Tough choices over costs of retiree benefits

John Howell
Posted 6/11/15

Unlike pension plans where the city and its employees contribute to a fund for future payments, the city has no reserves to pay for other post-employment benefits (OPEB) of retirees.

Those …

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Tough choices over costs of retiree benefits

Posted

Unlike pension plans where the city and its employees contribute to a fund for future payments, the city has no reserves to pay for other post-employment benefits (OPEB) of retirees.

Those payments, which largely are for health care, keep growing as employees retire and health care costs increase. According to consultant Jefferson Solutions, Inc., based in Clifton Park, N.Y., the city paid $7.3 million for retiree benefits other than pensions in 2014.

Furthermore, unlike active municipal employees who share in the cost of their health insurance, retirees do not have co-pay. Implementing health insurance co-pay would not be easy. Retirees are not union members. Their benefits were defined by contract when they worked for the city and as happened in other municipalities that have sought to alter OPEB, the city could face court action.

OPEB is the elephant in the room for Ward 9 Councilman Steve Merolla.

“This is an inflationary type benefit that we may not be able to pay,” he said at Monday’s City Council meeting. “We don’t want retirees to pay 100 percent of medical but that could happen.”

Raymond R. Cerrone of Jefferson Solutions told the council the city faces a $263 million unfunded liability for OPEB. Schools face an additional $54 million. On the city side, he said, if everyone were to retire today the liability would escalate to $354 million.

Like pensions, the city could annually contribute to a trust that with investment returns help pay for the benefits. So the city had a fixed cost going forward, Jefferson Solutions has calculated, it would need to annually allocate $23.1 million.

“For us to fund the ARC [annual required contribution] would take every dime and we would get to a point where we can’t afford to pay our debt,” Merolla said.

“There is only so much we can do to raise revenues,” he added, observing that bankruptcy or receivership would appear to be the only alternatives.

The mounting expense of “legacy costs” has been the drum beat of former councilman and school committee member Robert Cushman. Cushman appeared before the council this winter, and in a presentation that was ridiculed by some city union representatives for being drawn up on his kitchen table showed how mounting pension and OPEB costs were taking up a greater and greater percentage of the city budget.

Merolla pointed out yesterday that Cerrone put the health costs of retirees at $525,000 per employee for life.

“This isn’t kitchen table math.” He predicted, “This will get corrected, and it will get corrected in a receivership.”

The administration sought to address the OPEB issue in the upcoming budget with a $200,000 appropriation. There was some question where the money would go. Initially, Mayor Scott Avedisian earmarked the funds for a trust and then suggested it could be used for a study of how the city should address the problem.

Jefferson Solutions evaluated a $200,000 trust payment, concluding it would fund 1.2 percent of the unfunded portion of OPEB costs. In a letter, which was used by some council members to justify cutting the $200,000 from the mayor’s budget, Cerrone calls the appropriation “relatively immaterial, but it is also a step in the right direction.”

In a related action to OPEB, the administration negotiated contracts with all three unions that change the health care benefits of employees hired after July 1. On retirement those employees will not be eligible for family health care plans. They will only be entitled to individual plans, which will be a savings to future taxpayers.

Changing the plan for new hires is one of 11 strategies Jefferson Solutions proposes to mitigate the impact of OPEB. Additional measures include leveraging of Medicare to reduce health care costs for retirees 65 years old and older, funding annual contributions greater than the current pay-as-you-go practice; capping health care payments that could be tied to the CPI and require employee contributions. Other strategies suggested are the creation of a trust; the creation of a “narrow network” HMO for retirees that would exclude high-cost medical providers and therefore reduce premiums; sells bonds to fund a third of OPEB costs; buy out benefits as was done in Beverly Hills, California; reform benefits for incumbent employees and labor relations.

The report reads, “If the cumulative costs are unsustainable, employees should be made aware of this unavoidable fact of life and the consequences of inaction.” It reasons that when faced with the prospect of a “lost decade with virtually no salary increases and chronic workforce attrition, many employees will eventually accept the need for change, especially if the reforms are phased in incrementally and designed thoughtfully.”

Looking at what’s happening in the city, Merolla asked Monday, “Where’s the breaking point? Is there a way to figure that out?”

“I think you’ve been there for a long time,” Cerrone answered. “If this was my business model I would run away from it.”

His solution would appear to be the final sentence of his report:

“Many public officials will eventually conclude that medical benefits for public employees who retire before attaining Medicare age can be sustained only through employee matching contributions to a defined contribution plan or a very modest defined stipend based on a full lifetime career of public service.”

Comments

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  • Bob_Cushman

    Feeling vindicated!

    Thursday, June 11, 2015 Report this

  • Reality

    Let me understand this.....Scottie's expert said the business model that Scottie put into place for retiree healthcare is broken. Not surprising. Is Lloyd of the WFD going to send an email to Mr. Cerrone's employer to try to get him fired.

    Has Scottie leveled with the employees of Warwick that their benefits need to be cut in the next few yrs? What is Vella-Wilkinson's plan to address the issue. ? That's a joke..................

    Thursday, June 11, 2015 Report this

  • wwkvoter

    What is Cushman's plan to resolve this, if he could choose the path, I wonder?

    Friday, June 12, 2015 Report this

  • CameronClueless

    how do ya like them apples?

    Friday, June 12, 2015 Report this

  • patientman

    I've been saying the Mayor needs to talk to retirees honestly for years. A lost decade indeed.

    Friday, June 12, 2015 Report this

  • Bob_Cushman

    @TaxPayer: The plan is actually simply. Cut the cost of retireed employeed benefits.

    Reallocate the saving to reinvest in all other areas of the budget associated with providing services to Warwick citizens (including active employee compensation). [Simular to what schools need to be in consolidation to cut cost and reinvest in remaining schools and educational programs for the kids.]

    Getting everyone to agree that its needs to be done, is another story. The Mayor and Council continuing to mislead the employees into believing there isn't a problem makes resolving it impossible.

    Frankly I don' think it will be solved through a mutal agreement. However, sometime in the not so distent future outside forces will solve it in a very unpleasant manner for all.

    Friday, June 12, 2015 Report this

  • patientman

    Don't forget the Beacon's culpability as well. Firing Bob Cushman from his column was a major silencing of the one voice that actually knew what was going on.

    Friday, June 12, 2015 Report this

  • wwkvoter

    thanks bob for sticking with a key issue like no one else. to your reply, it looks like the retirees would have to agree to a reduction in that benefit. i wonder why we would pay that after they no longer working for the city, it isnt something we see at our non govt jobs. anyway, if they dont agree, there is no way to just switch retirees to single health because you cant, right? (unless they agree).

    Friday, June 12, 2015 Report this

  • allent

    "health costs of retirees at $525,000 per employee for life"

    "retirees do not have co-pay."

    plus their rich pensions. Unbelievable

    Friday, June 12, 2015 Report this

  • Scal1024

    Feeling vindicated? Many people agreed there was a problem. The issue people had Mr. Cushman was that you offered zero solutions on how to fix it. Anyone can state the problem, the hard part is fixing it. It's funny how you show up to spike the football, when all along you said it wasn't about politics. It's unfortunate that you and your associations to Warwick Watch cripples your message. The amount of partisan, political, garbage that comes off of that page is enough to turn off the public. If you want to be taken seriously Mr. Cushman then think about the folks you surround yourself with.

    Now before you call me a partisan I'll reiterate that the letter sent to your employer was wrong and shouldn't have happened. I do not work for the city so I had no control over that. The problem is if you truly want the problem fixed than I think your first reaction would be "ok how do we advance this from here?". Instead, your response is "feeling vindicated ". Makes it easier to see why people question your motives on this issue.

    I'm curious what the opinion of Cote, Cushman, and Stacia is on city employees getting a raise? What is your opinion of concessions gained? What would you have done differently? Let's get constructive answers to these questions. Take a position here instead of constantly criticizing the administration, tell me what you would have done. Don't tell me cut costs either. If you're going to say that than be specific!

    Saturday, June 13, 2015 Report this

  • wwkvoter

    crickets...

    Monday, June 15, 2015 Report this

  • Misfit

    What concessions were gained? How much they will reduce current and future costs?

    Monday, June 15, 2015 Report this

  • patientman

    Scall, I was always surprised on how much the firefighters fought Mr. Cushman. He was the one in the council chamber hammering on the fact that there is a huge problem. The fire union president sent a letter to his company trying to get him fired and threatening a national boycott of CVS. He should feel vindicated and if the mayor had any courage he would have started to deal with this 10 years ago. It is the responsibility of city leaderships job to figure out the answer. Problem is, they can't raise taxes much than they already are. So cuts are necessary. That means a reduction in services at the same time your raising taxes. That is how you confront a problem. It is also how you wake up the electorate before we end up in bankruptcy. Of course the mayor and city council would be wiped from office. And in the end that is why nothing has been done. The people that have actually realized there is a problem don't blame Mr. Cushman for pointing it out.

    Monday, June 15, 2015 Report this

  • davebarry109

    It is politically more expedient to let the city go into bankruptcy so that no politician has to feel the heat. I cannot believe that the councilmen talking about receivership have just recently woken up. Unbelievable. They are all crooks. Promise the unions anything to get elected, vote for ratification of contracts year after year and let bankruptcy bail your asses out.

    Crooks all.

    Tuesday, June 16, 2015 Report this

  • Notbornyesterday

    The funny thing is I have seen the letter, never once did it call for his job. Notice cushman hasn't talked about content either. I don't have a problem with Cushman. I have a problem with the way he was able to give presentation.

    Tuesday, June 16, 2015 Report this

  • patientman

    Notbornyesterday, If you have the letter please post it. If the letter threatened a boycott of CVS, what was the company supposed to do to prevent the threatened boycott? Why would you have a problem with the way he gave the presentation. The city would have continued to use the same auditor that was complicit in perpetuating the fraud. I believe the quote was something like "that's outside the scope of our work". They wanted the work in perpetuity. You don't get the next years contract if you spit in the mayors soup. Bob Cushman tried to save the city. It may be too late.

    Thursday, June 18, 2015 Report this