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Copyright © 2011 The Morning Call

ID: 4856410
Publication Date: January 30, 2011
Day: Sunday
Page: A1
Edition: FIRST
Section: News
Type: Local
Dateline:
Column:
Length: long

Byline: Christopher Baxter and Jarrett Renshaw Of The Morning Call

Headline: Who will pay for retiree medical costs? ** Large, unfunded
benefits for area government workers come to light under a new
accounting standard.

The financial soup of numbers reported each year by your local


government contains a multimillion-dollar ingredient that soon might
spoil your tax bill and serve up one major headache for elected officials.

The Lehigh Valley's counties, cities and four largest school districts have
promised more than $364 million in retiree medical benefits, but most of
them have not saved a dime to pay for it in the future, according to a
review of annual financial data by The Morning Call.

Instead of upending their fragile budgets, officials in the Valley largely


have elected to pin the bill on the next generation of taxpayers, who will
have to dig deeper into their pockets or surrender public services in return.

"I don't think there's any way you can responsibly say, 'I'm not going to
fund this,' " said Vic Mazziotti, director of fiscal affairs for Northampton
County, one of the few local governments tucking away money for future
retiree medical costs. "If you don't pay now, you'll pay more later. That's
just a reality."

The sobering problem of retiree medical costs, which grew hidden from
public scrutiny for years, has only recently come to light under a new
national accounting standard that requires municipalities to report the true
cost of the benefit on their balance sheets, the same way they report
pension costs.

But unlike the rules governing public pension plans, which require
payment each year to fund the current and future costs, the rules for
retiree medical benefits allow cities, counties and school districts to "pay
as you go," meaning they pay on the current cost each year and ignore the
long-term price tag.

"If you think about an aging population that is living longer, and people
are retiring earlier, it's a problem. It's a crisis," said Richard Dreyfuss, a
senior fellow and expert on employee benefits with the Commonwealth
Foundation, a conservative think tank.

The nation's public sector is just now realizing the size and scope of the
problem of retiree medical costs, he said, something the private sector did
a decade ago or more.

The long-term cost of the benefits does not pose an imminent threat to
budgets. But at some point in the future, officials will be forced to find
new ways to pay for the coverage -- such as raising taxes, cutting services
or requiring employees to pay more -- and might also need to phase out
the benefit altogether.

Government officials in the Valley have taken steps to pare the benefit or
increase retiree contributions, a way of discouraging participation. But
those steps only go so far to trim the long-term cost, and will not solve the
problem of how to pay for it.

"There's a danger that you get people in office who are only worried about
the span of that term that they're in office," said Tom Muller, director of
administration for Lehigh County. The county eliminated the benefit in
1986 for any employee hired after Jan. 1, 1987.

But county taxpayers still face a $141.7 million unfunded liability for
those hired before that date, by far the largest bill in the Valley. As of the
end of 2009, 696 retirees participated in the benefit plan, and another 211
employees were eligible in the future.

The new accounting standard recommends, but does not require, that
governments establish a trust and contribute a certain amount each year,
similar to that paid toward pensions. The trust can then be invested more
liberally than most other government funds.

A trust costs taxpayers more up front, a difficult case to make on the heels
of the Great Recession. For example, taxpayers in Lehigh County would
have had to pay $9.7 million to fund a trust for the benefit in 2009,
according to that year's audit. Instead, taxpayers paid $5 million to cover
immediate costs.

Muller said the county considered paying more into a trust fund three or
four years ago. But when the economy went south, cutting into pension
investments and increasing those contribution costs, the county could no
longer afford to also contribute to a retiree medical benefit trust.

Although retiree medical plans vary, they typically require an employee to


work a certain number of years and reach a certain age. For example,
members of Allentown's largest union can retire after 10 years and receive
full medical coverage until they are 65, when they become eligible for
Medicare.

The city has an unfunded liability of $51.1 million for retiree medical
benefits, the total amount needed to cover the plan's 1,155 eligible active
and retired workers. The city's pension funds have a combined unfunded
liability of $110.6 million, but they also have $237.5 million tucked away
in investments.

If Allentown decided to build a trust for retiree medical benefits,


taxpayers would have to contribute $3.7 million annually, rather than the
$1.8 million they paid in 2009. That would be difficult for a cash-strapped
city that just established a commuter tax to help pay for ballooning
pension costs.

"It would be a great thing to do," Allentown City Controller Bill Hoffman
said. "But where would we get the money? I don't know that answer in the
short term."

Unlike pensions, employees do not contribute toward the benefit while


they work. When they retire, some plans, such as in Allentown and
Easton, require participants to pay a portion of the premium cost. In
Northampton County, employees who retired before 1996 pay nothing;
taxpayers pay all.

Employees who retired after that date pay various co-payments.

Monthly premiums in Bethlehem can be as high as $850, which dissuades


some employees from joining, city Budget Director Mark Sivak said. A
number of employees also retire from the city and go on to other jobs that
provide insurance, he said. Still, Bethlehem has a $14.3 million unfunded
liability.
"I don't think it's a big issue," Sivak said.

Local officials are also working to reduce long-term costs. The Allentown
School District negotiated retiree medical benefits out of the current
teachers contract, signed in 2007, said Deputy Superintendent C. Russell
Mayo.

"The concern was the long-term cost and escalating medical costs," Mayo
said. "The retirement benefit was certainly one today that might have been
very nice but the day for that is gone now."

The perk was grandfathered for teachers hired before the contract date,
and administrators continue to receive the benefit, meaning costs to
taxpayers are far from gone.

Post-retirement medical benefits are essential to attract and retain quality


employees, said Tom Costi, a state regional director for the American
Federation of State, County and Municipal Employees.

"It's vital, particularly to our older employees," Costi said.

Public employees are paid less than their private sector counterparts and
the additional perks help bridge that gap, he said. Costi expects the
benefits to come under fire, much as pensions have, but said his members
will work hard to preserve them.

Officials in Easton said they are working to reduce the $10.6 million
unfunded liability for retiree medical costs, which they recognize as a
potential future problem. Both fire and police union contracts set limits on
the benefits, and the issue is always at the forefront of negotiations.

To fund the retiree medical benefit, the cash-strapped city would have
been required to pay $1.17 million in 2009; instead, it paid $328,523,
according to that year's audit. The difference would have plummeted the
city budget into the red.

"At this point, I would like to continue on a pay-as-you go basis, let the
actuary do a study and take a look at it," city Finance Director Chris
Heagele said. He anticipates an updated actuarial study due this year will
decrease the long-term liability because of the city's efforts to reduce the
benefit.

Easton has been building a medical benefits reserve fund, which is used to
pay medical costs for current employees, and that could be tapped for
retiree medical benefits as well, Heagele said.
The Easton Area School District also has opted not to create a trust,
instead setting aside $1.5 million of its general fund reserve money for
retiree medical costs, estimated at $11.3 million in the long term. A trust
fund has been discussed in the Colonial Intermediate Unit 20.

"Since we pay as we go, we do have the flexibility to use other money for
other things," business manager Marie Guidry said. "As the economy
improves or stagnates, it's a tradeoff between what you think you want to
do and what reality allows you to do."

Only Northampton County has established a trust fund to pay for retiree
medical costs. The plan is 14.2 percent funded since officials began
contributing to the trust in 2007; the annual contribution is about $5.8
million, said Mazziotti, director of fiscal affairs.

About $53.3 million in retiree medical benefits remain unfunded,


Mazziotti said.

"Financially, the question is, 'What's the right thing to do?' " he said.
"Should we start paying now, start building assets, or should we push it
off? If you don't pay, you're pushing off the responsibility to future
taxpayers because it's going to be paid one way or another."

christopher.baxter@mcall.com

610-778-2283