Retiree Healthcare Debt

Benefits and Organization

Before 1998 all County employees had access to retiree healthcare benefits. In September of that year the County Board of Supervisors changed the benefit. Only those hired before September 1998 are eligible.

Eligible retirees receive their own healthcare benefits without payment of a premium, but pay $510/month for dependents (spouses and children). (Note - these were the requirements for fiscal year 08-09; they may have changed.)

There is great dispute about whether or not retirees have a legal right to receive this benefit as they do pensions. It appears to us that the County has the legal authority to unilaterally change the terms of this benefit including termination of the benefit. Employees and retirees dispute this. A legal analysis has not been performed for this report.

Changes in Reporting Requirements

New government accounting rules were issued in 2004 requiring the County to begin reporting the financial condition of its retiree healthcare benefits in its audited financial statements for June 30, 2008 in the same way as it does for pension obligations.

The County hired an Actuary - Aon Consulting - to determine its financial situation. The Actuary released a report on August 21, 2008 - two months after the new rules took effect. Aon reported an Unfunded Retiree Healthcare Liability of about $136.3 million.

Projected Payments

Historical and Projected Payments
Retiree Healthcare 1993 - 2037

This shows actual payments for retiree healthcare as reported in audited financial statements (fiscal years 1993 through 2007) and projected by Aon for 2008 through 2037.

Only retirees who were hired by the County before September 1998 are eligible for this benefit. There are no younger people coming into this group. Everyone in the group gets one year older every year until they no longer do.

Most health care costs we incur in our lifetime, on average, occurs during the last year of life. Retirees who receive this benefit are steadily moving into that stage during which their healthcare costs as a group will significantly increase. That's why the graph shows such a large increase.

We are right at the point where the curve really takes off.

Buton top of the "average" cost curve, we know projections of healthcare costs are much more uncertain than for pensions, payments will almost certainly be significantly more volatile than the smooth curve in the graph. We can expect sudden steep “spikes” in payments.

The County's Financial Management of this Benefit

Today's $130 million Unfunded Retiree Healthcare Debt was earned by employees in the past. The County never calculated or reported the accumulating debt, and therefore didn't report the corresponding true economic expenses each year. The County's true staff expenses were about $130 million more than the public was ever told.

The County hasn't set aside one dime to pay for the rapidly rising retiree healthcare costs in the next few years. Every dime has to be generated within each budget year.

County Says "Retiree Healthcare Paid From Pension Fund Excess Earnings"

As stated on the previous page, Mendocino County and MCERA officials have maintained for years that MCERA paid the County's retiree healthcare benefits out of "Excess Earnings" in the Pension Fund. Basically Excess Earnings are any amount of earnings above the Pension Fund's 8% target. There are two main problems:

What Excess Earnings?

MCERA paid about $25 million for Retiree Healthcare from 1998 through 2008. How can there have been Excess Earnings when -

• The Pension Fund’s own Actuary says its 12 year return - not including last year’s $50 million loss - was 20% below target.
• If there were Excess Earnings, why was the County forced to borrow $110 million by selling Pension Obligation Bonds in ‘96 and ’02?
• Unfunded Obligations increased in 14 of the last 16 years.
• The Pension Fund has always been under-funded.

The answer is that the County and MCERA have adopted a policy that says it doesn't matter how deep the Pension Deficit is - if in any year the Pension Fund earns more than 8%, it can be swept out of the Pension Fund and into the Healthcare Fund.

Here's what that policy means right now - MCERA will pay $4 million or so of Retiree Health costs this year out of Pension Fund "Excess Earnings" even though the Fund was $130 million short of its target over the last two years - and it has $110 million less than it should to be fully funded. (See Supplemental Information below)

This County and Retirement Association policy dooms the Pension Fund to be under-funded. The 8% target is also a "ceiling" - the Pension Fund has to absorb its shortfalls, but can’t keep its surplus.

The truth is that the County’s Retiree Healthcare has been funded by increasing Unfunded Pensions. Eventually the County has to borrow money to eliminate them. And that means the ultimate source of the funds will be cuts in staff and public services over the next 30 years so that debt can be paid.

Supplemental Information: Click to read about how the Pension Fund's Financial Position is Determined - Lies, DAMN LIES, and Actuarial Statistics (pdf file - 371KB).

A Little Problem With the Law

Even if this policy technically conforms to the law, the Retirement Association’s financial statements show there weren’t enough Excess Earnings as defined in the law to pay the County’s share of Retiree Health over the past 11 years.

YourPublicMoney.Com has asked the Retirement Association to show how its payments of Retiree Healthcare from Excess Earnings conformed to the law for over a year. So far it hasn't done so. At this point, we don’t think it did.