Rising medical costs combined with retirees living longer may mean one thing for the City Council: reforming city employee benefits.
"It's a valid thing they need to look at," Mayor Ron Littlefield said.
More than a quarter of the proposed 33 percent jump in city property taxes next year is needed to pay the increased expense of employee and retiree benefits, records show. The extra $8.9 million cost to maintain existing retirement and health benefits for city workers equates to about 17 cents of the proposed 64-cent hike in the property tax rate assessed for every $100 of property value.
And it's expected to get worse. City projections show that if a trust fund to pay retiree health benefits is not established, then the city could pay almost double the $8 million it pays now for retiree medical benefits alone within the next decade.
WHO GETS REFORMED?
Daisy Madison, the city's chief financial officer, said last week the city is looking at how to reform its system. She warned that any changes made now would not affect the proposed 2010-2011 fiscal year budget. In fact, some of the changes made may take 20 to 25 years to make any kind of dent in the budget if the council chooses to only reform new hires coming in, she said.
The question is, who and what gets reformed?
"We're looking at all options," Ms. Madison said.
Opponents of the mayor's property tax increase suggest that the city can't afford to continue all of its current employee and retiree benefits.
"The type of benefit programs the city gives its employees and retirees are just not provided in most of the private sector any longer," said Brandon Lewis, owner of Painter Ready and creator of the anti-tax website, StopTheTaxIncrease.com. "If the city doesn't change its benefit plans, it faces either bankruptcy or increasingly higher tax burdens."
But Chattanooga Police Sgt. Craig Joel, vice president of the Police Benevolent Association, said the benefits paid to city employees help make up for what he said are substandard wages for most city workers.
"We are going on our fourth year without a pay raise on pay rates that were already low," he said.
Cutting promised benefits, he said, will increase costly employee turnover and hurt the quality of the police force.
RISING RETIREE COSTS
The city is having to make up for both a lack of funding for retiree health benefits in the past and for investment losses two years ago in its pension funds for retirement benefits.
For fire and police officers next year, the city plans to pay more than 43 cents in retiree benefits for every dollar paid to officers and firefighters. Chattanooga police officers and firefighters are eligible to retire under the police and fire pension plan after 25 years of work, allowing some workers to retire with health and retirement benefits while they are still in their 40s.
To fund the fire and police pension hurt by investment losses during the stock market downturn two years ago, the city projects it will need to put in at least 25 cents for every dollar paid to police officers or firefighters in the fiscal year that begins July 1, Ms. Madison said. Currently, the city puts in about 22.7 cents for every dollar paid to police or fire department employees.
Ms. Madison said the city will need to reserve about 18 cents of every payroll dollar next year to begin to adequately fund its post-retirement health benefits, which extend even beyond when retirees begin getting Medicare coverage.
Police officers are also allowed to take home the city vehicles they drive and use gasoline to help encourage better maintenance of the vehicles and to provide more police presence throughout the city. But 58 percent of the city's police force lives outside the city. Mayor Littlefield has previously proposed charging a fee for officers to use take-home vehicles if they don't live in Chattanooga.
Cutting out take-home vehicles could save the city $1.5 million.
The biggest extra benefit cost in Mayor Littlefield's proposed budget comes from the cost of health benefits paid to retired city employees. Unlike the city's pension programs, which pay for retirement benefits for retired city workers, no money has been set aside in the past to pay for health care benefits given to retired city workers.
Such expenses, which total about $8.2 million this year, have nearly tripled in the past decade and are projected to continue to rise as health care costs go up and retirees live longer. Mayor Littlefield has proposed adding another $6.3 million to the retiree health fund to help handle future expenses.
CURRENT RETIREES NOT AFFECTED
Ms. Madison said one option not on the table for the city's administration is looking at reforming medical benefits for existing retirees. Some City Council members have questioned whether existing retirees or current employees can be touched in reforms.
"Whether or not that is something this administration is going to propose, I don't think so," Ms. Madison said
She said even within the current employee benefit structure there are different tiers that can be looked at. Employees are vested into the current pension plans after five years and are eligible to retire after 10 years, she said. When council members start looking at what they will want to reform, they will have to look at all these different types of employees, she said.
Councilman Peter Murphy said he is interested in looking at the options. He said he thinks the current pension plans tend to lock in some employees who don't want to be there and rids the city of some employees who do want to be there, but want to leave to gain a substantial retirement bonus.
He said one option would be to look at a defined contribution plan, similar to a 401K.
"I think, in particular, with new employees we need something more portable," he said.
Council Chairman Manny Rico said he expects labor unions and city employee groups would fight against any kind of reform. But he said it needs to happen to keep the city afloat.
"We're going to have to fix them. I don't know how fast or how legal it is," Mr. Rico said. "It's too much of a Cadillac package."
He said specifically the city needs to look at the post-retirement medical benefits that extend for the lifetimes of retired employees. A survey of Tennessee cities by the Sherrill Morgan consulting firm found that only 26 percent of cities still pay for health benefits beyond age 65 and that number continues to decline.
The Government Accounting Standards Board, the agency that sets the rules for how governments keep their books, began requiring state and local governments to disclose their projected liability for all unfunded retiree programs in 2008. For now, the new accounting rules require only disclosure, not a remedy, for any shortfall.
But city officials warn that delaying the fix to the rising retiree health expense will only end up costing the city more in the future.
"The council could opt this year to reduce the extra $6.3 million contribution (for post-retirement health benefits), but that just pushes the costs on to future years," said Richard Beeland, a spokesman for Mayor Littlefield. "Anything we put off paying now is just going to be tacked on to what we have to pay in future years."