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Tough choices ahead as Lodi’s benefits fund runs a deficit

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Posted: Thursday, May 9, 2013 12:00 am

The city of Lodi is not setting aside enough to pay for health care for its retirees now or in the future, according to a recent report.

The 2012 audit found that the city’s benefits fund is running a deficit, the Lodi City Council learned at a recent study session presented by Deputy City Manager Jordan Ayers. Now, they are faced with the dilemma of what to do about it.

In the throes of the recession in early 2010, the city council faced a case of competing priorities, said Ayers.

They could set aside money for future retirement costs, or continue to pay firefighters, police officers and other essential city services.

“We did not have money available for this,” Ayers said. “The question was, ‘What service will we not provide so we can fund this?’ The council chose to continue providing services instead of funding this.”

The lump sum of money needed to cover future health care costs for retirees gets bigger with every year that the city doesn’t set aside funding for it.

At the same time, the total number of retirees is increasing, so the amount needed rises faster every year.

It would cost a total of $17 million to fully fund health care benefits for all the city’s current retirees over the next 30 years. But payment is required just one year at a time.

Some of these 260 current retirees get their health care through the California Public Employees Retirement System (CalPERS), since they worked for the city. That costs Lodi $115 a month per person.

Others get their health care through a conversion of their leftover sick leave, not CalPERS. They qualify for that option because they were hired before certain dates in 1994 or 1995, depending on their department. The cost to the city varies.

Last year, retiree health care cost the city about $600,000. That amount comes out of the city’s benefits budget, which is around $7.8 million per year.

But if the city were saving up for the future — at least the next 30 years — the cost would have been $1.2 million in 2012-13.

That’s enough to cover the current cost and put enough away to help cover future costs, like a savings plan.

Here’s the tricky part: The city is required to calculate and report this number to the state, simply because they provide benefits to retirees. But they aren’t required to pay it. The city only has to pay what’s owed each year.

Setting aside money for the future is optional, and right now, Lodi isn’t doing that. If your paycheck covers the car payment each month, why stress about finding the $24,000 for the total cost all at once?

City officials said it’s time to take a look at the numbers and see what can be done to help fill in that deficit.

Asking employees to pay more into their own retirement is not an option, said Ayers.

“As this benefit is a fully vested benefit, we have not proposed charging retirees additional amounts, as that move would likely bring a lawsuit,” he said.

One option is to keep the system as-is, and think about putting some money aside at the end of each year to go toward the ever-growing pot. Another is to take money out of each department’s budget on a per-capita basis to build up the savings cushion.

The final option, and the one that gave council members the most pause, is to pull funds out from department or general budgets and establish a third-party trust to manage those funds.

“That option does introduce risk. It’s a better rate of return, but the higher the return, the higher the risk,” Ayers said.

Mayor Alan Nakanishi was leaning against that option.

“I’m against putting money in some distant vehicle,” he said. “We’re going to have a cash flow problem in the future if we take that money now.”

There is something attractive about setting up a fund to take care of the funds, said Councilman Bob Johnson.

“Once you set it up, you can’t get the money back. It has to stay in the trust for those purposes,” he said.

Councilman Phil Katzakian said there is nothing wrong with how the city is dealing with this right now, and nothing needs to change.

“We’re servicing the debt just fine today without setting anything aside,” he said.

Making sure the public knows these details is essential for Councilwoman JoAnne Mounce.

“It’s important that there is transparency and the public sees we have a fully loaded liability,” she said.

A final decision was not made during the study session. The city council will address the problem at a future meeting.

Contact reporter Sara Jane Pohlman at sarap@lodinews.com.

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