Retirees will cost a bundle Retirees will cost a bundle (September 09, 2005)

City needs $30 million to cover workers' benefits, report finds

By Jon Wiener

The city is $30 million short of meeting its commitment to give health benefits to retired workers, according to an actuarial report released last week.

The huge shortfall is attributable to a number of factors, including falling interest earnings on its investments, skyrocketing health care costs, and new accounting rules that force the city to count service time earned toward retirement benefits as an annual expense.

City workers must have 15 years of service and be at least 50 years old to be eligible for the city to pay 85 percent of their health care premiums in retirement. Under the new accounting rules, which don't take effect for two years, the city needs to set aside enough money each year to cover the premiums of each worker from the day they retire for the rest of their lives.

The report put the city's liability for these retiree medical benefits at more than $43 million in present value, dwarfing the $13 million in reserves the city had set aside for that purpose.

"It is a substantial financial challenge, there's no doubt about it," said city manager Kevin Duggan. "All of our efforts are not having enough impact."

Duggan said the report was meant to be informational and that it would be several months before his staff would be making recommendations on how to address the problem.

City leaders will need to come up with more than $2 million in savings or new revenues each year just to cover the shortfall, and an equivalent amount to continue funding the benefits in the future. That translates to roughly 7 percent of a $60 million payroll. Other options include dipping into unallocated reserve funds, issuing short-term debt or trying to renegotiate agreements with its major employee groups.

"We're exploring all alternatives," said city finance director Bob Locke.

Mountain View is in a better position than most other cities, and not just because it has AAA credit rating from Standard & Poor's that allows it to borrow money cheaply. The city still has yet to lay off anyone despite five straight years of budget cuts.

Officials prepared the report two years ahead of new accounting rules that will require every city in the state to do the same, getting a head start on what is sure to be a hurdle for local governments everywhere. Four earlier actuarial reports provided the impetus to start a reserve fund for the purpose.

The issue of reserves was a contentious one during this past year's budget hearings. Some city council members wanted to dip into reserves rather than cut jobs.

"I think what the report shows is that it's not a question of spending our reserves, it's a question of how do we pay our liabilities," said council member Greg Perry, who criticized the city's union contracts as overly generous.

Perry said he would push to change the retiree health benefits to a 401(k) model, where employers set a cap on their contribution levels. "We need to stop the bleeding," he said.

E-mail Jon Wiener at jwiener@mv-voice.com

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