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Duluth struggles with retiree health costs
by Bob Kelleher, Minnesota Public Radio
December 30, 2004

City services, like snow plowing, could be at risk, unless Duluth comes to terms with escalating costs for retiree health care. That's the warning from Duluth Mayor Herb Bergson. (MPR Photo/Bob Kelleher)

People are feeling the rising costs of health care from the living room to the board room. In Duluth, health expenses could put basic city services at risk. Officials warn that the city's generous coverage for retired employees could eventually gobble up Duluth's entire budget - with nothing left for police and firefighters, parks or street maintenance.

Duluth, Minn. — Duluth's City Council has just finished its annual budget ritual, another painful exercise in what to cut next. But next year looks even worse. Duluth Mayor Herb Bergson says every city service is at risk unless something is done about soaring health costs.

"Unless we do, in my lifetime, we will be in the health care business, and out of public service business," Bergson says.

Blame a uniquely generous benefit package which promises life time coverage for retired city workers. And blame something we all face - which some call medflation. That's a rapid expansion in the cost of health procedures and drugs, combined with an aging population that requires more health care.

According to Bergson, even a small increase in medflation adds up to a huge bill.

"If the inflationary percentage is 5.5 percent on health care, then it costs $2.6 million to insure that employee from the day we hire him or her tomorrow until the day they die," Bergson says. "Fourteen million if the inflationary number is 10 percent."

Employee health coverage isn't just a problem for Duluth. It's a problem for other cities, and for private businesses. But according to Stephanie Lake, with the Minnesota League of Cities, businesses have options that cities don't.

In my lifetime, we will be in the health care business, and out of public service business. - Duluth Mayor Herb Bergson

"Unlike, perhaps a private company, they (cities) are stuck between the rising costs and budget cuts," Lake says. "A private company might be able to go out and raise the cost for its end product, but the cities, because they face those cuts in budgets, combined with that rising health care cost, really got pinched."

You can't just change the benefit package. Retirees keep the benefits they retire under. Try to change that and expect a lawsuit. And officials with AFSCME - the American Federation of State, County, and Municipal Employees - say they're not interested in re-opening current employee contracts which are good for another year. They say the city has the means to pay the coverage.

Complicating things is a new federal rule.

Duluth pays its health obligations year by year, depositing a year's worth of expenses with a plan manager. That's worked for 20 years, according to City Administrative Assistant Mark Winson.

But when you pay-as-you-go, there's nothing in the bank for future expenses. Something called The Government Accounting Standards Board, GASB, is about to change that. The board has issued new rules on how cities account for future obligations to retirees. According to Winson, until GASB rule 43, Duluth's health expenses were worrisome, but still manageable.

"But that was still looking at a kind of pay-as-you-go," says Winson. "The implementation of GASB statement 43 brought it to a much higher level of importance."

American cities will soon have to have something in the bank to back up what they'll owe retirees in coming years. If not, the city's bond rating is at risk.

Duluth is facing a 30 year health cost that tops $150 million. By this time next year, city officials will need an $11 million down payment on that expense in the bank. That's on top of $10 million dollars budgeted for ongoing health care bills. The accounting standards are faced by cities everywhere, but Winson says Duluth's generosity to retirees makes the city unique in Minnesota.

"With the new accounting standards that are coming into place, we will have probably a higher liability, unfunded liability, for retiree health care, compared to any other city our size," Winson says.

The solution will likely come from several directions. Already, the city's moved to cut costs. There are now 16 unfilled city jobs that won't be filled. And a new contract with city workers includes fewer health benefits for newly hired employees. Meanwhile, the city's share of property taxes is going up more than 5 percent. That fixes the 2005 budget. But there's still a big hole ahead in 2006, an $11 million dollar hole, and just 12 months to figure out how to fill it.

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