Liability falls by millions

Actions taken by the city of Duluth to reduce its potential liability for the cost of retirees' health care have begun to pay off. But the city's top financial officer said the latest numbers don't do justice to progress made in the past two years.

According to an estimate released Monday, potential claims by retirees on the city's self-insured health-care fund totaled $270 million in 2007 and are projected to reach $277 million by 2014.

In 2005, the potential liability was $280 million; it was projected to reach $309 million by 2007 and $405 million by 2014.

The city agreed in 1983 to provide health care to retirees at no cost but for decades did not set aside money to cover the maximum amount it could owe. Federal accounting rules adopted in recent years require that governmental bodies set aside money to cover potential liabilities.

The city has taken several steps since 2005 to reduce the liability: moving all employees to a single health plan and a new drug co-pay plan, changing new employees from a defined benefit plan to a defined contribution plan, establishing an irrevocable trust fund, and taking necessary steps to establish a funding plan.

The changes were among recommendations made by a 2005 task force.

"I'm very pleased with the progress we have made," Don Ness said Monday before being sworn in as mayor. "For 25 years the liability has continued to grow until this past year. By being true to the recommendations of the [2005] retiree health-care task force and implementing those recommendations, we were able to reverse a 25-year trend."

Ness credited departing Mayor Herb Bergson for his leadership on the issue. Ness said he is committed to efforts to further reduce health-care costs by finding management efficiencies, improving policies and moving the city's current retirees to a single plan.

The progress reflected in the recent study by Minneapolis actuarial firm Van Iwaarden and Associates would be even greater if changes in accounting rules hadn't required the city to cover $53 million in additional costs -- for Medicare Part D coverage and dental and life insurance liabilities -- that were not part of the 2005 valuation.

If the additional costs aren't included, the 2007 liability actually would be down to $217 million, said City Finance Director Genie Stark.

"You're not really comparing apples to apples," Stark said. "It's almost a $100 million difference in two years."

It is estimated that the liability could be reduced by another $30 million if retirees were all on the same health plan.

Last week, Ness asked Bergson not to proceed with plans to notify about 1,100 retirees they would be switched to the same plan as employees in the next couple of months. Ness said he wanted to study options with his legal staff and then meet with retirees.

The final version of the Van Iwaarden and Associates report, expected within a few weeks, will include updated information on retirees and their dependents.