Health coverage for retired town employees: finding a solution

By RICHARD SPURGIN

Published on October 31, 2008

As part of the work to develop a five-year budget scenario for the town of Amherst, the Facilitation of Community Choices Committee (www.amherstchoices.org) ran into some complicated issues that have not received much attention but may have a significant impact on our long-term financial health. Our mission is to engage the public in these difficult topics. This article focuses on one of these issues - paying for health care for retired employees of the town and the regional schools.

One of the fastest growing portions of Amherst's budget is the cost of providing health care to retired employees. The number of retirees covered under the plan has steadily increased because of longer life spans. The cost of providing health coverage has increased even faster. This has left the town with a large - and growing - unfunded liability. An unfunded liability is a debt that will be paid in the future, but no trust fund has been set aside to provide for these future payments.

If we did have a retiree health care trust fund, how much money would it need to have today in order to pay the health care benefits that our employees and retirees have already earned?

Take a deep breath. Our consultants have estimated that a trust fund of $34.6 million would be needed today to provide for all of the health care costs of our current retirees. Another $34.4 million in trust fund principal would be needed to pay the health care of current retirees when they retire, so the total is $69 million. The only solution is to start building the health care trust fund slowly. Our consultants tell us we should start by putting $3.5 million in the trust fund this year (in addition to paying the costs of current retirees). If we make that payment, and then steadily increase those payments over the next 30 years, we will have a fully funded health care trust fund in the year 2038. Additionally, the Amherst Regional Public Schools have an unfunded liability that is about half of Amherst's: The total liability is $34.8 million and the initial trust fund payment is $1.7 million. If we started these annual contributions to a health care trust fund in FY2010, the estimated budget deficit of $2.6 million for FY2010 for the current level of municipal services, would increase to $7.8 million, about 13 percent of the total budget for Amherst.

What kind of health coverage does Amherst provide to retired town employees?

Amherst offers health insurance to retired employees and their spouses. The coverage for retired employees is the same as the coverage for active employees. When they turn 65, most retirees switch to a Medicare supplemental plan. Retirees pay between 18 percent and 25 percent of the cost, depending on the plan. Under the current rules, employees who are age 55 and have worked for the town for 10 years are eligible, as are employees under 55 who have worked at least 20 years for the town.

How much does it cost the town to provide these health care benefits?

A study recently commissioned by the town estimates that retiree health care costs are about $2.2 million in the current fiscal year. The cost is projected to rise by 40 percent to $3.1 million per year in 2013. To put this in perspective, the $2.2 million we will pay this year in retiree health care costs exceeds the entire Amherst library budget. In 2013 these costs may exceed the town budget for all capital improvements. The school district is estimated to pay $1.2 million in the current year for retiree health costs. Amherst taxpayers are also responsible for a share of those costs.

Is the cost of retiree health care covered by the town's pension fund?

No. The pension fund only pays pensions. There is no money set aside to pay health benefits for retirees. All costs are paid out of current tax revenues. Amherst is not alone in having this problem. The vast majority of municipalities across the country offer some form of retiree health care benefits and have not set aside any money to pay for these costs.

What is the bottom line?

This problem did not appear overnight and it will not be solved overnight. The town must consider ways to reduce the unfunded liability for retiree health care - or at least ways to keep this liability from growing. There are many potential solutions, some of which require outside help. A national health care program would reduce the liability. Every town in the commonwealth faces this issue, so it is possible that a state-wide solution will emerge. The FCCC welcomes your comments and suggestions.

Richard Spurgin is a member of the Facilitation of Community Choices Committee and a finance professor.