City Bankruptcies Target Retiree Health Care Costs

The cost of retiree health care promised state and local government employees, growing at a faster pace than more-publicized public pensions, has become a common target for cuts in a string of California city bankruptcies.

San Bernardino, which filed for bankruptcy last week, lists a $2.2 million savings from a deferred retiree health payment in a three-month fiscal emergency plan said to be needed to allow the city to make payroll.

In a lengthy bankruptcy that began in May 2008 and ended last November, Vallejo cut monthly retiree health care payments to $300 from as much as $1,500, saving an estimated $100 million over time.

Stockton, in a June bankruptcy, would end all retiree health care payments, citing overly generous and costly benefits: immediate eligibility, uncapped payments, less than half of retirees covered, and a cost equal to 31 percent of payroll for proper pre-funding.

Unlike pensions, there is no widely held view that promised retiree health care is a “vested right,” protected by contract law, under a long series of court decisions. Some think promised retiree health care can be cut, depending on circumstances.

Pensions in the three bankruptcies also are protected by the deep pocket of the California Public Employees Retirement System, whose threat of a long and costly legal battle reportedly is the reason Vallejo did not try to cut pensions in bankruptcy.

Cutting retiree health care in bankruptcy was upheld last month. U.S. Bankruptcy Judge Christopher Klein in Sacramento denied a temporary restraining order sought by a group of Stockton retirees.

Klein began a hearing on July 23 by saying he understood from filings that Stockton retirees were in a “dire situation” and that a cut in retiree health care could be “catastrophic to some of them.”

But the judge asked the retiree attorney to explain why the court’s hands are not tied by a federal regulation, “section 904,” prohibiting interference with the debtor’s political or governmental powers, property or revenues and income-producing property.

Scott Emblidge, the retiree attorney, said his clients want protection of what they believe is a vested right. He said the federal law is broad enough to allow the health care cut to be blocked as the action of an employer, not interference with governmental powers.

“At a minimum, preserve the status quo,” Emblidge said. If the bankruptcy court cannot block the cut, he urged the judge to lift the “stay” on debt collection automatically obtained by a bankruptcy filing, so retirees can seek a block in another court.

Marc Levinson, the attorney for Stockton who also represented Vallejo, said blocking the retiree health cut would interfere with governmental powers, forcing the city council to make legislative budget decisions about layoffs or other revenue sources.

Levinson said blocking the retiree health care cut would be telling the city how to spend its money. If the stay is lifted, he said, the court also would be telling the city how to spend its money, raising the question: What is the point of a bankruptcy filing?

Lifetime retiree health care from an employer, rare in the private sector, is an important benefit as public employees decide whether to retire as early as 50 or 55 as most retirement plans allow, well before eligibility for federal Medicare at age 65.

Some retiree health plans are generous. Former Gov. Arnold Schwarzenegger’s administration said active state workers pay 15 percent of their health care costs, while the state can pay all of the health care cost for a retiree and 90 percent for dependents.

Gov. Brown’s 12-point pension reform plan, presumably still under consideration as the Legislature returns today for the final month of the session, would “change the anomaly of retirees paying less for health care premiums than current employees.”

The governor’s plan said state retiree health care costs increased 60 percent in five years and will nearly double over 10 years. The deficit-ridden state general fund is expected to spend about $1.7 billion this year on state worker retiree health care.

As in most local governments, state retiree health care is pay-as-you-go. No money is being invested to yield earnings to pay for the retiree health care promised current workers in the future, “pre-funding” the cost like pensions.

Two decades ago legislation by former Assemblyman Dave Elder, D-Long Beach, created a retiree health fund for state workers. Lawmakers over the years have not put money in the fund, choosing to pass the bill for current workers to future generations.

The cost of providing retiree health care was a long-ignored government debt, often not even calculated. In 2004 the Governmental Accounting Standards Board said the retiree health care “unfunded liability” should be reported.

In 2007 state Controller John Chiang made the first estimate of the cost of providing retiree health care for current state workers and retirees: $50 billion over the next 30 years. Last February his actuaries increased the estimate to $60 billion.

two-part report on retiree health and other post-employment costs issued last week by California Common Sense, a group of Stanford students and alumni, made a similar estimate of the state unfunded liability, $62 billion.

The report said nine of the 20 largest California cities (by budget) do varying amounts of pre-funding, but retiree health care in the rest is pay-as-you-go. The estimated unfunded liability for the cities is $12 billion.

Retiree health and other post-employment costs in the 20 cities is up an average of 36 percent since 2008, taking 3.28 percent of the average general funds. In half of the cities, the costs are doubling every four to six years, much like the private sector.

“Nationally, average annual health care costs have increased about 33 percent since 2008 for a family of four, from $15,609 to $20,728 in 2012,” said the report, citing a Milliman study assuming the family of four is insured by an employer-sponsored PPO.

Although cuts in pensions are not proposed in the city bankruptcies, Stockton and San Bernardino want to cut their pension costs by delaying or reducing payments on pension obligation bonds.

The three-month San Bernardino plan defers a $3.5 million payment on pension bonds and an infrastructure bank loan. The city issued a $50 million pension bond and has a current annual payment of $3.5 million, expected to rise to $6 million by 2021.

Stockton issued a $125 million pension bond in 2007. The city has proposed eliminating the general fund portion of the payment, $6.4 million this year, and only making the special fund payment, $1.3 million.

The pension bond insurer, Assured Guaranty, which has said bondholders will be paid in full, denounced the Stockton plan as unfairly “disproportionate.” Opponents who want to contest the Stockton bankruptcy have until Thursday to file with the court.

Vallejo had not issued a pension bond. Other bonds issued by the city had been consolidated under one lender, Union Bank, and in the bankruptcy bond payments were cut from $50 million to $30 million.

As Vallejo emerged from bankruptcy last November, voters approved a one-cent sales tax expected to yield about $10 million a year. But the budget approved by the city council in June had a $4.8 million deficit in a $78 million general fund.

Vallejo also was still struggling to cut pension costs. After a devastating cut in the police force, sworn officers reduced from 155 to 90, the new budget contained money to add five more officers.

The new positions were authorized only if the police union agrees to lower pensions for new hires. Adding to the city’s problems: Police and firefighters were not given a required six-month advance notice of new contract negotiations.

And as a result of the administrative failure, labor contracts scheduled to expire at the end of June were automatically extended for another year.

(Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. Originally posted on CalPensions.)