Photos Julio Almanza Ken Loeffler-Kemp More from MPR Duluth struggles with retiree health costs Resources Government Accounting Standards Board Tools E-mail this page Print this page Sponsor

Julio Almanza is serving the City of Duluth as its interim Chief Administration Official. Almanza stepped out of retirement after serving seven years as Superintendent of the Duluth Schools. (MPR Photo/Bob Kelleher)

Duluth's City Council considers tonight a plan intended to plug a $280 million gap between the projected costs of retiree health care and what's been set aside to pay it. For 20 years, Duluth employees have been given full coverage health benefits - for themselves and their dependants - for life. But some say the difference between what the city's put away and the eventual cost could push the city into bankruptcy.

Duluth, Minn. — Duluth's retiree health coverage has been called the most generous among Minnesota Cities. Some believe it's a generosity that could sink the city's budget.

For years, Duluth has covered retiree health expenses each year - a pay-as-you-go plan. But new nation-wide accounting regulations will force the city to recognize on its books the long term obligation, taking into account an ever growing number of retirees and the soaring costs of health care. That adds up to $280 million in unfunded benefits.

Arend Sandbulte heads the task force that's been working on the problem. Sandbulte says the fix will be expensive.

"This series of recommendations is going to require a lot of giving from all constituents in the city, whether they're active and retiring employees; whether it's tax payers; whether it's utility rate payers; whether it's the city administration, whatever," Sandbulte says. "It's going to take a combined effort to make this thing work."

They recommend a combination of new health plan savings; and putting $26 million a year into a health account for 30 years.

That money would come from higher utility fees, higher property taxes and by shifting some funds that might have gone to street repairs and other services. The plan recommends drug imports from Canada and Sandbulte says it includes cutting the city's share of retiree health costs by about 20 percent.

"That could happen through using a defined contribution plan," says Sandbulte. "It could happen through having higher co-pays on drugs or other medical services. It could be higher deductibles. It could have even premiums. I mean there's a number of ways that they could bear a higher portion of the cost."

How those cuts are made will be key to the city worker's next contract, due in another year. Current contracts affect future payouts. AFSCME union representative Ken Loeffler-Kemp, says he supports the task force plan, and predicts union members will do their part.

"But we do need to see, from the city, them doing their part as well," Loeffler-Kemp says. "By that I mean making sure that the plan is adequately funded, that it's properly administered and that these cost saving measures are indeed enacted."

The plan will also need a buy in from Duluth's city administration. Duluth Chief Administrative Officer Julio Almanza is worried the city might be moving too fast. For example, Almanza says higher utility fees and property taxes will be a hard thing to sell to the public. Instead, he says, there might be other ways to lower the bill.

"That can be reduced through a variety of ways," Almanza says. "As you reduce that you reduce the liability, and so you may not need $26 million to set aside on a yearly basis to address this."

There are some questions about the city's obligation to retirees and Almanza says the urgency is overstated. Accounting rules require the obligation be acknowledged in the books, but they don't require the money be set aside immediately. Minnesota State Auditor Patricia Anderson recently said the unfunded costs do need immediate attention, with a potential city bankruptcy at stake. But Almanza says that's not going to happen.

"I have confidence that we're not going to go bankrupt," says Almanza. "And I think those kind of comments about it is kind of a Chicken Little, the sky is falling scenario. But good fiscal management does say you have to address this, and you have to do it in a methodical way, and I think we're ready to do that."

The task force's 14 recommendations aren't set in stone, according to Chair Arend Sandbulte, but he says the size of the $26 million annual obligation is.

"What we have said (is), 'If you have a better idea, fine,'" says Sandbulte. "But, whatever your idea is, determine what its impact is on this number and plug it in, and if it does that same thing as one of our recommendations, fine. If it doesn't, so then you haven't met the test in our minds."

The Duluth city council meets Monday night to consider the report. They might direct city administration to begin implementing its recommendations.