A sizable and generous health benefits package for Chattanooga city employees is creating a heavy burden for taxpayers, and it is time to start looking at how those benefits can be reformed, according to City Council members.
"The decisions we make today, we're going to be paying for it for generations to come," Councilwoman Pam Ladd said.
PDF: OPEB Presentation for City Council
On Friday, the council tentatively agreed during a work session to reform retiree medical benefits by cutting health benefits off at the age of 65 for employees currently not vested with at least 10 years of city service. City records show that would save the city $2.5 million a year. A vote on the proposal is expected Tuesday.
Meanwhile, with lifetime health benefits for its retired workers, the city's program is about ten times as expensive as Hamilton County's. County employees don't receive health benefits after age 65, when they are eligible for the federal Medicare health plan.
City Finance Director Daisy Madison said the city sets aside 18.8 percent of its personnel costs, or $14.6 million yearly, to fund post-retirement benefits. The county's obligation for post-retirement benefits, beyond its pension, is 4.2 percent of its personnel costs, or $2.9 million a year, records show.
The strain that retirement benefits put on this year's budget has led the city to take steps to curb costs.
"STOP THE BLEEDING"
While the City Council tentatively agreed to reform the medical benefits package, the panel balked at setting the age requirement at 55 for city employees to be eligible for the health program.
That means current employees who retire before age 55 can receive lifetime benefits.
Mayor Ron Littlefield said Friday the age-55 requirement would save the city $900,000 a year.
"I sense a tremendous amount of a lack of political will from the council," Mr. Littlefield said.
But Ms. Ladd said the entire benefits package possibly will be looked at even after the budget process is completed this year. Also facing scrutiny are expensive pension funds and retirement bonuses.
"We've got to stop the bleeding," she said.
Councilman Jack Benson said just adjusting the lifetime health benefits package for city employees brought the potential property tax increase the mayor is asking for down by 7 cents. Mr. Littlefield has asked for a 39-cent property tax increase. The council will vote on the proposal Tuesday.
Mr. Benson said reforming the city's retiree health care plan to match the county's also brings both entities in line for any possible merger of city and county governments, as Mr. Littlefield has proposed. Critics of consolidation have said the high cost of city retirement health benefits makes the merger too expensive for county taxpayers.
"I want to make it one step easier for consolidation," Mr. Benson said.
WHAT OTHERS ARE DOING
Fewer employers are maintaining health benefits for retirees after they become Medicare eligible, according to benefit consultants.
Only 26 percent of Tennessee city, county and state governments offer health benefits for retirees who qualify for Medicare, according to a March survey by Covington, Ky. consultant Sherrill Morgan for the Tennessee Personnel Management Association.
"The general trend, across all industries, is the removal of retiree benefits," said Mark Morgan, president of Sherill Morgan. "Government is ceasing, in a lot of ways, retiree health care because of the (Government Accounting Standards Board other post-employment benefits) liabilities. We're talking about million of dollars -- and up to 30 percent or more of all personnel costs -- that governments must pay."
The GASB, the agency that sets accounting standards for government agencies, adopted a rule in 2004 that required governments to begin calculating and reporting their financial obligations for post-retirement health and other benefits. Unlike retirement payments funded by pensions, most governments paid for health benefits of their retirees out of current revenues. No money has been set aside to cover most such expenses, which have ballooned as retirees live longer and health care costs continue to rise.
Among large Tennessee cities, Knoxville is the only one that doesn't pay for retiree health benefits after age 65. Nashville has an annual funding obligation of $174.3 million to meet its unfunded liability for its retirees, or 32 percent of its personnel costs, records show.
Randy Keener, spokesman for Knoxville Mayor Bill Haslam, said the city has not offered medical coverage for retirees since the 1980s, if not longer. He said he did not know how much money the city saves by not offering lifetime health benefits.
"If we had lifetime benefits for the city of Knoxville, it would be a substantial cost," Mr. Keener said. "The potential liability would grow."
Tennessee governments are supposed to come up with a way of funding retiree benefit obligations, although no deadline has been set.
"They are all making some effort to get the funding done, but the big issue will come when governments get bond ratings for future issues, and at some point the bond rating agencies will say, 'You no longer get your favorable rating because of your unfunded OPEB liability,'" Mr. Keener said.
With a lower bond rating, governments with large unfunded liabilities could be forced to pay higher interest rates on future borrowing.
Mr. Morgan said Chattanooga's retirement program for police and fire employees, who may retire after 25 years of service, is getting more unusual.
"Most programs have some age requirement of at least 55 years of age or older," he said.
Private employers generally don't offer as generous retirement benefits as governments. Historically, the richer benefits for government employees reflected their lower salaries compared with workers in the private sector.
But with wage and job cutbacks in the current recession largely in the private sector, Mr. Morgan said public employees, in many instances, are paid as much or more than their private sector counterparts and still offered better retirement benefits.
Mr. Morgan said most organizations are not required to continue health benefits for retirees, even if they long have been provided and promised to workers.
"Governments are free to cut out these benefits, but in most instances we find that employers try to first implement changes by cutting off the benefit for new hires or those not already vested in a retirement plan," he said.
Continue reading by following these links to related stories:
Article: Police union worried chief's contract could alter pension plan
Article: Chattanooga: Pension fund closer to resolution
Article: Chattanooga: Council wants update on pension committee