Sacramento County faces retiree health squeeze
Sacramento Bee 1/30/07
Unlike most private employers, most public agencies in California subsidize the medical insurance of employees who retire before they turn 65 and become eligible for the federal Medicare program. But few of those agencies have set money aside to cover the cost of their retirees' insurance. As more employees retire and draw on that benefit, and as health care costs increase, the costs are growing.
For years these public agencies were able to ignore their looming liability. They simply paid the ever-increasing cost each year and figured they'd find a way to pay the bigger bill the following year as well.
But a recent change in government accounting rules requires public agencies to estimate the cost of these unfunded benefits stretching into the future. And once that cost is estimated, the agencies will face increasing pressure to set money aside to pay for the obligation -- or else do something to reduce it.
In Sacramento, county officials are recommending a combination of both remedies.
The county has since 1980 offered its retirees a subsidy to help pay for their health insurance. Originally, that subsidy was set at the level of premiums for the highest-cost HMO plan with at least 10 percent of county retirees enrolled. Beginning in 2003, the county set its contribution at a fixed amount. The subsidy is now $244 a month for retirees with at least 25 years of service. Retirees with less than 10 years of service get $122 per month.
Providing a health care subsidy for retirees is expected to cost county taxpayers about $14.3 million in the next fiscal year. To put that number in some perspective, retiree health care now costs the county more than it spends on its entire regional park system. The county has not yet estimated what it would cost to continue offering the benefit to all current retirees and future retirees already on the public payroll. But officials believe it would be more than $300 million over time. To cover that unfunded liability without dumping it all on future taxpayers, the county would have to set aside an additional $30 million a year on top of the $14 million taxpayers are already paying.
To reduce both the annual cost and the unfunded liability, county staff is recommending that the subsidy be eliminated for employees who retired after June 29, 2003, when pension benefits were increased an average of about $1,150 per month.
This would reduce the annual cost from more than $14 million to about $9 million. It is not yet known what the effect would be on the county's unfunded liability, although that number would begin to drop over time as older retirees passed away and were replaced by new retirees who would not be getting the subsidy.
Future retirees would not be left completely on their own. The county is offering a $25 per pay period stipend that will go into a savings account that retirees control and can spend on health care. That won't be much help to someone on the verge of retirement now. But new hires could save tens of thousands of dollars in such an account if they spent their entire career at the county. Retirees will also be able to buy into the county's group insurance plan if they wish.
County officials believe that they have the right to end the health care subsidy entirely if they want to, because no county employee or retiree has ever been promised the subsidy for more than one year. For many years the subsidy was paid for out of "excess earnings" in the retirement fund, after an annual determination that such a surplus existed.
"Every year for the past 26 years, this has been voted on by the board," said County Executive Terry Shutten.
Think of it like a Christmas bonus. Or profit sharing in a private firm. No matter how many years in a row an employee might get such a benefit, it's never guaranteed to recur the following year.
But an independent auditor hired to advise the county concluded that even if the obligation is not set by contract, the county is required by the new accounting rules to report it. Reporting the number is a way of telling investors who might want to buy the county's bonds that there are other obligations on the books, even if the county thinks it can legally cancel those obligations.
Indeed, the county can expect to be sued by retirees if the board adopts the staff recommendation today. Those former employees would argue that even if the health care subsidy was never explicitly promised to them, they had a right to expect it after other retirees before them had received it for so many years.
Sacramento County isn't the only public agency that finds itself in this position. The sooner the legal questions are resolved, the better it will be for retirees, current employees and the taxpayers.