Retiree Healthcare Debt

Last Update: 2/18/11

Benefits and Organization

Before 1998 all County employees had access to healthcare benefits after they retired. In September of that year the County Board of Supervisors made several changes to this benefit:

• Only those hired before September 1998 were eligible.
• The main source of funds to pay this benefit would be Pension Fund Excess Earnings (see below).
• If there were no Excess Earnings the County would pay half the cost - retirees would pay the other half.

Numerous former employees - corroborated by the former "Human Resources Director" - report they were told they could rely on receiving this benefit in retirement. And although I personally haven't seen them some say they have that promise in writing.

Up until around the end of 2009 eligible retirees received their own healthcare benefits without payment of a premium, but paid a fee for dependents (spouses and children).

Then the Pension Fund's severe investment losses in 2008 and 2009 prevented the replenishment of the Retiree Healthcare Fund from so-called Excess Earnings. Retirement Administrator Jim Andersen told the Board of Supervisor on 9/22/09 that the Retiree Healthcare Fund would run out of money around January 2011 given the rate of spending and the County would have to begin to pay its agreed upon half of the cost at that time.

But - as should have been anticipated - the same economic forces that produced serious Pension Fund investment losses were imposing severe pressures on Mendocino County's budget.

The County Board of Supervisors passed a resolution on September 22, 2009 that terminated the County's obligation to pay half the cost of this benefit if Excess Earnings were not available.

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.

County officials knew at least since 2004 they were going to have to report the financial condition of this benefit in 2008. Numerous national reports predicted unfunded retiree healthcare of governments was many billions of dollars.

Members of the public (including me) repeatedly suggested the County find out how bad the County's unfunded retiree healthcare was while they had a few years to come up with a plan.

Instead they waited until the very last minute to find out.

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

This shows what the County was facing when it got the Aon Report - actual payments for retiree healthcare as reported in audited financial statements (fiscal years 1993 through 2007) and projected by Aon for 2008 through 2037.

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

In fact payments for this benefit were rapidly increasing at the time Aon's report was released.

These are the payments the County walked away from.

The County's Financial Management of this Benefit

Retirees were eligible to receive this benefit because of their work in the past. The County never calculated or reported the accumulating debt, and therefore didn't report the corresponding true economic expenses each year.

If the County had ever been serious about providing this benefit it would have built up a Retiree Healthcare Fund while the retirees were still working. And they would have reported the expenses and debt to the people - and to their employees.

But the County never set aside one dime. In fact, the County itself didn't pay for this benefit - on a year to year basis.

Simply put - the County never did what it needed to do to secure this benefit for its retirees.