Public sector reels at retiree healthcare tab

Times Staff Writer

MARY Alplanalp worked 19 years for the San Diego County welfare department, spurning higher-paying jobs to stay in a position where the most she ever made was $8 an hour. It was worth the low wage, she figured, because of a benefit package that promised she would never be destitute in old age.

Or so she thought.

At age 83 with a long list of debilitating ailments, no family and a monthly pension of just $1,000, Alplanalp says the only thing between her and homelessness is the lifetime health insurance she secured on the job to cover what Medicare does not.

Now county officials are threatening to take it away.


“If I don’t have my medication, I will hallucinate,” said Alplanalp, who suffers from mental health problems along with colon cancer and diabetes. “Where has compassion gone?”

Alplanalp’s worries are shared by thousands of current and former public employees in California, as officials at every level of government confront the staggering cost of providing healthcare to their retirees. For years, public employers have promised workers lifetime benefits, but little money has been put aside to cover the bill. Now, new accounting rules have required government employers to calculate and disclose the potential liability.

The tab is enormous.

Some examples:


* Over the next three decades, the Los Angeles Unified School District will have to pay out hundreds of millions of dollars a year for retiree health benefits. It has yet to set funds aside to cover the bill. “These costs are just crushing,” said district general counsel Kevin Reed.

* The state government is on the hook for payouts averaging well over a billion dollars a year -- and possibly billions more -- for retiree healthcare over the next three decades.

* Contra Costa County’s retiree healthcare tab is on track to grow larger than the value of all its assets by 2012, according to a government report, which would make the county at that point “technically insolvent.”

* In just four years ending in fiscal 2004-05, the cost of providing healthcare to the average Los Angeles County retiree doubled. By 2011, government retiree healthcare costs statewide are projected to be nearly triple those in 2004.


* A grand jury in Marin County, which surveyed dozens of public institutions for its March report “Retiree Health Care Costs: I Think I’m Gonna Be Sick” warned that some local governments may soon realize “it is impossible to meet their obligations. Bankruptcies or a ‘death by a thousand cuts’ in services are real possibilities.”

The alarming costs stem partly from public employers’ continuing to promise lifetime health benefits long after most private firms stopped doing so.

Government retirees, in many cases, receive excellent insurance, with no premiums, no big co-pays and few out-of-pocket expenses at all.

The state of California estimates that the price tag for providing such health benefits has reached more than $500,000 for a married retiree and spouse who live 20 years after retiring. Because many government employees retire before 60 and since life expectancies continue to grow, the cost could easily reach $1 million for some employees.


“A lot of these employers really did not know what they had committed to,” said John Haslinger, an analyst at the Deloitte accounting firm who is helping several public employers find ways of dealing with their obligations.

The perk is typically a holdover from the days when insurance cost as little as $5 a month. Now it can be as much as $1,000.

“I can’t tell you how surprised many of our clients have been,” he said.

Taxpayers may be surprised too when asked to pick up the tab for benefits largely unheard of in the private sector. Analysts at Credit Suisse warn that the cost of continuing to provide these benefits could easily lift the tax rates of governments by 10%.


One alternative would involve cutting benefits for those already retired. Many recent retirees have large pensions -- a 30-year San Diego County employee whose salary is $80,000 upon retirement can collect a pension of as much as $70,000 a year -- plus generous healthcare benefits.

“Frankly, they are getting the cake and eating it too,” said San Diego County Supervisor Dianne Jacob.

Her board recently voted to take the lifetime health benefits away from thousands of employees positioned to receive the biggest pension checks.

The county’s retirement board, which is controlled by organized labor, has balked at acting on the proposed cuts. But county officials have warned that if they aren’t made, the supervisors might invoke their authority under the county charter to cut off healthcare to all retirees.


Some government bodies don’t have the option of booting retirees from their rolls -- regardless of how large their pensions are. Los Angeles County, which recently disclosed that over the next 30 years its tab will be as much as $20 billion, is bound by a state law that restricts it from cutting the benefits of any retiree.

The law, passed in the early 1980s, was the result of a deal between the county and its retirement board. The board, which controls pension funds, gave the county tens of millions of dollars to help it out of a budget jam in return for the county’s agreeing to provide retiree health benefits that are at least as good as those received by active employees. A state law was passed to make the agreement binding.

The laws are murkier elsewhere in the state, but in many places retirees can make the case that their benefits are guaranteed by contract.

“It is very difficult to take benefits away from people who have earned them,” said Chip Eady, an attorney at the firm Nixon Peabody who specializes in government retiree benefits. “There could be legal issues around such efforts.”


Californians for Health Care & Retirement Security, a coalition of government employee unions, proposes what sounds like a simple solution. The problem “can be resolved by putting money aside now to create a fund to pay for retiree healthcare in the future,” the group says in its talking points.

Large bills for retiree healthcare “do not mean there is a crisis.... They represent what various programs would owe if they had to pay them all at once. In other words, this is an accounting issue,” the group says.

Still, the money has to come from somewhere. Starting a trust fund to pay for future obligations would help, most financial experts say, but that alone won’t solve the problem.

The nonpartisan California Health Care Foundation projects that, thanks to skyrocketing healthcare costs, an upcoming surge of retirements and lengthening life spans, the price to governments of continuing to provide coverage at the current rate will increase 15% a year over the next 15 years. Even if public employers had many billions to invest -- which they don’t -- insurance costs will continue to rise much faster than investment earnings, the foundation says.


Case in point: the Peralta Community College District in the Oakland area. Officials there got a head start on confronting the problem several years ago, after a financial study revealed that retiree healthcare costs were on their way to swallowing up to 14% of the district’s budget.

“We couldn’t sustain that and still provide educational services for our students,” said Thomas Smith, vice chancellor for finance and administration.

But there was no point in investing millions in a trust fund, Smith said, until the district could stop the flow of red ink. The investment profits would never catch up with the costs, leaving the school system sinking deeper into debt.

So the district ended the promise of private health insurance for Medicare-eligible retirees hired after 2004. The insurance covered all the expenses Medicare didn’t -- expenses that would set the average couple back about $215,000 over the course of their retirement if paid out of pocket, said a recent report by Fidelity Investments.


Former Assemblyman Keith Richman, a San Fernando Valley Republican whose railing against pension costs has made him the nemesis of government workers statewide, proposes another solution: Push back the retirement age for most government workers to at least 65. At that point Medicare would pick up most of their health expenses.

“There is no reason regular government employees like clerks and accountants shouldn’t retire at 65,” he said. To Richman, asking taxpayers who can’t afford to retire any earlier than that age -- largely because the cost of healthcare would break them financially -- to pick up the tab for government retirees to do so is unconscionable.

His nonprofit California Foundation for Fiscal Responsibility hopes to bring the proposal before voters by next year.

Labor leaders say the answer is universal healthcare. Richman’s proposal, they say, is mean-spirited and overzealous.


Dave Low, a union lobbyist and member of a commission set up by Gov. Arnold Schwarzenegger, had some words for a Richman ally who proposed the idea at a March hearing.

“My sister just retired,” he said. “She’s a teacher. She’s 58. She worked in the classroom for 36 years. She has cancer. She’s going through her fourth bout of chemotherapy. She probably is not going to live to see 65.... And so she basically would be going now without healthcare.”