When most workers retire before they are Medicare-eligible at 65, they have to bear the costs of health insurance on their own.
But not if you work for Tucson.
Like most governments, the city picks up costs for its retired employees’ health insurance.
Last year, the city paid $15.4 million in direct and indirect health-insurance costs for its 1,350 pre-Medicare-eligible retirees and widows of retirees.
Of that total, $9.6 million went to subsidize retirees’ health plans. The remainder was what the city calculates it pays in increased premiums to carry the additional, older members on its plan.
Current employees must also shoulder more in health-insurance costs to cover the retirees who share in the same plan.
Chief Financial Officer Kelly Gottschalk said blending retirees and active employees in the same insurance pool lowers the cost for retirees while increasing the costs on current employees.
“The active employees are subsidizing the retirees,” she said.
The city has not calculated how much less current employees would pay if retirees were either dropped or put on a separate plan.
Governments have long offered more generous health and retirement benefits to offset lower wages and attract talent from the private sector, said professor Marjorie Baldwin, a health economist at Arizona State University’s W.P. Carey School of Business.
But that was before skyrocketing health-care costs and dwindling budgets.
Baldwin said health-care costs will only rise as baby boomers get older and place more demands on the health-care system.
She said governments might be able to get by in the short term with the same level of benefits, but something will eventually have to give.
“It’s not sustainable, and people are going to have to accept some cuts in their benefits,” Baldwin said, “or cities or counties or states just aren’t going to be able to afford it.”
The city owes around $239 million for both current and future retiree health-insurance benefits.
Unlike the pension funds, where there are some assets backing future obligations, the city uses a pay-as-you-go model to fund its retiree insurance.
Each year, the city calculates what it owes in a current year and pays it. The rest is an unfunded liability.
University of Arizona finance professor Michael Bond said the pay-as-you-go approach means there’s no money from investments the city could use to cover the annual cost.
So when costs rise, the money likely comes from the existing pot, Bond said, and that translates into less for roads, parks and public safety.
It’s a significant strain on an already overburdened budget.
But there is some hope.
While pension promises can’t be undone, the city does have wiggle room on retiree health-insurance plans.
City Attorney Mike Rankin said the city isn’t legally required to maintain retiree medical benefits at a certain level, and could make changes if it wants.
The city has adjusted its benefit in the past. It used to cover 75 percent of a plan for retirees, but changed to a flat rate for those who retire after January 2011.
Gottschalk said the change saves money, but also that there are still plenty of retirees who qualify for the 75 percent subsidy who haven’t reached Medicare eligibility.
Even when those employees leave, the city will still be kicking in up to $475 a month for retired employees’ health insurance.
A few years ago, the city attempted to create a separate health plan for retirees and active employees, but it was shelved after employee groups protested.
In 2010, Pima County stopped paying for its retirees’ health insurance.
Since county employees are part of the state retirement system, they have the option of joining the state’s health-insurance plan.
The county saved around $13.5 million the first year alone.
City Manager Richard Miranda said the city doesn’t have any plans to change retiree health insurance this year.