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Critical Condition: Retired workers represent a billion dollar liability for public employers - but who will pick up the tab? 

Medicare payment for retired workers presents a major challenge.

Around conference tables and in city council chambers around the state, elected officials and finance officers are asking themselves how cash-strapped public employers will fund health care premiums that have been promised to future retirees.

In Oregon, it's a $3 billion question as health care costs continue to rise and an aging and benefit-rich public workforce edges closer to retirement.

For years, school boards, county commissioners and budget officers opted to forestall dealing with the looming issue of so-called other post-employment benefits. But that's changing as organizations wrestle with the reality of shrinking revenues and growing expenses related to retiree health care.

Unlike the public employee pension system, or PERS, there is no centralized system for funding these benefits, which were traditionally offered as part of the overall compensation package. In most cases, cities, counties and schools agreed to fund health care premiums for retirees from the time they stop working until they reach age 65 when they become eligible for Medicare benefits. That can vary greatly from employee to employee and organization to organization, but the cost is significant.

While there is some disagreement as to the best method for calculating the actual liability, under the federal government's accounting standard the top 100 public employers in Oregon owe roughly $3 billion in promised benefits - primarily heath care premiums - to future retirees. However, most local governments have yet to set aside any money to fund those obligations. According to any analysis by the Portland-based Cascade Policy Institute (CPI), more than $2.8 billion of that total remains unfunded.

Locally, both Deschutes County and Bend have significant unfunded retiree health care obligations, according to figures that have been submitted to the state. Bend has roughly $22 million in unfunded future liability, which puts it among the organizations with the greatest outstanding obligations as a percentage of payroll, according to CPI's analysis. Deschutes County is not far behind. It ranks 15th on the list with roughly $27 million in unfunded retiree health care benefits. That's a fraction of what some of the state's larger organizations owe, such as the Portland-area transit district, TriMet, which reportedly has promised benefits in excess of $800 million.

Budget hawks such as CPI's President and CEO John Charles see the mounting debt as a crisis in the making.

"The more [governments] procrastinate and the more they defer, they create a timebomb that will blow up on someone else's watch," Charles said.

His organization, which promotes "free market" solutions and limited government is advocating that cities, counties and other governments set up accounts and begin paying down those debts before they come due. The think tank recently found a champion in House Republican Leader Kevin Cameron, R-Salem, who has drafted proposed legislation for the upcoming session.

Cameron said he isn't sure when or where the bill would be introduced. However, he said he is hopeful that it will get a hearing this winter. He acknowledged that tackling post-retirement benefits is not necessarily at the top of lawmakers' agendas, including the members of his own party who he said are focused on the larger priority of the economy and "creating private sector jobs."

Still, Cameron said the prospect of dealing with a municipal bankruptcy got him thinking about how to improve the long-term fiscal health of local governments around the state. While the issue of post retirement health care benefits is one that has traditionally been dealt with solely at the local level, Cameron said lawmakers have a responsibility to the state's citizens to ensure that governments at all levels are being fiscally responsible.

"It's obviously easier to promise something to someone and not pay for it," Cameron said.

"All we are asking is if you, as a board, are promising some benefits, we just want to make sure that you're also declaring how these things are going to be paid for," he said.

Under Cameron's proposed bill, employers would fund their outstanding retirement liability under a rolling 25 year amoritization schedule. Under such a scenario, the city of Bend would theoretically have to set aside roughly $3.8 million annually to cover post-retirement benefits. Deschutes County would have a similar obligation. That's a bitter pill for organizations that have already laid off staff and reduced services in recent years.

While there seems to be a consensus that public employers need to get a handle on the post-retirement benefit costs, not everyone agrees on the scope of the problem. The most recent update for the Bend-La Pine school district showed that its obligation had been cut nearly in half due to enrollment changes in the employee health care plan, said Brad Henry, district finance director. Moreover, Henry said there's a question of whether the district is even on the hook for the remaining $11 million in post-retirement health care benefits. At this point the district doesn't make a post-retirement medical contribution for employees. It does, however, allow employees to remain on the district insurance plan. As such, they have an indirect cost to the entire pool of policyholders. In other words, those retirees, who presumably need more medical services, drive up the cost of everyone's premiums. It's that additional cost that shows up on the balance sheet as the unfunded post-retirement costs, and that's misleading, Henry says.

"I have a hard time believing that this liability is ours," he said. "I guess I can kind of understand that it's generated by our retirees, but we have a miximum that we can contribute. So it's hard for me to say it's a district liability - at the least it's shared by the employees and the district."

City of Bend Finance Director Sonia Andrews agrees. While the city's plan differs from the school district (the city essentially pays health care premiums for retirees until they reach age 65 and become Medicare eligible) the vast majority of the liability is tied to retirees' inclusion in the insurance pool.

The city has come up with its own calculation for the actual cash liability related to post-retirement medical benefits and found it to be a fraction of the number being bandied about in Salem. Nonetheless, the city is taking a proactive approach to dealing with the issue. It is in the process of setting up a trust fund for post-retirment medical costs. Andrews said the city needs to set aside about $1.1 million this year to fund the account. That cost is spread across all the departments proportionally, she said.

Like other public employers, the city is limiting its liability by reducing the number of employees who are eligible for post-retirement medical benefits. New hires do not have the option of enrolling in the program.

City Manager Eric King said a bigger challenge than the pre-Medicare contribution is the city's standing promise to pay the Medicare supplemental premium for retirees after they reach age 65, a payment the city continues to make until the former employee dies.

Such benefits are nearly unheard of in the private sector and are becoming more rare in the public sector, in light of the ongoing fiscal challenges and the ever-spiraling costs of health care. But it's one that employers , like the city, will have a tough time weaning its workers from.

Still, King is optimistic that the city can get there - eventually.

"We want to work with employees and offer some incentives to opt out. We don't need to take an abrasive approach. I think our employees want to work with the city," King said.


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