Retiree costs coming home to roost Retiree costs coming home to roost (September 16, 2005)

Last week's notice that the city will need to find $30 million to cover the anticipated medical insurance expenses for its retiring employees is a shock, and one that we're sure will stir up considerable debate on the city council and among the city's workers and their unions.

The notice also is a reminder that despite its ability to carry a substantial budget reserve, the city's economic well being is hardly immune to the forces that continue to drive health insurance costs ever higher.

Luckily, the new accounting procedure that accounts for a large chunk of the increase will not take effect for two years. By then it will require Mountain View to have adequate funds on hand to pay for 85 percent of lifetime medical benefits for all its retiring employees. If the city does not set aside enough funding in accordance with the new standards, officials say, its stellar AAA credit rating, not to mention its financial solvency, could be in jeopardy.

There are some stipulations. For example, an employee must have worked for the city 15 years and be over 50 to be eligible for the 85 percent lifetime coverage.

An actuarial study estimated that current and retired city workers have earned so much service time that the city will owe $43 million in health care costs after they've all retired. The city had thoughtfully set aside $13 million to cover this liability, but to close the gap, the city will need to save more than $2 million a year or find the equivalent revenue.

A similar amount will be needed just to pay for the increasing costs of benefits as workers continue to close in on retirement in the future.

How will the city deal with such a significant hit, an amount equal to 7 percent of the general fund budget? Given the huge impact on city spending, we expect the council to conduct a rigorous discussion on how to pay for this unexpected cost. Here are a few questions:
* Should the city tap its reserves, which help pay for things like capital projects, to meet the health care obligation? * Should the city substantially reduce services in order to save enough to cover the cost? * Should the city consider changing the eligible age to receive the benefit from 50 to 60, for example, and/or change the percentage covered by the city to something less than 85 percent for life? * Should the city attempt to renegotiate union contracts and ask employees to contribute to the health care plan?
These questions, and likely many more, will need to be discussed and debated as the city searches for a way to meet this new obligation. The outcome will have a major impact on city finances for years to come.

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