By Daniel Connolly,
June 18, 2014

The Memphis City Council made a dramatic move this week to shore up city finances, but the government’s money problems are far from over.

The council voted 7-5 Tuesday to cut subsidies for retiree health care and use the savings to boost contributions to a troubled pension fund.

“It appears to me that they’re making real progress toward addressing our concerns on the pension side,” said state Sen. Mark Norris, R-Collierville. He sponsored a recently approved law that requires governments to fully fund the annual contribution to their pensions by 2020. State comptroller Justin P. Wilson, who had written letters criticizing the city government’s financial woes, called the council’s action this week “a very positive step.”

Yet experts have said the city won’t fix its pension shortfall unless it dramatically increases pension funding from today’s level and keeps it high for years, which could affect property tax rates and city services.

And the lawyer for the Association of City Retired Employees, Clyde Keenan, has threatened a lawsuit to stop the health-care subsidy cut that is paying for much of the increased pension funding this year. He said he’s meeting with employee labor union attorneys Thursday morning to review options.

A lawsuit might prompt a judge to order a temporary halt to the health-care subsidy cuts, forcing the city to make other plans in the meantime. A panel for the federal 6th Circuit Court of Appeals ordered this type of temporary halt earlier this year in a case involving health care for government retirees in Flint, Michigan.

Memphis has not fully funded its obligations for retiree health care or its pension trust. The unfunded health-care liability is an estimated $1.3 billion and for pensions it’s $551.9 million. (A union expert concluded it was $301 million.)

Legal protections for health care are generally weaker than the legal protections for pensions and, like many governments across the country, the city of Memphis moved to cut health care and support pensions.

The health-care cut wipes out most of the long-term liability and also saves an estimated $23 million in the fiscal year that starts July 1, and the city is using this and other sources to boost the annual pension contribution from $20 million to $47.4 million, city finance director Brian Collins said.

The $47.4 million figure is larger than the $35 million Mayor A C Wharton had originally proposed as part of a five-year ramp-up — council members Jim Strickland and Shea Flinn had pushed to contribute more for a two-year ramp-up.

But the amount is still short of the $78.3 million annual contribution that experts for the City Council and city administration are now recommending.

The city could face dramatically larger pension contributions until at least 2040, experts with The Segal Company said in a report earlier this month. By that year, the city might have to pay somewhere between $85.6 million and $95.6 million.

That scenario assumes the city doesn’t change pension benefits. Wharton proposes moving new hires and those with less than 10 years’ experience out of the traditional pension plan and into a 401(k)-style retirement plan that’s subject to investment risk. The council will likely discuss the 401(k)-style plan and other options on July 1, and a vote would follow sometime thereafter. Still, Segal expert Eric Atwater has warned that many years would pass before the city sees savings from a lower-cost retirement plan, since it would only affect younger workers.

The retiree health-care subsidy cuts are scheduled to go into effect Jan. 1. And a 24 percent rate increase the City Council approved for both retirees and employees would go into effect starting in the first pay period in September, said Quintin Robinson, the city human resources director.

Final prices aren’t available, but The Commercial Appeal made calculations based on previously released numbers. For instance, when the city drops its 70 percent subsidy, a retiree under 65 on the city’s “premier” level family coverage would see a monthly premium rise from $365 to $1,216.

The 24 percent premium increase would bring that to more than $1,500. Most retirees will have to seek insurance through the new Obamacare exchanges or other sources, and it could cost them far more than what they’re paying now.

Retirees who are over 65 and eligible for Medicare could get a new supplemental insurance plan offered through the city. Those who are over 65 and not eligible for Medicare could keep the 70 percent subsidy, but they would still have to pay the 24 percent premium increase. Current city employees would also see their health insurance premiums rise 24 percent. The price of “premier” plan family coverage would rise from $355 to $440.

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