CHICAGO — Chicago began notifying its retirees this week that most will lose their health care subsidies over the next few years as Mayor Rahm Emanuel’s administration seeks to shed a rising expense.

The administration has been weighing options to address the growing expense of providing the benefit categorized as non-pension, other post-employment benefits ahead of the June 30 expiration of a court settlement. 

A special commission led by city Comptroller Amer Ahmad concluded in a report released early this year that the cash-strapped city can’t afford to keep subsidizing retiree health care at existing levels. 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.

If left intact, the current $108 million annual bill is projected to grow to $307 million in 2018 and $541 million in 2023 based on estimated plan participants and rising health care costs.

“The retirement health care system as it stands today is fiscally unsustainable, and we have a responsibility to ensure a secure financial path for Chicago taxpayers. But the mayor also wants to ensure that our retirees who served this City honorably have access to health care and the critical information they need to make informed decisions,” mayoral spokeswoman Kathleen Strand wrote in an email.

The administration announced this week that it would continue coverage at current levels through 2013. The city intends to adjust premiums and/or deductibles and other benefits over the next three years phasing out the benefit altogether by 2017. A revised structure will be announced over the summer.

The subsidy would be preserved those who retired prior to 1989 and were behind  litigation that led to the settlement. Police and firefighters who retire before they are eligible for Medicare also will continue to receive the benefit as required under their contract. More than 30,000 others will lose coverage. 

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.  “We look forward to working with our retirees in the coming months to ensure that they have all the information and time they need to make their decisions about their health care coverage,” Ahmad said in a statement.

The city argues that retirees who are not yet eligible for Medicare will find affordable coverage through the health insurance exchange Illinois will set up in 2014 as part of federal health care reform.

The city argues that continued funding at current levels is untenable and ultimately could hurt the city’s already strained credit ratings.  The Retiree Health care Benefits Commission’s report was required under a settlement agreement reached in litigation known as the City of Chicago v. Korshak. The agreement expires June 30.

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. Full continuation of the existing plan would result in a $2.1 billion accrued unfunded liability.

City Council approval would be needed for the changes.

The city has proceeded cautiously as any changes could prompt additional litigation and unions slammed the city’s announcement and said they would weigh their options. The Illinois constitution affords strong contractual rights against impairing or diminishing pension benefits, but some believe those protections don’t extend to OPEBs. The settlement in the Korshak court case never addressed whether the city was required to help cover retiree health care.

The state moved last year to trim retiree health benefits and those changes were upheld at the circuit court level which ruled OPEBs don’t enjoy the same protections under the state constitution.  An appeal before the Illinois Supreme Court is pending.

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 lawmakers have yet to act on state level reforms.

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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