The Association of U S West Retirees



Health insurance for retirees will burden governments
Some cities, counties and school districts have future obligations that could have severe effects on their fiscal stability.
By Pat Doyle
Minneapolis Star Tribune
Wednesday, December 14, 2005

For teacher Greg Van Alstine, the deal promises early retirement after more than 30 years of working in a public school in the northern Twin Cities suburbs.

But for Duluth, a similar deal for city employees could mean higher taxes, reduced services or even bankruptcy.

The cost of health insurance for retired government employees, overlooked for years by politicians and the public, is slowly coming into focus for cities, counties and school districts in Minnesota.  One of the biggest obligations is in St. Paul, where the total future liability could reach $1 billion for the city, the school district and Ramsey County.  Duluth is looking at a $280 million bill.

Nearly half of the state's school districts pay part or all of the health insurance premiums for their retirees.  A hint at what could be in store for some of them occurred this year in the Crosby-Ironton School District in northern Minnesota, where teachers struck over proposals to cut retiree benefits before agreeing to concessions.

"You had a district that had made these promises for a large number of years and ultimately didn't have the ability to fund it," said Harley Ogata, general counsel for Education Minnesota, the state teachers union.  "Both sides had to give."

Retiree health insurance was sometimes approved as a substitute for better wage increases for public employees.  Typically providing a bridge to Medicare for early retirees, it cut payroll costs by encouraging early retirement.  Over time, public employees saw retiree health insurance as deferred compensation for government pay that was lower than what they might earn in the private sector.  And politicians saw it as a way to hold the line on raises while agreeing to a benefit that was harder to quantify.

Disclosures will be required

But concerns about the rising cost of health care have prompted the federal government to require state and local governments to begin disclosing in 2007 the impact of their long-term obligations.  Few state employees in Minnesota are entitled to retirement health insurance, but the impact is significant among local governments.

The state auditor's office is scheduled to meet next week with finance officials of major local governments to discuss the new federal rule.

"We want to find out how many ... have started looking at this," said Carla Heyl, general counsel for the auditor.

Local governments already are scrambling to figure out what they owe and what to do about it.  "We can't afford to continue to give this away," Duluth Mayor Herb Bergson said in an interview last week.

Without concessions from city unions, he said, Duluth faces an estimated $280 million health insurance liability for current and future retirees.   Although that figure is much higher than the city's annual budget, the cost would be paid over decades.

Raising taxes to meet the obligations is an option, but "if there are levy limits ... it would probably require mass service cuts and layoffs," Bergson said.

If contract revisions, budget cuts, tax increases and other remedies don't solve the problem, "then the city will likely face bankruptcy," said a task force report delivered Monday to the Duluth City Council.  The report recommended that the city ask lawyers for "advice regarding this alternative and the steps the city needs to take now to protect its citizens should bankruptcy happen in the future."

Heyl said she is not aware of any local government in Minnesota that has ever filed for bankruptcy protection.

St. Paul Mayor-elect Chris Coleman hasn't yet formulated a plan for dealing with retiree health insurance costs but was scheduled to get a briefing on that city's obligations in a couple of weeks, said spokesman Bob Hume.  Ramsey County has dropped the benefit for new hires.

The Minnesota Supreme Court ruled this year that a government can't unilaterally cancel health benefits of retired public employees who won those rights in collective bargaining agreements before they retired.

Crosby-Ironton example

The Crosby-Ironton settlement offers an example of how future retirement costs could be contained.  Current teachers hired before July 1990 won't have the same guaranteed district-paid retirement health insurance as current retirees.  Instead, the district will contribute money to a trust account for older teachers.  It will be managed by the union, which will determine how benefits are paid.

Employees hired from July 1990 until July 2005 will receive up to $1,500 a year for health care savings accounts that they can use to pay premiums when they're retired.  The district won't pay for retirement health insurance for future employees.  The arrangement spares the district about $13 million in retiree health contributions through 2019.

"It would have bankrupted us, no doubt about it," said Superintendent Linda Lawrie.

Ogata said the possibility of more severe cuts was a blow to a large number of older teachers, "who had dedicated two or three decades of work to the organization with the idea that the promise was they would get retiree health insurance."

Van Alstine, 58, a third-grade teacher at Rice Lake Elementary School in Lino Lakes, said he and other veteran teachers worry that the district will insist on stripping away five years of early-retirement health benefits.  Without the benefit, "I would end up teaching longer," he said, because paying insurance premiums until he could collect Medicare payments would cost about $15,000 a year.

The district proposed cutting the retirement benefit during contract negotiations between his union and the district, but has backed away from the idea.

Pat Doyle 651-222-1210