Report: Carmel’s retiree health insurance underfunded by $19.7 million
By Pete Smith
An actuarial report conducted by McCready and Keene determined that Carmel hasn’t funded an obligation to its retirees for the past four years and is staring at a $19.7 million liability.
The issue came to light when the city was seeking a bond and disclosed that it treats the retiree health insurance fund as part of its general operations fund.
The city claims that it’s not legally obligated to fund its retirement obligation, but an Indianapolis-based labor lawyer said that’s not so. Based on the contracts the city signs with its public unions, employees would have a case if they decided to seek a court order to enforce their contracts.
Carmel currently offers its retirees health insurance, and the city makes $900 monthly contribution toward that insurance premium as long as a retiree pays monthly fees totaling about $1,000 to $1,500, said Sean Sutton of the Carmel Firefighters Union.
The Current in Carmel recently received a copy of a questionnaire the city answered to qualify for its bond rating from Standard and Poor’s Rating Services for the bond it floated to fund the extension of Illinois Street.
That questionnaire posed the following question: “Does the city keep any other funds that would be considered an ‘operating fund’ that is outside of the general fund and rainy day fund, which you consider to be available for general operations?”
The city responded, “Yes, there is a balance set aside for post-employment benefits within the health insurance fund. However, the balance is considered available since the city has no legally enforceable obligation to provide post-employment benefits beyond the current fiscal year.”
When City Councilor Luci Snyder inquired about the fund, Director of Human Resources Barb Lamb responded Nov. 19, 2013 with an e-mail that read:
“We didn’t actually stop paying into the retiree insurance fund until 2011. So there are/will be no deposits in 2011, 2012, 2013 and 2014.
“We currently have more than $2.5 million in the retiree account, which at the current rate of expenditure will last us more than 13 years. However, we are due for a significant number of retirements in the next few years, so the current rate is not a good indicator of our position.
“Because our retiree account is not held in trust – and is therefore technically ‘available’ – McCready and Keene cannot offset our accrued liability by our current balance. If it could, we would be only about $17.5 million underfunded.
“We are due for another actuarial valuation in 2014, although I don’t know whether it will happen as current accounting rules apparently do not require us to comply with GASB 45-per Mr. (Curt) Coonrod. Diana (Cordray) controls that process, so it may happen anyhow. That would give us a more current assessment of our situation.”
“The city has chosen to pay retirees a monthly stipend for health insurance. This is determined on a year-to-year basis and appropriated from the general fund each year,” Carmel Mayor Jim Brainard said. “There is no obligation to make these payments in future years. It is not underfunded because there is no ongoing obligation.
“S&P treated it as available because there is no legal restriction on its use,” Brainard said.
Sutton agreed, saying in an e-mail, “Yes, they are non-binding contracts due to the fact that Indiana is a non-collective bargaining state.”
“The Carmel Fraternal Order of Police is aware of the situation involving retiree health insurance. We have been working closely with the city on this and other health care issues. We trust the Mayor and administration of the city can develop a resolution that is in the best interest of all parties involved,” said Carmel FOP president Shane VanNatter. “The city has a proven track record concerning employee benefits and compensation. We have confidence this will continue.”
Stephanie Jane Hahn, an Indianapolis-based attorney with a statewide practice in employment and labor law, said that the unions’ contracts are enforceable and that the $19.7 million shortfall could become a serious city liability.
“I have represented municipal employees in various causes of action over the years where the collective bargaining agreement was at the heart of the matter being litigated or negotiated,” Hahn said. “And in none of those matters did the municipality – the employer – ever allege that the contract, the collective bargaining agreement, was unenforceable under Indiana law.
“It is my opinion that the union leadership or members of the union would be in the best position to hold the city accountable by confronting the city and, if necessary, litigating this matter,” she said. “And theoretically the retirees and their spouses, who are arguably the third-party beneficiaries of the contract – assuming that they are no longer full voting members of the union – would also arguably be able to bring a cause of action.”
“The purpose of the health insurance fund is to contribute a portion of the monthly premiums for retirees who have worked for the city for 20 or more years,” Lamb said in a statement. “The money for the fund is included in the city’s annual budget; each department contributes an amount proportionate to its anticipated retiree insurance expenses. While the fund may technically be considered available, it is not now, and never has been, used for any other purpose. The status of the fund has never been hidden from city employees. It has not become an issue because the city is not using the money for any other purpose.”
City Councilor Sue Finkam said uniformed employees view this benefit as important and that it should continue to be offered.
“When this benefit was originally put in place, we were in essence making a promise to employees that chose to work for the City of Carmel that this benefit would be in place when they retire,” she said in a statement. “As with all employee benefits, the amount the City contributes should be reviewed regularly given the volatility of the insurance marketplace and changes to local municipal revenue streams. It’s too early for me to say how retiree health insurance should be funded in the 2015 budget. The annual budget process is our opportunity to put dollars to our priorities, and funding priorities change from year to year. Given there are adequate dollars in this fund for several years to come, funding this benefit in 2015 should be considered when we have all other information in front of us.”