Bad for Your Health

The New York Times has delved back into its series about the financial problems facing governments because of mounting pension costs.

Tuesday’s story surveys agencies that use their pension plans to fund retiree healthcare costs, a practice that has surprised the governments with larger bills in the future, according to the story.

Here’s one key example that may strike home with local readers:

… many local governments and their financial advisers did not see it that way in the 1980s and 1990s. While rules were established aimed (sic) at protecting pension assets, their investments were doing so well then that there seemed to be plenty of money to spare. Building a retiree health plan into a pension fund seemed an efficient way to use the “excess” and take pressure off the local budget at the same time.

While not cited as an example in the story, the city of San Diego followed the same logic in 1996. The city’s retiree health costs were transferred to the pension fund’s ledger as part of the agreement known as Manager’s Proposal 1, which also allowed the city to lower the amount it paid into the retirement trust and created new benefits for city employees.

The city, however, stopped paying those retiree health costs with pension money in 2005, and is trying to set up a separate trust fund to deal with that looming expense. Currently, the city’s retiree health deficit, like its pension deficit, stands at $1.4 billion.

Here’s how one familiar expert put the problem:

“Anyone who has embedded their obligation for their retiree health plan in their pension fund and doesn’t think it’s going to be a big drain on the assets of that pension fund is crazy,” said Lynn E. Turner, a former chief accountant for the Securities and Exchange Commission who is now managing director of research at Glass, Lewis & Company, a proxy advisory firm.

Turner, as you may remember, worked with the Kroll Inc. consultants who issued a report detailing San Diego’s past pension and financial disclosure miscues in August.

Aguirre hinted at a press conference today that he might use a law prohibiting governments from going into debt without a public vote to challenge the retiree health care benefit in the same manner he’s attacked other employee benefits.

“You may be hearing something along those lines later,” he said.

– EVAN McLAUGHLIN