December 18, 2006

New Federal requirements may be 'wake-up call'

Warning bells tolling for rising health care costs
New Federal requirements may be 'wake-up call'

Keith Matheny and Erica Solvig
The Desert Sun

It's the biggest fiscal calamity almost no one saw coming and few are talking about.

It's left Coachella Valley cities and schools owing more than $174 million and wondering how they're ever going to pay it.

It's simply the cost of governments' promises to provide workers and their families with health-care coverage in retirement.

"There is going to be a collective jaw-drop when those numbers are revealed," said George Passantino, senior fellow for The Reason Foundation, a Los Angeles-based think tank .

The issue is coming to the forefront now as the federal Government Accounting Standards Board requires local governments across the country to fully examine what retiree health care will cost them for past, current and future employees.

Until now, governments - including those in the Coachella Valley - merely paid whatever was owed in a given year, paying no heed to potentially staggering expenses just over the horizon.

The new accounting standards are "really going to bring to our attention the problem of paying for these benefits is worse than we thought," said John Graham, director of health care studies for the Pacific Research Institute, a San Francisco-based think tank.

It will be a wake-up call, predicted Kevin McCarthy, finance director for the city of Indian Wells: "(It's) kind of the first slap in the face to cities."

Why costs are soaring
This impending dilemma has been years in the making, the result of several factors:

# Skyrocketing health care costs. State spending for retiree health care increased an average of 17 percent a year for the past five years.

# People living longer. U.S. life expectancy is at an all-time high of 77.6 years.

Because public-sector employees are allowed to retire in their 50s with full benefits, local governments are forced to pay increasing costs for more years per employee than ever before.

# Baby boomers retiring in droves. Several city officials say many of their employees are within a few years of retirement.

# Unbreakable labor contracts. Cities and schools have to make good on what they've promised in contracts with their workers or negotiate a way out. That's a difficult task with employee unions reluctant to give back what they've worked years to achieve.

# Lack of savings. Unlike pre-funded pension plans that use returns on investments to cover long-term costs, cities and schools pay health care bills every year when they come due. This pay-as-you-go method means no money is set aside for the millions of dollars in future costs.

"The public-sector unions, lax oversight and these loosey-goosey accounting rules allowed them to get away with it," Graham said.

"Thank goodness the Government Accounting Standards Board has finally put a stop to it. But it's many years too late."

Now what?
Now that they know what they owe, officials at many valley school districts and cities are only starting to figure out how to pay off the debt.

The new accounting standards don't kick in for many until 2008. And they only require putting the costs on the books; not necessarily funding them.

But bond-raters are expected to penalize governments carrying large debts. That could impact how much a city or school pays to borrow money for infrastructure projects - or their ability to borrow at all.

The 28,000-student Desert Sands Unified School District is already taking action to rein in the cost. They've negotiated with employee unions to reduce expenses, including having teachers work another five years, to age 60, before they get retirement health care.

Assistant Superintendent Charlene Whitlinger told school board members this fall they should begin setting aside $1 million starting this year, and more in subsequent years, to meet the district's 30-year obligation. Borrowing money through bonds remains a possibility.

Palm Springs Unified has banked about $3 million to "start chipping away at this," assistant superintendent Jim Novak said.

It will allow the district to buy some time and see how lenders react to other school districts deep in the red because of healthcare costs.

"This doesn't seem like a lot, but it's probably $3 million more than most other school districts have set aside," he said.

And it's not just the district officials who are trying to curb the costs.

The California Teachers Association has made an effort to help limit the rising costs without having to reduce the benefits to teachers and other school employees.

The union is among the many groups that have teamed up for the California Health Care Coalition, a group of private and public sector employers and workers that are addressing the issue by pooling together to reduce overall health care costs.

"The biggest thing is we want to reduce costs for all," said Tomás Martínez, the association's Rancho Mirage-based regional representative.

"The association, along with employers and school districts, are in this together. It's not one against the other. We're in this together."

Desert Sands board member Amy Ammons, who works as an accountant, said she sees the new requirements to put long-term retiree benefit costs on the books as a good thing.

"The business practice of government used to be, 'We'll push it forward to the future; it will be somebody else's problem; maybe the laws will change and it will go away,'" she said.

"A positive thing about this is it forces government entities to say, 'We have a liability here; we've made a promise.'"

Municipalities now have to fully examine what retiree health care will cost them for past, current and future employees. Indian Wells finance director Kevin McCarthy calls the new federal standards "kind of the first slap in the face to cities." Several factors have led to the $260 million tab Coachella Valley cities and school districts owe.

Did you know?
Most cities pay retirees' health care costs until Medicare kicks in at age 65. After that, most just pay a small, secondary stipend.

Double for the feds
Data released this year by the U.S. Bureau of Economic Analysis shows that for the first time, federal employees' total compensation doubles that of private-sector workers.

Federal workers earned an average of $106,579 in 2005 including benefits, or about twice the average private-sector compensation of $53,289 with benefits included.

The soaring cost of public retirements affects every city and school district in the Coachella Valley. And that means taxpayers like you will be affected, too. Tell us your thoughts or ask our reporters your questions and they'll answer.
Tell us what you think at

How much would your pension be if you worked for one of the Coachella Valley cities?
Check with's pension calculator.

How the benefits stack up (PDF 618KB)
Rapid growth strains police, fire departments (PDF 1.4MB)
Video: Pricey promises: Who will pay?

Public Retirements
The complete story

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