Tax now or pay later: City of Racine faces big bill for retiree health care

By David Steinkraus

Wednesday, December 7, 2005 2:03 AM CST

RACINE - The city of Racine is facing a million-dollar gap in funding the future health care for its retirees, and the question for the City Council now becomes what to do about the gap and whether to gamble that the city's financial rating won't be hurt later if aldermen refuse extra taxes or cuts now to meet that liability.

Just how big the gap is became clear on Tuesday because of an analysis required by a new accounting rule for governments. Under GASB 45 (for the Governmental Accounting Standards Board), municipal and school governments must calculate their future liability for health care benefits and show that as part of their financial statements. For the city, this is at least $268 million over the next 30 years, actuaries told the council on Tuesday night. It's like a mortgage that you must account for, and that amount is what city employees have accrued so far. There's a potential for that to increase to $374 million without changes in the city work force or labor

contracts.

"The accounting does not require funding of the obligation," said Marcie Gunnell of Mercer Health & Benefits. She is an actuary, a specialist in calculating risks, and talked to the council about the analysis. The accounting rule requires only that the liability be calculated and stated as part of the city's financial summary, she said.

If the city carries a large unfunded debt, there may be an effect on the city's bond rating and thus on how much taxpayers will have to pay to borrow money. But municipal officials say that no bond rating company has yet taken a position on how they'll view a large health care liability.

"The issue is going to be how you're funding this liability," said Paul York, finance director for Beloit. Beloit provides lifetime health care to some of its employees, as Racine does for all of its employees. Although it hasn't done its actuarial analysis yet, its liability gap is likely to be large, York said.

"And I think that's what the rating agencies are going to be looking at," York said. "I mean if you have no plan at all I'm sure they're going to be concerned about that."

Transparency The rule was really put in place for analysts, said Paul Reilly of Madison. He worked for the city of Madison for 27 years, retiring as its comptroller, and then served for 10 years on the GASB. When he started there in 1990, the rule was under consideration, "but basically it became a project that needed work because of what was going on in parts of the country with this issue."

Governments were making promises of future payments for health care, but the potential costs of those promises were not being reported, he said. It paralleled what had happened with pension systems, and, he said, the GASB decided promises about health care should be treated the same way. "And that's so analysts, when reviewing cities, can determine comparables, the likelihood of the current tax levels being able to pay the bills in the future."

Racine County will also face this requirement. It hasn't done the analysis, said Doug Stansil, the county finance director, but several years ago, when the change in accounting standards reached the horizon, a rough calculation showed the county's unfunded liability to be more than $100 million. The question becomes one of financial

philosophy.

"Do we want to tax ourselves now so we can set money aside?" Stansil asked. "Or should we say, well, we'll worry about that 20 years from now when the bill comes due?" Spare money The problem, Racine aldermen said on Tuesday, is where they could find money to establish a trust for future needs, or where they could make future cuts to pay for future benefits.

Not many cities are facing this problem because few are providing such generous health care benefits.

"However in the school district arena, those school districts are going to be bankrupt," said Kathleen Fischer, a CPA who is special projects manager for Racine. "I mean, I used to audit almost all the schools in the state, and every one of them had a plan this rich, if not richer. You go to Milwaukee Public Schools - theirs has got to be in the billions."

The county has been working to cut its future potential costs, Stansil said. Newer contracts say that retirees will be covered only until they reach Medicare eligibility, and the county is attempting to require new employees to work a certain number of years before they qualify for retirement health care. The city is trying this, too, Becker said. It's a key goal of negotiations.

A ray of hope in this is that the current health cost death spiral may not last. Among the assumptions which actuaries commonly use is one which says that by 2015 health care cost increases will fall to 5 percent annually. The reason is unknown, Gunnell said, yet analysts assume there will be one because current health care spending is simply unsustainable and leads quickly to a time in which the whole wealth of the nation is devoted to paying its health care bill.

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