Curbing retiree health care costs will be painful

By the Editorial Board

April 06, 2015 05:00 PM

Sacramento firefighter Masoud Baruk holds his son Cayd during City Council budget hearings in 2012. Council members are starting to debate health care benefits to city retirees, including firefighters. Jose Luis Villegas Sacramento Bee file
Sacramento firefighter Masoud Baruk holds his son Cayd during City Council budget hearings in 2012. Council members are starting to debate health care benefits to city retirees, including firefighters. Jose Luis Villegas Sacramento Bee file

Even as the city of Sacramento’s current budget outlook is relatively sunny, there are dark clouds on the horizon. Among the most threatening is the unfunded liability for retirees’ health care – a whopping $452 million. That includes $385 million associated with the general fund – more than the entire budget for basic services this year.

So it’s a positive, if overdue, step that on Tuesday the City Council’s budget committee will start talking in detail about how to get these long-term costs under control. How difficult that will be is made clear in the staff report outlining some options.

The city could require current workers to pay into a trust fund for retiree medical benefits, or create retirement health savings accounts similar to 401(k)s. It could reduce benefits for current employees, and cap them for firefighters to the same amounts as other city retirees. It could separate retirees from current employees in the health insurance pool, resulting in higher premiums for retirees and lower ones for active employees.

City Treasurer Russ Fehr isn’t saying which options he might recommend, though he does say “the status quo is clearly unsustainable.”

Any major reductions almost certainly will be opposed by retirees and current city workers who would be affected. The staff report says trimming benefits for current retirees, which make up half the unfunded liability, should be a “last resort.”

As it stands, retirees must have at least 10 years with the city to get half the benefit and 20 years to get 100 percent.

Firefighters hired before Jan. 14 get benefits worth $774 a month when they retire; those hired after that will give up about half of the payment when they become eligible for Medicare. Under their new contract, firefighters are paying into a trust fund to help pay the benefits.

Eligible police and other retirees get $300 a month. The benefit was eliminated for new non-public safety employees starting in 2012 and for new police hires in 2013.

Now, the city is paying only the actual cost of the benefit each year, $10.2 million in 2014-15. Fully funding the benefit in advance would cost $36 million more in 2014-15. Given the size of the liability, the city is going to have to chip away. The staff report suggests phasing in any major changes over five to 10 years.

Retiree health care is a big chunk of the city’s $2.3 billion wall of debt. “Sacramento’s long-term liabilities threaten to overwhelm the budget and limit the services the city provides,” Mayor Kevin Johnson said in his budget priorities report, which called for more study.

Other local governments, school districts and the state also are wrestling with retiree health care costs. Gov. Jerry Brown is considering cheaper insurance plans and smaller subsidies. As The Sacramento Bee’s Loretta Kalb reported Sunday, the Sacramento City Unified School District faces a $634 million unfunded liability.

It may seem there are more pressing issues, but officials in Sacramento and elsewhere wouldn’t be doing their fiduciary duty if they ignored retiree health care. The longer they wait, the more expensive and painful the solution will be for people who ultimately must pay, the taxpayers.