Rhode Island’s Worst-Funded Local Health Plans

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Friday, February 10, 2012

Dan McGowan, GoLocalProv News Editor

Ten communities combine to make up nearly 85 percent of the $3.5 billion unfunded liability for municipal other post-employment benefits (OPEB) in Rhode Island, an amount some experts say could force cities and towns across the state to go belly up.

The city of Providence has seen its unfunded OPEB (mostly retiree healthcare) liability balloon to nearly $1.5 billion – by far the largest in the state— according to a report issued by the Auditor General’s office last fall. Pawtucket, Warwick, Johnston and West Warwick round out the top five.

“It’s a ticking time bomb,” said Gary Sasse, who served as Director of Administration under Governor Carcieri and is now a fiscal advisor to the Providence City Council. “It’s every bit as much of a problem as some [communities’] pension problems.”

Only $27.5 Million Put Aside

Sasse said the problem communities are facing is that it is too difficult to address every issue at once, which is why most are focusing on tackling pensions first. He said the difference is that cities and towns haven’t been required to fund their OPEB system the way they should have been funding their pension system, but that if they don’t take on the OPEB in the near future, they’ll face real problems.

One of the issues has been the disconnect between the retiree health benefits typically negotiated through collective bargaining agreements and the associated long-term costs. For example, if a public safety worker retires with family health coverage for life, the coverage could span more than 40 years.

According to the report, locally-administered OPEB plans are less than one percent funded, with only $27.5 million set aside to pay future retiree health benefits. The funded status of the OPEB plans is more dire than some pension plans since the requirement to measure and disclose these liabilities is recent, many plans continue on a pay-as-you-go basis, and efforts to fund future costs have only just begun.

“Sometime in the future, it's going to raise up its ugly head,” Sasse said.

Almonte: Decisions Need to be Made

Sasse isn’t the only one concerned about the future for many cities and towns if they can’t address their problems with retirees who were promised pensions and health benefits through collective bargaining. Former Auditor General Ernest Almonte said the amount of money dedicated to retirees could soon consume such a large portion of a municipality’s budget that it won’t be able to provide current services.

That could mean layoffs, the closing of schools and fire departments and no money for arts, culture or history in a community, Almonte told members of the Providence City Council this week. He warned that not addressing the problems could have devastating results.

“You have to make a decision,” Almonte said. “Do you want a city where you just got to sleep or do you want a city where you go to live? You can sleep anywhere, but you want a community that is a vibrant community where people want to live and raise a family and enjoy life.”

All Options on the Table

Warwick Mayor Scott Avedisian, whose city faces a $229 million unfunded liability, said he is looking at various options for addressing retiree healthcare.

“We will be looking at all possibilities of lowering the health benefit costs, including incentives to employees who choose a primary care physician,” Avedisan said.

But change may be easier said than done, as the city of Providence learned last week when Judge Sarah Taft-Carter ruled that it could not require retirees to switch over to Medicare after age 65 because they were guaranteed lifetime health benefits from the city. Officials are expected to meet with the State Supreme Court today to see if they can file an appeal.

That ruling led Mayor Angel Taveras to declare that his city was “on the brink” of bankruptcy during a press conference last week. Taveras plans to hold a forum for retirees next month, but said there is no question that their benefits will be cut, whether it’s through agreements with the city or bankruptcy.

“As a city, we no longer have the ability to sustain these benefits. It must stop now,” Taveras said. “Our retirees must be a part of the sacrifice to save Providence. Either retirees will join their neighbors and make a sacrifice to save Providence or they will follow the path of Central Falls retirees who have had their full pensions slashed drastically in the courts.”

Late last year, Pawtucket Mayor Don Grebien, whose city has a $378 million unfunded liability, told GoLocalProv that it will difficult to solve their OPEB woes in the short-term.

“There is no realistic way the city can immediately come up with the approximately $378 million needed to remedy the OPEB liability or the current annual required contribution,” he said. “That solution must come in extended phases over time but the main areas to be addressed are clear. We must reduce costs and revise the terms contained in our fire and police contracts because those contracts, which both expire in June 2012, are the primary contributors to our OPEB liability. We must also work with our other labor unions to find any available cost savings there as well.”

Tremendous Stress

Almonte agreed with Grebien. He said he understands that any attempt to alter current retirees’ health benefits may end up in court. He said the obvious solution to make sure similar promises aren’t made in the future.

“One of the ways to dramatically drop that liability is to stop offering health care when people retire,” Almonte said. “You can negotiate now and talk about anyone that retires in the future. You could cut that liability almost in half.”

Sasse said municipalities would have to look at all options, but that the current system is unsustainable.

“You're looking at a situation where cities and towns are effectively paying for the health care costs twice, one time for active and a second time for retired employees,” he said. “The demographics are such that it will cause a tremendous amount of stress on municipalities.”

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