O.C.'s Benefits Balloon Looming
Orange County may have to budget at least $110 million annually beginning in July for retiree medical benefits -- nearly five times the current plan -- because it must soon show how it will cover the benefits for the next 30 years, officials said Tuesday.
The cost of covering only current retirees, without setting aside money for the future, would be $23 million next year.
However, covering just next year’s costs means the county would have to identify the amount due over the following 29 years -- estimated at more than $1 billion -- as a debt on financial statements beginning in 2007, according to new government accounting standards.
That could affect the county’s otherwise stellar credit rating, even as the county moves ahead toward paying off its 1994 bankruptcy debt 10 years early.
The increased medical costs could overwhelm much of the savings that the county hoped to achieve by paying off the bankruptcy debt in 2016 instead of 2026. On Tuesday, supervisors hired a financial advisor to restructure the old debt by applying $116 million in reserves to shorten its annual bankruptcy payments.
The strategy is much like that of a homeowner paying off a large chunk of a mortgage early to shorten the length of payments and is expected to save the county about $445 million in debt interest over the 10 years.
In 2002, the county hoped to deal with its future retiree medical payments by setting aside $22 million. That was supposed to cover its share of costs through June 2006. But skyrocketing insurance premiums consumed the money, which will run out this month.
The county’s portion of retiree medical costs increased from $8 million in 2002 to $12 million in 2004 and will jump to $23 million next year.
The good-news/bad-news in county finances was delivered in separate staff reports Tuesday. Supervisors decided to study retiree medical expenses for 60 more days before deciding what to do.
Board Chairman Bill Campbell said he didn’t want the cost of covering future medical premiums to swallow up so much of the budget that other county services would have to be cut. At the same time, he and other board members said they wanted to treat retirees as humanely as possible without passing huge premium increases on to them.
One county official offered a recommendation Tuesday: Bite the bullet and pay as much as possible now.
“It’s a debt that needs to be addressed,” Treasurer John M.W. Moorlach said in an interview. “If you can’t hit the target, then you need to get as close as you can. The best way to address debt is to pay it off.”
The situation is muddied by the county’s reliance on investment earnings to cover its costs for retiree medical payments. When the stock market performed well, the costs were covered. When it didn’t, the county had to dip into general funds to cover its payments. The recent jump in health insurance costs has exacerbated the problem.
Supervisors must come to grips with the rising retiree medical costs now, rather than later, said Kris Vosburgh, executive director of the Howard Jarvis Taxpayers Assn.
“It really seems like a lot of public officials are irresponsibly kicking the can down the road and hoping the next generation of public officeholders solves this,” Vosburgh said.
Any changes in what the county pays toward employee and retiree medical expenses would be subject to approval by the county’s dozen labor unions. With those contracts not up until 2008, the county cannot negotiate in the meantime for retirees or current employees to cover more of the costs. Current employees have 1% taken out of their paychecks to help cover those costs.
New county employees may have to contribute more toward their costs or be put in cheaper health plans, said Supervisor Chris Norby.
“This has major financial and human implications,” Campbell responded. “And we should look for a balance.”
The quandary dates back to 1993, when county finances were flush and supervisors approved paying a portion of medical costs for workers after they retired.
The perk didn’t cost the county out of pocket while the stock market flourished. But when the market dropped, a reserve fund that the county used to cover the payments dwindled. In the past few years, the county has had to tap more general fund money to cover medical costs for about 5,500 former workers. The county has about 17,000 active employees.
If nothing is done, medical costs will continue to burden the county and retirees, said Robert A. Griffith, president of the Retired Employees Assn. of Orange County.
Workers who retire after 20 years get $300 a month from the county toward a $700 monthly health premium. The remaining $400 comes from the retiree’s pocket, Griffith said, with the total premium expected to increase at least 15% each year.
“It’s expensive now and going to get more expensive for everyone,” Griffith said.
The sting over rising medical costs was softened with the decision to pay off the bankruptcy debt early.
“It has been a terrible drain on the county budget,” said Supervisor Jim Silva. “Taxpayers get nothing for the interest and principal [paid].”
The bankruptcy was the byproduct of risky investments by then-Treasurer Robert L. Citron, who borrowed hundreds of millions of dollars to place big bets on highly speculative securities that depended on low interest rates. When rates rose, the county lost $1.64 billion.
The county still needs to make sure its restructuring plan meets guidelines of the Internal Revenue Service because it involves the sale of tax-exempt bonds.
The county has an overall bankruptcy debt of $763 million. It has made annual payments of $90.7 million, which officials said could have gone to county services that were cut because of the budget debacle, including park and beach improvements, flood control projects and social services.
Facing the music
The ballooning cost of healthcare premiums has left Orange County far short of the amount needed to cover retirees and current employees over 30 years. Supervisors are considering four options, from paying only enough each year to cover the existing premiums, to covering the entire cost for all employees over three decades.
Estimated funding needs per year under four payment options: (in millions)
*--* 2005-06 2010-11 2015-16 *--*
*--* Current premiums only $23.1 $32.0 $40.4 Total 30-year liability 110.6 133.5 166.4 Limited 30-year liability* 64.2 75.8 94.5 Current premiums + 5-year reserve: 50.9 32.0 40.4 *--*
* Includes offsetting retiree premium costs but eliminates lump-sum payments for employees who leave before they are retirement-eligible.
Source: County of Orange. Graphics reporting by Jean O. Pasco