Retiree Benefits Called Peril to Orange Schools

The Orange Unified School District could face financial collapse within the next five years because its retirement plan guarantees lifetime medical coverage, according to a pair of independent reports.

The cost of the plan, which pays nearly all medical costs for retired district employees and their dependents for life, will soar from about $3.5 million this year to about $8 million by 1995 and to about $15 million by the year 2000, according to estimates in a February report prepared by the accounting firm of KPMG Peat Marwick.

Meeting those costs could lead to major budget cuts or even bankruptcy for the already financially troubled district, according to the Peat Marwick report.

According to a report released April 19 by School Services of California Inc., an independent research firm, the district’s discretionary fund--which is used to pay for books, supplies, maintenance and to meet other day-to-day costs--is now about 13% of its $100-million budget. The district has already been forced to cut into that fund to keep the health-care package afloat, the report says.

“There is definitely the potential for the district to go bankrupt over this issue,” said Lisa Howell, district director of fiscal services. Rising health-care costs for retirees are cutting into the district’s discretionary revenue, she said.

“The district should recognize that it is sacrificing its class size in order to maintain retiree health benefit provisions that are in excess of prudent financial management,” the School Services report says. “This issue has to be one of the highest priorities for revision as the district begins development of its negotiation plans and patterns for the coming year.”

Officials of the Orange Unified Education Assn., the 1,100-member teachers’ union, disputed the reports’ findings and district administrators’ and school board officials’ contention that the retirement plan could bankrupt the district. Union leaders blamed past malfeasance and current “fiscal mismanagement” for the current financial shortfall.

Many of the district’s financial problems, they contend, stem from the scandals that prompted the 1986-87 Orange County Grand Jury to indict four school board members on charges that they were “not minding the store” while thousands of dollars in kickback contracts were negotiated from the district headquarters.

“There are a multitude of factors that create some funding limitations,” said Steve McDonald, executive director of the teachers’ union, who blasted the School Services report. “You add that on top of the money the district has squandered, and (the fact that) we did have a previous school board that was indicted for fiscal mismanagement.”

The Schools Services report notes that although the district’s total expenditures are in line with those of other unified school districts in the state, Orange Unified pays out nearly 2% more than the state average for health and welfare benefits while spending $100 less per student on books and supplies.

School Services President Kenneth Hall said in a telephone interview from his office in Sacramento that the Orange Unified School District’s lifetime health benefits are “atypical” among school districts statewide.

The district “made a conscious decision to increase class size, in part, to the fund the higher costs” of the health care plan because it failed to establish a trust fund to pay for it.

Class sizes in the district range from about 31 pupils in kindergarten, for instance, to 34 in sixth grade--between two and four pupils more than the average for other Orange County unified school districts, according to the report.

“The district is sacrificing some of its educational services in order to provide a higher level of health benefits,” Hall said.

Howell, however, denied that class size was increased specifically so as to cover the costs of the retirement health-care package. She said that, in past contract talks, the teachers’ union negotiated for larger class sizes in exchange for bigger salary increases.

Howell criticized the negotiators who took part in the talks that resulted in the retirement health plan. The plan was devised about a decade ago, but its current level of benefits was agreed upon in subsequent contract talks. In making those agreements, the district failed to establish a way to pay for the future costs of the plan, she said.

“Why the district and the administration did it, I can’t tell you,” she said. “There should have been some funding base set aside to pay future liabilities. When you enter into an agreement to fund a future benefit that is an unlimited amount, that is what you would do.”

Teachers, administrators and school board members with 10 or more years of service are eligible for the benefits. Under one of three available medical plans, an individual can receive a maximum lifetime benefit of $1.3 million. By the end of the 1989-90 school year, there will be a total of 660 retirees eligible to participate in the plan, which will cost the district an estimated $3.5 million.

With the district’s employee population aging rapidly, and with medical costs rising as much as 30% per year, the Peat Marwick study says, the costs of funding the health-care benefits will more than double by 1995. The study projects that there will be 834 retirees eligible for the plan in five years, which would cost the district $8 million, or 6.7% of its total budget. By the turn of the century, the district could be spending as much as $15 million a year, or 10% of its total budget, to cover the health benefits of an estimated 1,017 retirees.

Should the trend continue for the next 25 years, the report says, there would be a total of 1,264 retirees costing the district $70.8 million a year.

According to school board members and district officials, however, the district would be bankrupt long before then.

“If there were to be no changes made, there would be an eventual bankruptcy, yes,” said school board member Alan E. Irish, a certified public accountant. “We would probably find ourselves in a real problem three years out and bankrupt in five years.”

McDonald of the teachers’ union said the predictions in the School Services Report are an effort to influence the round of contract negotiations scheduled to begin later this month.

“We disagree with the interpretation of the report or any interpretation that claims that the health and welfare benefits paid to the employees of this district is the cause of the financial problems,” McDonald said. “The district in the last two budget adoptions has overprojected its enrollment, and as a result has lost approximately $4 million in state aid.”

Orange County Assistant Supt. John Nelson, who heads the County Education Department’s business services division, confirmed that the district miscalculated its average daily attendance, a figure that determines the amount of state money it receives. Nelson said the county notified district officials “to reanalyze their ADA both for this year and for the future because of changing demographics in the district.”

But Nelson also noted that the county “expressed concerns about unpaid liabilities” in the district--in particular the expensive retirement health-care package. “It’s going to take up a great deal of their budget,” Nelson said. “They’re going to have to make some changes.”

McDonald acknowledged that health-care costs are soaring nationwide and said that the teachers’ union is willing to discuss “cost-containment measures,” but he added that revision of the health-care package alone will not improve the district’s financial status and argued that other costs must be cut too.

“I think to blame . . . the health and welfare benefits of (the district’s) current employees or retired employees is a sham and is a total distortion of the current financial problems,” McDonald said. “We recognize that class sizes in Orange Unified are too large, but to pick out one budgetary expenditure and lay blame is ridiculous.”