would be a step in the right direction but not a solution to the fiscal problems the unfunded costs pose.

“Setting up an account is a good first step. The real trick is going to be finding money,” said Kennedy, who has recommended the city also cut costs.

Kennedy, who said he feared city leaders would be too quick to celebrate the creation of the trust fund, said the city should find a way to fund the full cost of workers’ pension and benefits.

“That’s not an easy thing, but that’s the thing you celebrate,” he said.

Warmerdam called the creation of a trust fund an "important first step" toward paying what the city will owe, and she said financial advisors typically recommend cities don't pay down 30 years' worth of bills at once since a lot can change over that period of time.

"There is no way we can solve an $80 million liability in one year but we have to start somewhere," she said.

Cities in California and elsewhere have also sought to rein in pension and benefit costs that many leaders have said they are struggling to pay. Cities have traditionally been believed to have more control over the level of retiree health benefits they offer, while pensions have been seen as sacrosanct under California’s constitution.

A federal judge who ruled in December that Detroit can declare bankruptcy reportedly said pensions are a contractual right not protected in a federal bankruptcy; at least one union is appealing, and the city has since filed a suit seeking to be relived of $1.44 billion in pension bond debt. But a handful of California cities that have gone bankrupt, reportedly due in part to skyrocketing pension and retiree health costs, have not asked courts to write off those debts, and CalPERS has consistently advised cities that they are legally untouchable.

Stockton is reportedly preparing to exit bankruptcy without touching its workers’ pensions, as did Vallejo, which instead sought to slash retiree health costs. That city is reportedly facing fresh budget troubles as its pension costs grow.

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