City of Memphis' pension shortfall has a lesser-known twin — retiree health care costs

$1.3 billion divide double that of pension plan

Financial advisers told Memphis City Council members last month that the city's pension plan is badly underfunded and "not sustainable in the long term."

But the pension isn't the only massive, underfunded liability the city faces: Another is retiree health insurance, sometimes called OPEB, which stands for Other Post-Employment Benefits.

In some ways, the retiree health insurance picture is even more dire than that of the pension. As of July 1, 2012, the city had about 74 cents in the pension trust fund to cover every dollar of pension payout it will owe to retirees in the coming decades. By contrast, the city had just one cent in the trust fund to cover every dollar of future retiree health care costs. The gap between the retiree health care liability and the assets on hand was $1.3 billion, roughly double the gap for the pension.

The retiree health insurance trust fund is so tiny because the city historically didn't have one and simply paid directly for retiree health insurance costs each year, said city finance director Brian Collins.

New accounting rules mandated the city create a trust fund a few years ago. Now, most of the money that the city pays toward retiree health still goes toward current-year expenses. Over time, the city hopes to build up a fund that could gain investment earnings, Collins said.

The huge liabilities underscore the depth of the challenge the city faces over the next several months. Memphis Mayor A C Wharton and his administrators will try to persuade City Council members to approve cost-cutting measures to the pension. And they likely will engage in a similar struggle over retiree health insurance. Opposing them will be municipal labor unions that want to keep benefits as they are.

Historically, city retirees and their families have been able to stay on city health insurance for years and have faced no obligation to join Medicare, the federal health insurance system for those 65 and older, said Quintin Robinson, the city's director of human resources.

Earlier this year, the City Council passed an ordinance that pressures those who retire after Jan. 1 to go on Medicare when they turn 65. Even if they don't, the city will act as though they're on Medicare and pay only a small part of their health insurance cost, Robinson said.

Wharton's administrators are looking at further reductions in retiree health benefits. "How rich of a plan does Memphis have going forward?" Robinson asked. He pointed out that some employers don't offer medical retiree insurance at all.

But employee labor unions will likely push hard against any plan to reduce pension or retiree health care benefits.

"Yes, we're adamantly fighting. We're vehemently fighting because we don't see it the way that they see it," said Michael Williams, president of a key municipal labor union, the Memphis Police Association.

Williams says that the administration is trying to create a false perception of crisis because it wants to save the money that it would otherwise have to contribute to pension and health care funds. He said it's unfair to pressure any retirees to join the national health care system.

"I've told you, these guys have given 30, 40 years to the city and they did that with the promise that health care would be provided for them," he said.

The unions can mobilize both political contributions and votes at election time, which gives them some influence over the City Council members who would have to approve any changes to retiree benefits.

Despite the coming fight, the mayor's administration says the system must change.

"I'm thinking of pension and OPEB together, and it's number one," said Collins, the finance director. "It's our single most important challenge financially."

One root cause of the massive shortfalls is that the city has consistently underfunded both the pension and the trust fund for retiree health care.

For the 2011 fiscal year, for instance, financial experts known as actuaries told the city that it needed to contribute $95.4 million to the retiree health care fund to keep it in shape. The city contributed just $36.1 million.

If the city were to start paying the amount that financial experts recommend for both the pension and retiree health care funds, it would have to contribute more than $100 million in addition to what it puts in now, Collins said.

"And by the way, that $100 million isn't just this year. It's every year."

The city's general fund budget is $613.4 million this year.

Wharton says that the city must act because changes in accounting rules have forced more disclosure of long-term liability when the government borrows money. "Now, they look at everything," he said.

That could impact the city's borrowing costs in the future and affect whether projects get done, he said. "You know how we build fire stations and precincts and parks? You borrow money," he said.

Memphis isn't the only city that's struggling with pension obligations and retiree health care costs. The National League of Cities surveyed city finance directors nationwide about the factors affecting their budgets. Asked to name the costs that have increased over the past year, 84 percent named health benefit costs and 80 percent named pension costs.

Wharton's chief administrative officer, George M. Little, said he plans to meet with labor unions on Friday, then make a presentation to the City Council on Nov. 5.

The administration hasn't put forward specific proposals yet. Little's first goal will be to try to convince City Council members that they need to do something. "That, yes, indeed we have a problem, and indeed it's immediate," he said.

If they buy into that idea, the administration will bring a full set of recommendations to the Dec. 3 council meeting.

Little says he anticipates his Nov. 5 presentation will focus on the pension, but that he'll likely mention retiree health benefits, too. "Because you can't really talk about one without talking about the other."