Retiree health costs a $290M unfunded tab

Warwick Beacon ·

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--.”