Council considers cost cuts for retiree medical care

Council considers cost cuts for retiree medical care

Michele Ellson

City leaders are slated next week to begin tackling what City Manager John Russo is calling the “largest threat” to Alameda’s long-term financial stability – rising retiree medical costs.

The council meets to discuss the growing costs and how policymakers might tackle them on July 23.

Rising health care costs, and a growing number of retirees living longer than anticipated have contributed to growing annual health care costs and a tab for future benefits that stands at around $86 million – a bill the city hasn’t been setting aside money to pay.

That's separate from the city's unfunded future pension costs, which are an additional $107 million.

The city has been paying only what it owes each year for retiree medical benefits, though if it were fully funding the benefits it has already promised employees it would be setting aside much more. In 2011-2012 the city paid $2.4 million toward retiree medical benefits, when the amount that should have been set aside to meet current and future benefit obligations was $7.6 million, according to a report from Russo to the council.

Failure to pay the amount needed to cover those future liabilities – along with rising costs – will mean bigger health care payments each year, the report shows. It shows the minimum payment to cover retiree health costs in 2015-2016 rising to $4.1 million.

The unfunded liabilities are also damaging the city's credit rating, which would be higher if they were addressed. The city's credit rating governs its borrowing costs and is used by investors to determine the financial stability of municipalities.

Russo offered the council a list of nine cost-cutting options to consider, which include creating a trust fund to cover future retiree medical costs, offering a cash payment to current retirees in lieu of medical benefits, asking employees to pay more toward their medical benefits and trimming benefits for existing and future workers. The potential costs savings that could be generated by the proposals hasn’t yet been calculated.

Russo is also asking the council’s permission to begin informal conversations with the city’s unions about ways to trim retiree medical costs. A timeline for those conversations and future discussion with the council hasn’t yet been set.

The council began discussing Alameda’s growing retiree health care obligations in 2008, after new accounting rules required municipalities to clearly report their existing and future pension and health care liabilities. Council members said then they didn’t want to continue with the existing “pay as you go” system and considered different options for pre-funding their expenses – which were $11 million lower than they are now. But they never moved forward with a plan to fund future costs.

The city put together a task force in 2012 to determine the extent of its pension and retiree medical problems and to consider potential solutions for addressing them. While no one solution for tackling retiree health costs was embraced by the members of the task force, the most popular strategies included further changes to vesting requirements and eligibility rules for new hires, establishing a defined contribution plan similar to those typically found in the private sector; buying out existing retirees’ plans; or working with employee unions to negotiate down the city’s liability.

In 2011, the city’s public safety workers agreed to a two-tier plan under which new hires must work for a decade before earning the right to lifetime medical benefits; they also lose lifetime benefits for their spouses, something police and firefighters who were hired before the contract was signed get. All of the city’s workers have since signed new contracts that require them to pay a portion of any increases in their health care premiums.

While those agreements have reduced the amount of money the city will spend on retiree health care in the future – monthly medical costs for public safety workers hired after June 7, 2011 are $921 a month, compared to $2,228 for police and firefighters who retired before that date – they don’t address the cost of paying for care for existing public safety retirees, which this year cost close to $2.6 million, more than 10 times the $222,000 cost of care for non-safety retirees.

Only one of the potential solutions proffered by Russo addresses the cost of providing care to existing retirees: Setting up a buyout plan similar to the one Beverly Hills offered its non-safety workers in 2010. Under that plan, Beverly Hills released $20 million in bonds to offer interested retirees a cash payout in exchange for their medical care coverage, a move consultants who helped craft the plan said saved the city as much as $31 million and shaved $157 million off their future liability.

The buyout was part of a five-point plan aimed at reducing Beverly Hills’ employee costs, which may save the city more than $1.5 billion over 40 years, a presentation offered by the consultants shows. The plan also includes tying salaries and benefits to market rates, implementing a health care plan that limits the city’s contribution to a set amount and putting in place a two-tier plan offering less to new hires.

The meeting begins at 7 p.m. in council chambers at City Hall, 2263 Santa Clara Avenue; an agenda and materials are available via the city’s website.