Mounting Healthcare Costs For City Retirees in the Spotlight

Rohnert Park may not be able to afford to pay for the 108 retired city employees, plus their dependent, who get between 50 and 100 percent of all medical expenses paid for by the city. The situation is dire, said City Manager Gabe Gonzalez — healthcare costs are draining the city's $28.5 million operating fund, which is projected to have a $1.5 million deficit this year.

If the defecit continues to grow, city staff said, Rohnert Park could be forced to make drastic cuts to city services.

But, a handful of retirees say it's unfair to take away something that was promised to them.

“It’s severe — we’re able to make today’s payments, but with costs going up and revenues going down, that may not be sustainable,” Gonzalez said. “It’s a very serious situation that we need to address today so that the city can continue to exist 10, 15, 20 years from now."

Rohnert Park’s unfunded retiree medical liability — or the estimated amount of money retiree's healthcare will cost the city during the span of their lives — is mounting. Today it’s 53.2 million, but as city employees vested before 2007 retire, that number will skyrocket to an insurmountable figure.

It’s just a matter of time, Gonzalez said.

“We’re paying $1.5 million for 108 employees right now, but in the next five years, that could be 150, or 160,” Gonzalez said. “How am I going to pay for that?”

As Gonzalez moves forward with the budget for fiscal year 2011-12, he said he may be forced to cut places he doesn’t want to: law enforcement, parks maintenance, and possibly retiree healthcare plans.

"It's a matter of priorities," he said. "It's very important long-term to restore the city's fiscal solvency, but it's critical to fund today's costs."

When asked if the city could renegotiate medical benefits with its employees to avoid the massive financial crunch, Gonzalez said that it was a tricky question. 

"That’s more of a legal question, it requires specialized legal opinion,” Gonzalez said.

The problem of unfunded liabilities started way before Gonzalez’s time. Normally, to pay for retiree medical, cities set up a trust fund, invest in it every year, then use the accrued interest to pay for the annual medical bills. But Rohnert Park never created a trust fund. Carl Leivo, who was City Manager from 2002 to 2005, set aside money in a retiree medical account, but it was withdrawn a few months later.

“We haven’t been funding it all these years,” said Sandy Lipitz, director of finance for Rohnert Park. “The longer we delay the funding, the more the problem continues to grow.”

Lipitz said the problem today is complex. Not only has the city never put money away and allowed it to grow, but health premiums have gone through the roof, development in Rohnert Park has been at a standstill for almost 15 years, people are living longer, interest rates have skyrocketed, the retiree pool is growing and people are retiring at a younger age.

And in 2007, accounting laws changed. The Governmental Accountability and Standards Board (GASB) initiated a rule requiring municipalities to disclose in annual budgets how much their unfunded liabilities were, known as GASB 45. It became a more real number for Rohnert Park in 2009, when the city first reported the unfunded liability. It now impacts credit ratings and the city’s ability to issue debt.

"These [reports] are important because they’re looked at by our investors, our bond council, our underwriters, our bond rating agency or trustee and even potential companies that may be thinking about relocating in Rohnert Park, or maybe thinking about doing business in the city," said Marilyn Oliver, an actuary consultant with San Mateo-based actuary firm Bartel Associates, who estimated the city's long-term unfunded liability. "It’s important that we show in our financial statements the city’s current financial condition."

The issue now is bigger than it’s ever been, Lipitz said.

“We never set aside money before because it was manageable,” she said. “Health costs were so low, retirees were so small — it wasn’t an issue. We’ve only been incorporated since 1962, so the city didn’t even start paying attention to this until the ‘80s.”

“The city was very generous,” she added. “GASB 45 is relatively new. We’re only now developing a plan to address it, because all the bond underwriters and credit raters are expecting to know what the city’s plan is.”

City staff said they recognized the problem as early as 17 years ago. In 1994, healthcare coverage was tiered from 100 percent coverage — a 10-year employee received 50 percent coverage, a 15-year employee got 65 percent coverage, 20-year employees received 80 percent coverage and 25-year employees received 100, according to a memorandum of agreement between the city of Rohnert Park and the Rohnert Park Employees Association. It was a system that lessened some very expensive medical bills for the city.

Then in 2007, health plans were adjusted again. Today, if you’re a city worker employed here for 10 years or longer, you’re eligible for a Retiree Health Savings Account, in which the city deposits $75 a month in an account to be used for medical expenses upon retirement.

Unfunded liabilities went from $45 million down to $27 million in 2008 because of these changes, according to the actuarial. But now, it’s back up to $53 million, and in order to make a dent in it, the city should be setting aside $5 million annually.

“At some point the city will not be able to afford the existing cost for the active employees plus the cost for existing employees. It’s dangerous,” Lipitz said. “We’re in the process of establishing a fund to be in place before year’s end.”

But even if funds are set aside now, the problem persists.

“We have a structural debt, that I inherited,” Gonzalez said. “There’s no money coming in from developers, there’s no new building permits, we’re in a recession and have double-digit unemployment — we stopped growing, yet our benefit packages stand at a place that we can no longer fund.”

The City Council on Jan. 24 said they wanted more information on how long they could wait before the city’s unfunded healthcare liabilities became an emergency.

“When is someone going to come knocking on the door because we’re not paying, or when are we going to have retirees knocking on the door saying ‘hey we’re not having our medical bills getting paid,’” Councilmember Joe Callinan said. “Since I’ve been on the council, we’ve been talking about this unfunded liability.”

"We know it's a big problem." said Vice Mayor Jake Mackenzie. "We made great progress in 2007 with new [labor] contracts, and we're re-engaging as a City Council now."

That the Council is talking about the problem right now has thrust the issue into the hands of current retirees, who are getting the medical benefits.

“Part of what labor’s perspective is, is that we have guys out there, working for 20 years, every single day they’re working under this promise, and then the city goes and changes it — that created a very profound sense of betrayal,” said David Stubblebine, a public safety officer who worked for Rohnert Park from 1995 to 2008.

“The larger issue afoot here is a systematic decline in public employee rights in general,” Stubblebine said. “What’s happened is unfair, underhanded, despicable.”

“I got into the business 29 years ago, and I don’t have an answer,” said Wulff Reinhold, a retired public safety officer. “But this job takes a real physical and emotional toll, so the medical and pension benefits are pretty important — we always knew we weren’t going to get rich at this job, but at least the benefits were good.”

“Did the union negotiate large benefit packages? Perhaps. But I don’t think it’s unreasonable to expect the public to fund some of our benefits,” Reinhold said.

For Dale Utecht, president of the Rohnert Park Public Safety Officer’s Association, it’s all about promises made.

“We negotiated in our contracts what retirees will get,” Utecht said. “It’s unfair to work all our lives with that promise, and after we retire, someone to say ‘hey sorry, we’re not going to give you that after all.’”

“Hopefully the city won’t be able to change the contracts for people who have already retired,” Utecht added. "We've already given up salary increases and other givebacks."

"The city had a chance to put away money in 2007, and they didn't," Stubblebine added.

The question becomes, is it better to have something rather than nothing, Lipitz said.

“I mean, how are we going to pay if there’s no money?” she said. “It’s better to work with the city and our financial situation, than just dig in your heels and say ‘I have a contract,’ because at some point, we may not be able to pay.’”

Whether or not the city's unfunded healthcare liabilities is a real problem is up for debate.

"I was mayor during 2006 during which time I did see this situation as a growing financial risk to the city," wrote former Mayor Tim Smith in an email, who served on the Council from 2004-2008. "In fact, during my term as mayor in 2006 I did bring up this topic often, including opportunties to do so in Sacramento."

"For me, it was the most important issue we faced on the Council," Smith said.

Leivo said he disagrees.

"It's not really a problem," Leivo said. "I think this is just a drop in the bucket as far as the other financial problems the city is facing. All they have to do is put money into an account to show good faith, that'll satisfy the debtors."

"I'm probably the only one that's going to tell you that," Leivo said.

Correction: this article originally stated that Tim Smith was the Mayor when the benefits were tiered in 2007. In fact, he was a councilmember. The retiree reserves were set up before Smith was elected to the Council. Rohnert Park Patch regrets the error.