CHICAGO – The increasing unfunded retiree healthcare liability of two Wisconsin cities more than outpaced the reduced liabilities of 18 others.

That's the finding of a study of the state's 25 most populous cities.

In all, the 25 cities are carrying a $2.2 billion unfunded tab for "other post-employment benefits," or OPEB.

Over three years, the southeastern cities of Milwaukee and Racine saw increases of 15% and 24%, respectively, that offset other cities' success in chipping away at the burden. The total tab rose by 5% to $2.25 billion for fiscal 2016, the most recently available collective data, from $2.14 billion in fiscal 2013 according to “Promises to Keep,” published this week by the Wisconsin Policy Forum..

“Over the three-year period, most communities made progress in reducing their unfunded commitments to retirees. However, the projected costs in two cities—Milwaukee and Racine—rose so dramatically that they erased the combined gains in all the other cities,” the report said.

The report illustrates the struggle facing many communities. It did note that additional gains may be seen by some when fresher 2017 data becomes available in Racine.

“Soon to be released numbers will show that Racine also made progress in 2017, reducing its liability to $386 million, a decrease of more than $117 million,” the report said.

Most cities lowered their costs by reducing their healthcare commitments, a power that was aided by the state’s passage in 2011 of the controversial ACT 10 that stripped some public unions of various collective bargaining rights. That gave local governments more autonomy to adjust most future benefits for all but police and firefighters.

Overall, most cities shaved a collective $120.1 million off their healthcare liabilities – separate from pension tabs – while Milwaukee and Racine saw their expense rise by a combined $228.1 million. Milwaukee’s total tab is $1 billion and Racine's was at $503 million.

Racine faces the biggest challenge for a city of its size -- only 77,000 residents. The city has told the organization that 2017 data will show the liability dropped to $386 million due to various measures including a shift for some retirees to a Medicare Advantage plan for prescriptions.

A handful of other cities also saw increases including Appleton, Brookfield, Madison, Sheboygan, and West Allis, but their individual unfunded tabs are all under $100 million with the exception of 60,000-population West Allis at $140.9 million.

The report raises concerns over the lack of long-term financial planning to cover the cost as most tackle OPEB on a current, pay-as-you-go basis instead of through a pension-like retirement trust fund.

In 2016, the cities reviewed paid $76.8 million to cover benefits. Setting aside an amount sufficient to pay down the unfunded tab over the next 30 years would have required an additional $98 million in funded, according to the report.

Local governments have various options to further chip away at the expense. While many have already eliminated OPEB benefits for new employees, they could further reduce the benefit for current employees who have not yet earned the retirement subsidy under current policies, move to pre-fund the obligation, or increase co-pays for existing employees.

La Crosse has raised eligibility standards for retiree health care and has phased it out entirely for employees who were hired after January 2014. The city’s liability fell by $10.3 million, or 13%, to $66.4 million in 2016, according to the report.

“Local leaders and voters will have to consider factors such as how fast their tax base and revenues are growing, how much debt they are carrying, and what their other long-term spending needs may be,” the report suggested. “Some city budgets may tolerate higher retiree health care costs than others. Whatever route is chosen, many local leaders will have challenging budgets in the coming years."

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.