City Retiree Medical Benefits: Smart Financing or Voodoo Economics?

In the City Council this past Tuesday, there was expected to be a routine explanation of the new GASB 45 reporting requirements on retiree medical benefits. What it became was a heated debate regarding the city’s budget, specifically the longstanding issue of structural deficit.

Paul Navazio, the city’s finance director, came before the council with the report that drew such conflicted remarks from the city council. Mayor Sue Greenwald brought down the hammer on the growing structural deficit from the commitments that the city has made, stressing that the city needs to be more committed to fiscal responsibility so that it can continue to afford the same level of service for its retirees.

Mayor Greenwald:

“Would it be fair to say that what we’re really looking at here when we do the accounting somewhat more correctly, is that we have an additional real annual deficit of about, citywide, 2.5 million to 4.2 million per year?”

Paul Navazio:

“Yeah, if we immediately implemented a fully pre-funded plan we would need to come up with another 2-4 million dollars to fully fund it… The long-term cost of this benefit exceeds what we’re building into our projections.”

Mayor Greenwald:

“And that’s really our deficit, right? I mean, nobody requires us to have a balanced budget anyway, except ourselves. So this 2.5 to 4.2 million deficit is equal to about 16% to 23% of our payroll, depending on the rate of return on the investment.”

Mayor Greenwald’s comments contrasted drastically with Councilmember Stephen Souza’s, who argued later that the city will deal with these issues because it is still here today, and therefore will continue to manage as it always has. This overly rosy outlook seemed ridiculous after Mr. Navazio was forced to admit by Mayor Greenwald that the city did in fact have a structural deficit that it was unsure of how to pay for.

Councilmember Stephen Souza:

“I have the faith that we’re gonna be able to take on each of these components, and one’s going to be more pressing than another, that’s just the way life is, that’s the way needs are, things break down faster than other things break down, needs arrive faster than other needs arrive, and we’re gonna address them as they come along, we’ve been doing that as a city, for almost, for over 90 years. And I have the faith that we’re gonna continue to do that for another 110 years, so that when we reach our 200th year anniversary as a city than we’ll be as fine a city as we are today 110 more years from today.”

Councilmember Souza even implied that the city might want to draw from its general reserve fund to pay for these deficits. The general reserve is onetime use money, meant for funding emergencies. To use it to pay for a structural deficit that recurs each year makes no sense.

According to the report, full funding of the City’s Retiree Medical Benefits would require annual contributions of about $4.3 to $6.0 million annually. Currently, the city only sets aside $1.8 million for this, and has this year only added another $500,000 to that number for fiscal year 2007/2008. This means that even after that half million, the structural deficit is still between $2.0 and $3.7 million, ANNUALLY.

The report recommended saving money in the long run by shifting gradually from the current method of pay-as-you-go funding to pre-funding of these benefits. However, to make that change will cost more money now, and as it is the budget is fairly strained. But more importantly, the model in the report assumed that health care premium rates are going to drop in the next several years, an assumption that Mayor Greenwald found to be very disconcerting.

Paul Navazio:

“They’re assuming for the short term…annual increases of health care premiums in the 10 to 11.5% range, and that’s consistent with what we’ve built into our own projections. I will say that the actuarial assumptions in this model assume that within the next ten year period, that the annual rate of increase would actually be reduced to 4.5% per year. This is an interesting assumption, one that we’re checking…nobody has a crystal ball on this, and health insurance has increased dramatically and continues to. Implicit in this assumption is the premise that health insurance costs can’t continue to increase in the current rates in perpetuity. If it keeps going at this current rate, than by 2020 health care will be 100% of GNP. There is an inherent assumption here that health care costs have to normalize.”

Mayor Greenwald:

“And they’re saying that this will happen in about ten years, right as the baby boomer generation starts to get old?”

Paul Navazio:

“Well by most economists standpoints, the current increases in health care rates are not sustainable. What that means for the future is something we’re going to look at.”

Mayor Greenwald:

“When I look at that 4.5%, it sounds like we’ll be lucky if our annual deficit is only 2.5 to 4.5 million. Because that 4.5% increase in the out-years that are being projected, are just based on the assumption that it can’t get any higher, so it has to come down, and I don’t know, it doesn’t give me a whole lot of confidence.”

The council meeting ended on the note that more research needed to be done by city staff, and more budget workshops needed to be held, before a decision could be made on how to properly address this issue. Mayor Greenwald made it clear that there may need to be some tightening of the city’s budgetary belt in order to deal with this, possibly including some salary cuts to city employees. While this idea may not sit well with a lot of employee’s of the city, it was the only idea that came out of the council at all on how to deal with this issue, and the fact of the matter is that the city cannot allow it’s unfunded liability to continue to build.

---Simon Efrein