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Chicago Report Warns of OPEB Burden

JAN 15, 2013 5:39pm ET
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CHICAGO — A long-awaited review of the state of Chicago’s retiree health care system concludes that the cash-strapped city can’t afford to keep subsidizing its other post-employment benefits at existing levels.

“I must raise the very serious question of whether the city can continue to fund retiree health care benefits at the current levels given its current financial condition,” writes city Comptroller Amer Ahmad, who chaired the commission which produced the report. “It is of the utmost importance that the city takes a course of action that will safeguard its fiscal well-being.”

The Retiree Health care Benefits Commission’s report was delivered to Mayor Rahm Emanuel last week and published Monday. The review was required under a settlement agreement reached in litigation known as the City of Chicago v. Korshak.

In addition to examining the current state and costs of the city’s retiree health care benefits, the commission was tasked with looking at cost trends, affordability, and offering up options on how the city should proceed after the settlement agreement’s June 30 expiration.

Chicago covers its retiree health care costs on a pay-as-you-go basis with the annual cost now at about $108 million. The city’s accrued unfunded OPEB obligation at the end of 2011 was just $254 million, but that assumes that the bulk of the city’s obligations end with the June 30 settlement expiration.

Changes, however, could prompt additional litigation, so the city must tread cautiously. The Illinois constitution affords strong contractual rights against impairing or diminishing pension benefits, but some believe those protections don’t extend to OPEBs. The state moved last year to trim retiree benefits but litigation has been filed challenging the action.

The commission looked at current and projected enrollment and the costs of continuing the city’s plan in its current form, along with changes that could rein in growing expenses such as shifting changes to eligibility rules and benefits, and altering city and retiree contribution.

Full continuation of the existing plan would result in a $2.1 billion accrued unfunded liability. Extending benefits until 2023 and then continuing just some special police and fire benefits would result in a $1.1 billion liability, and $490 million if all benefits ended in 2023. Full continuation of benefits with the city’s contribution falling to 40% and current contributions remaining the same for special police and fire funds would result in an unfunded liability of $1.9 billion.

The commission offered up a menu of options aimed at reducing the current contributions to a level between $12.5 million and $90.5 million. The options range from reducing city contributions to 20%, 30% or 40%, raising annuitant contributions, cutting benefit plans and eliminating coverage of dependents. The reduction to $12.5 million could be achieved by ending coverage to Medicare-eligible retirees.

The report attempts to underscore the city’s inability to maintain the current system warning of the long-term fiscal implications. “Continued funding on the same basis would also likely result in other financial consequences as the significant change in long-term liability will likely affect both the city’s bond rating and its creditworthiness,” it concludes.

The commission acknowledges the potential impact, especially on lower-income retirees, and recommends that some groups of retirees continue to receive their current benefits and that any changes to their benefit structure be “cautiously considered.”

Chicago currently covers 55% of the costs for annuitants who retired before 2005 with contributions for later retirees based on an annuitant’s length of city employment. The city pays $64 million to cover its share of benefits for non-Medicare annuitants and their spouses and dependents, and another $44 million for Medicare.

The report warns that with no changes the costs will rise to $307 million in 2018 and $541 million in 2023 based on estimated plan participants and rising health care costs.

The OPEB litigation began in 1987 when the city filed a complaint to clarify its obligations, if any, and to receive reimbursement for possible overpayments. The court dismissed the overpayment issue but decided the obligation question could be litigated.

The city and pension fund trustees reached a temporary settlement agreement in 1988 that required Chicago to cover half the cost until 1997 and for retirees to increase their contributions. The pact would terminate in 1997 if the parties did not reach a permanent agreement.

Ahead of the expiration, the city and pension funds reached an agreement that created a new structure for annuitant health care extending the benefits to 2002. A group challenged the agreement saying it did not offer a permanent solution. The city negotiated with the group and eventually an order entering the settlement that continued benefits through June 2013 was entered.

The OPEB liability is among the obligations straining city coffers. Chicago carries $16.7 billion of unfunded pension liabilities and faces a $550 million increase in its pension payments in 2015 under a state legislative mandate. Emanuel is seeking state action on pension reforms but those efforts have stalled over political disputes.

The city faced a $300 million shortfall in its $6.5 billion 2013 budget and has paid a premium to borrow due to Illinois’ liquidity problems and its own fiscal woes. Moody’s Investors Service revised its outlook to negative on Chicago’s $8 billion of Aa3-rated GO debt last year. Fitch Ratings last year affirmed the city’s AA-minus rating and Standard & Poor’s affirmed its A-plus rating. Both assign stable outlooks.

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