Retiree health costs a $290M unfunded tab

By John Howell
Posted 4/6/17

By JOHN HOWELL It isn't a pretty picture. According to an actuarial study of retiree health care benefits, the city faces an unfunded liability of $290.7 million this year. That figure contained in reports prepared by Jefferson Solutions had a chilling

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Retiree health costs a $290M unfunded tab

Posted

It isn’t a pretty picture. According to an actuarial study of retiree health care benefits, the city faces an unfunded liability of $290.7 million this year.

That figure contained in reports prepared by Jefferson Solutions had a chilling effect on the City Council Monday night. Ray Cerrone of Jefferson went through the report that is required under Government Accounting Standard Board Statement No. 45, commonly referred to as GASB 45. GASB requires municipalities to disclose obligations for post-employment benefits (OPEB), which other than pension payments are health care benefits in the case of Warwick.

Unlike pension payments that the city saves for by paying more into pension accounts than it takes out, no such fund exists for retiree health care costs that continue mounting with higher health care expenses (about $9,500 for an individual plan and $23,000 for a family plan for retirees under age 65) and the growing ranks of retirees.

Mayor Scott Avedisian considering budgeting funds to start such a trust, but the amounts were small and the council never went ahead with a plan.

In an email response to questions as to how to deal with the unfunded liability, Avedisian said Wednesday, “As you know, I have been trying to several years to create an OPEB trust at the Rhode Island Interlocal Risk Management Trust.  The Trust was approved by the General Assembly and the Governor to serve as a fiduciary agent for cities and towns in this matter.  What I sought to do was to create a line item in each budget to begin funding OPEB, along with the notion that in 20 or so years, the unfunded liability for pensions will be paid off and we could use that annual appropriation to fund OPEB.”

Avedisian went on to explain, “the idea was to start a trust now and fund it annually until the unfunded pension liability is gone and we could transfer the money into OPEB.  In discussion with members of the council and Council President Solomon it was obvious that there was little support for this legislation so I withdrew my proposal.”

As it works now, the city pays the bills amounting to about $8 million for retirees, never putting aside additional funds to build a trust to help pay for the future cost of these benefits. To fund the annual required contribution over a 30-year period, Cerrone calculates the city would need to spend $22 million in the coming fiscal year and adhere to a program of additional expenditures going forward.

Ward 9 Councilman Steve Merolla put the situation in perspective. He said even if the city raised taxes by the maximum 4 percent allowed by state law, it couldn’t fund the OPEB.

“We’ll never be able to pay this off,” Merolla said.

Cerrone didn’t argue, although he offered some options going forward, which he said would probably end up in court. They included an age cutoff at 65 years old when people become eligible for Medicare. Teachers who are in a state plan face such a cutoff. Some plans also provide for the retiree to stay in the municipal health plan at their own cost or providing an annual maximum health care payment. Other plans offer terms on health care, limiting coverage to just the retiree and not his or her family and carry co-payment requirements.

About two years ago, Cerrone provided the council with a more detailed list of 11 actions the city could take to reduce the cost of retiree health care benefits.

On Wednesday Finance Committee Chair Ed Ladouceur questioned why the administration hasn’t followed up on those recommendations. At the very minimum he thought the city should be placing restrictions on retiree health care benefits for new hires.

“Lifetime health plan makes no sense. Health care benefits should be capped and it should only be for the retiree only [no family plan],” he said.

“We can throw millions and millions at the school department or some of other things and that’s not going to fix it. Long-term sustainability has got to be dealt with right now,” he said.

Of the unfunded OPEB liability, the lion’s share – 70 percent – is made up of uniformed retirees. As Cerrone pointed out, depending on their contracts fire and police are eligible for retirement after 20 or 25 years of service. This means a municipality that has given lifetime health coverage, is paying for that benefit starting in many cases at an age in the mid-40s until death. Even when a retiree dies, the cost may not cease since by contract the benefit is passed on to the surviving spouse.

Cerrone calculated the health care cost of a typical retired Warwick firefighter at $568,000. That number left the council aghast.

“It becomes a really significant obligation,” said Cerrone.

Ward 1 Councilman Richard Corley wanted to be certain he understood the magnitude of the problem. He questioned whether this has nothing to do with pension payments and that nothing is being put aside to pay for the future cost of these benefits.

“That’s right,” said Cerrone.

And then providing the only moment of levity, Corley responded, “Oh, sh--.”

Comments

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  • Thecaptain

    Jut a couple of corrections as to the specifics:

    1. The number that was stated as unfunded liability is $450 million. As of present, the city is able to "disguise" (as Mr. Cerrone put it) the actual liability, due to the GASB 45 funding formula. As of July1, that formula is replaced with GASB 75 which mandates the actual accrued unfunded liability that the community with be obligated to must be reported. That number now for Warwick is $450 million. $381 mil from city, $70 mil from schools. In addition, Mr. Cerrone also stated that the number $450 is actually low because it takes into consideration a 4% discount rate and each percent amounts to 15% of the total liability. That means since there is ZERO dollars in the fund, 4% of zero is zero, so add another $60 million to the actual debt number. I seem to remember a man named Bob Cushman who presented these facts a couple of years ago in front of a crowd of 3rd grader firefighter adolescents and several drunken DPW workers. All whom thought that the fund was in great shape . AHAHAHAHAHAHAH !!

    Cerrone also stated that this year the we need to fund the healthcare with $24,800,000, (not 22 million as the writer stated).

    So lets break down the math so even a simple minded person such as Scott Small can understand it. (doubtful)

    With a maximum tax increase every year, the city can only increase revenue by $7 - 8 million. Meaning that THERE WILL NEVER BE ENOUGH MONEY TO FUND THE OBLIGATION !!!!! DO YOU UNDERSTAND THAT SCOTTY BOY ?

    So all of the promises that were made to you by the charlatan in office will never come true as there is no money to fund it. And although he continues to lie to your face (because he knows he is talking to dummies) he hasn't put aside 1 nickel for your future healthcare.

    AHAHAHAHAHAHHAHAHAHAHHAHAHAHHAHAHAHAHAH

    Thursday, April 6, 2017 Report this

  • richardcorrente

    Here is a solution that I have been recommending for years. Voluntary pension buyouts! It worked for Texas to the tune of about $770,000,000 in savings. The retiree gets a check. The City saves the cost of the future benefits. Remember, it's VOLUNTARY, so anyone that doesn't want it isn't harmed in any way.

    2. Also, anyone who has health benefits that are covered by a second health plan or a spouses health plan, that retiree could be offered a buyout check as well. Again, a win-win situation.

    3. Finally, anyone who has retired on an injury retirement should be re-examined annually to determine if they are still qualified to receive benefits.

    Implement these three ideas and I believe the taxpayers will save millions. I don't care if you don't credit me even though I have been promoting them for years, while my critics keep saying "How is he going to do it?"and "How much will it save?" These are ideas that make sense, good common sense. Isn't it time for good common sense pension reform?

    Happy Easter everyone.

    Rick Corrente

    The Taxpayers Mayor

    Thursday, April 6, 2017 Report this

  • Thecaptain

    Richard,

    Here's an easy question for you.

    Please state the specific line item in which the "buy out" checks would be written from. Now this is a very easy question. Please show your civics expertise and knowledge of the municipal budget with a very quick answer.

    Thank you

    Thursday, April 6, 2017 Report this

  • Scal1024

    It is pretty clear that the unions are going to have to come to the table with concessions. Otherwise, it doesn't appear the money will be there in future years.

    My fear is that the older employees will object to any type of deal, because many are close to getting out and collecting these same benefits.

    The problem for the unions is that "right to work" is making its way through the courts, eventually to a conservative Supreme Court. Any ruling against the unions means there is precedent and could mean restricted benefits or worse.

    I understand the frustration of employees who read this article and feel attacked, even though for many this is not a problem they created. The long term question is will there be a pension/benefits for employees in the future? Without major concessions i think its clear there won't be.

    Thursday, April 6, 2017 Report this

  • davebarry109

    Don't ask the current retirees to pony up. YOU politicians made your bed, live in it. The city has already moved new employees to a 25 year retirement and spouses no longer get benefits. Also, I believe there was a cola change, tying it to the CPI. As for me, I'll see you in court. Don't try and touch my benefits.

    Friday, April 7, 2017 Report this

  • Thecaptain

    Hey BigPapi or Cameron or Scott or however you are. As I DPW worker, I am sure that you know were to get better drugs than the one's you are using, as clearly, your hallucinations are departing further and further from reality. Also, if you feel man enough to threaten me in any way, have the balls to do it to my face. You're just another loud mouth sissy that hides behind fake names. Typical.

    Friday, April 7, 2017 Report this

  • richardcorrente

    Dear Scal1024,

    I believe you and I agree on the idea of paying newly hired employees a little less in order to protect the salaries and benefits of the existing people. Add to the equation the voluntary pension reform I stated above and I don't think you will need to ask for much, maybe nothing at all, from the unions that you have a clear and honest commitment to.

    For example, when David LaPlante was fired, his replacement was offered $113,000 a year for a position that, in private industry, would pay far less. I asked "What was the School Committee's (SC) opening offer?" I was told $113,000. I have to wonder what would have happened if the SC offered $70,000.The new replacement would probably receive $90,000+- and since the taxpayers would have ended up paying less, the current employees would have less pressure to make concessions.

    Happy Easter old friend.

    Rick Corrente

    Friday, April 7, 2017 Report this

  • Scal1024

    DaveBarry while i don't blame you for your stance, i feel something has to change with the current system. As far as a court challenge, look no further than state pension reform. There is a reason the employees settled before going to court. It was because they knew there was a good chance the courts would rule against them. Yes this was negotiated, no it is not fair but its certainly not sustainable either.

    Friday, April 7, 2017 Report this

  • JohnStark

    Warwick teachers are paid a fair wage for a day's work. They work hard, and are compensated accordingly. Therefore, why is there still a need for a "teachers' union"? Public sector unions outlived their usefulness about 40 years ago, yet no one in city government has demonstrated the testicular fortitude to say so. As long as public sector unions continue to be recognized but gutless pols, these problems will only get worse. Government employees should have been moved to a defined contribution plan 15-20 years ago, much like the Dreaded Private Sector. The notion that taxpayers are on the hook for retiree paychecks AND health insurance for their life expectancy is nothing short of obscene. And the fault does not lie with retirees and future retirees, bur rather with gutless politicians who agreed to this doomsday scenario, and are now..."aghast".

    Friday, April 7, 2017 Report this

  • Unbelievable

    JohnStark, why are you bringing Warwick teachers into this discussion? Don't you know that teachers are in the state pension fund, not municipal? AND they do not get medical for life. Check your facts before spreading mis-information.

    Monday, April 10, 2017 Report this