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If any issue demonstrates how deep a hole government can dig itself into via poor decision-making, it’s retiree healthcare in Duluth. And if any issue demonstrates how government can climb back out of a hole via good decision-making, it is also retiree healthcare in Duluth.
The roots of the retiree healthcare problem go back to 1983. At that time, city employees accrued unused sick leave throughout their time with the city. Upon retirement, they were paid a lump sum for the accrued sick leave, to be applied toward future medical costs. Cutting these very large checks had a big impact on the city’s budget. Mayor John Fedo, in negotiation with city unions, decided to eliminate the lump-sum payout and offer city retirees free healthcare for life instead.
In 1983, this decision wasn’t as crazy as it sounds today. Healthcare costs had not yet begun to explode (coverage for a single person was about $100 a month) and life expectancy was lower. Based on the information of the time, the lifetime retiree healthcare benefit was portrayed as, and may have been, a practical cost-saving measure. Unfortunately—and this is the truly crazy part—the city never set aside any money to pay for it. Although occasional studies and articles came out over the years that pointed to the growing liability, nobody got worried enough to actually fund it.
John Fedo was succeeded by Gary Doty, and Doty by Herb Bergson. The problem of retiree healthcare remained virtually invisible until 2004, when the city looked around and suddenly discovered that they were now facing an unfunded liability, based on actuarial projections, of $280 million—four times Duluth’s entire general fund budget. That number was large enough to get people’s attention. A lot of arm-waving, finger-pointing and frantic running around ensued.
In 2005, then-City Councilor (and now Mayor) Don Ness put together a volunteer task force of private citizens to study the problem. The task force was led by Arend Sandbulte, former CEO of Minnesota Power, and included four legal and insurance professionals. They came up with fifteen recommendations, which included setting money aside in an irrevocable trust fund, consolidating the health plans of existing retirees and making structural changes to retiree healthcare benefits going forward. The plan was popular with nobody.
“There was a tremendous amount of resistance from the Bergson administration, from the unions, [and] from all the other stakeholders,” Mayor Ness told me recently. “[The plan] asked for sacrifice from all interested parties. The administration had to do their part finding cost savings within their budget, the retirees and the unions had to do their part to reduce the increasing costs into the future, and the taxpayers had to do their part, making contributions into this trust fund.”
Nevertheless, according to Ness, the plan was “so sound and so clear-headed” that even people who didn’t like it saw the value of having a roadmap to follow. In 2007, Mayor Bergson kick-started the retiree healthcare trust fund with a $10 million contribution from the city’s casino revenues. Various other sources of revenue were dedicated to the trust fund as well. Since then, the fund has only grown larger; no withdrawals have been made. Today, the balance stands at $42 million.
When Ness became mayor, in 2008, he continued implementing the task force’s recommendations. One of the most important issues was getting city unions to agree to place all retirees on a single health plan. At the time, each retiree chose their own health plan, which meant that the city was dealing with more than 100 different health plans in paying for healthcare. The city prevailed in court on this issue in 2010, and retirees all moved to a single health plan. The resulting efficiencies caused annual healthcare expenditures to drop by more than $2 million a year.
Another important element of the plan included eliminating the lifetime healthcare benefit for future city employees. To keep the benefit in place, Ness told me, would have been unsustainable. “If you look at those early projections on those costs, it is a line that goes straight up forever, because your costs increase and you’re always adding new retirees.” The lifetime healthcare benefit stopped being offered to city employees hired after December 31, 2006. This transformed an endlessly growing problem into a problem that was gigantic, but finite—in the words of the mayor, the problem now had a “back end.”
Currently, somewhat more than 1,200 active and retired city employees are eligible for the lifetime healthcare benefit. Over the next several decades, demographics and mortality will cause this number to slowly, but predictably, drop.

The mayor’s plan

When we talk about the retiree healthcare liability, we are not talking about money that the city owes right now. The liability is the estimated amount of money the city would have to have in the bank today to fully fund all retiree healthcare into the future. In 2005, when the liability was $280 million, the city had nothing in the bank. Had no reforms been made and business continued as usual, today the liability would be $405 million. Instead, thanks to the reforms, the city has $42 million in the bank and the total liability has shrunk to $182 million (Figure 1).
Of course, $182 million is still a lot of money. On October 7, Mayor Ness unveiled a long-term plan to address this.
In 2000, the city was paying about $2.5 million a year to cover current retiree healthcare expenses. Today, with more retirees and higher healthcare costs, the city is paying about $9 million a year. The money comes from the general fund ($6 million) and the city-owned utilities ($3 million). The trust fund, so far, has not been touched.
Under the mayor’s plan, the city will continue to pay $9 million out of pocket each year. When annual healthcare costs rise above $9 million, the trust fund will be tapped to make up the difference. Over the long term—a matter of decades—annual healthcare costs will reach a peak of about $13 million and then begin to decline, as the number of retirees gets smaller. Eventually, annual costs will return to the $9 million level, then drop below it.
Figure 2 demonstrates this graphically (“OPEB” stands for “Other Post Employment Benefits,” the formal label for retiree healthcare). The $9 million annual out-of-pocket expense is the red horizontal line that doesn’t vary from year to year. Everything above that line—the “hump” of the graph—represents money taken from the trust fund. As we can see, healthcare expenses are predicted to first rise above $9 million in 2016. They will reach $13 million in 2030, then begin to decline, returning to the $9 million level in 2040. After 2040, the city will pay less and less each year, until the liability is fully paid.
Obviously, this is not an “easy” plan; coming up with $9 million each year will not be painless. The mayor is very concerned about the possibility that future administrations and future city councils could decide to reduce the $9 million figure and tap into the trust fund more heavily, which would render the plan unsustainable.
“The key is that we can’t allow for the city to pay less than that $9 million,” he told me. “If, next year, instead of $9 million, we went to $7 million, that throws all the economics out the window, and then you’re in this place where the fund is gonna dry up [before] you get to the back end of the cost curve.”
To guard against that possibility, the Ness administration will be introducing an ordinance in the next few weeks that sets conditions on how trust fund money can be spent. Essentially, the city will only be allowed to tap the trust fund when annual healthcare costs rise above $9 million, and then only enough to make up the difference.
Additionally, even as the city draws down the trust fund, it will be making contributions back in. Under the mayor’s plan, all earnings that the city makes on its investments will be dedicated to the trust fund. Because of market fluctuations, the amount of money invested and other factors, the city’s earnings on investments can vary greatly from year to year—the mayor said it can be anywhere from $200,000 to $2 million. Historically, the city administration would make a prediction on the coming year’s earnings and plug that prediction into the budget. If the prediction fell short, that meant trouble for the budget.
“This is one of the problems that we faced in 2008,” said the mayor. “They [predicted] $1.5 million in earnings, and then the general fund created a budget based on that $1.5 million in earnings, and then in 2008 the market crashed and we got a couple hundred thousand in earnings. All of sudden, now you have this major hole in the budget.”
By dedicating earnings on investments to the retiree healthcare trust fund, the city will continue to enjoy the benefits of the good investment years, but avoid hurting general operations in the bad. “All that variability is over on that side,” the mayor said, pointing to the trust fund side of the line, “so we’re essentially gaining stability within the general fund. We know exactly what our expenses are, and the variable revenues are going over to the health of the trust fund.”
To me, this all sounds very good, even excellent. I have criticized the mayor on other issues, but on retiree healthcare I don’t think anyone could have done a better job. A problem that was overwhelming was made manageable. Everybody contributes to the solution, and everybody shares the pain. In the end, the problem goes away.
I say bravo.

President Looney Tunes

Back in June, I described how City Council President Linda Krug used her position to vindictively cut off and lecture councilors who disagreed with her.  Since that article appeared, Krug has behaved herself fairly well—until the council meeting of October 27, 2014. The issue was horse trails—or, rather, the lack of them in the city. Several horse trails were closed a couple of years ago due to erosion concerns and have not yet reopened. Other trails have signs posted that prohibit horse riding, but nobody seems to know who put those signs up, or why, or when. A resolution by Councilor Jay Fosle was on the agenda, asking the city to reopen sections of two trails—Magney-Snively and Amity Creek—to horse riding.
The issue drew a great many horse enthusiasts to council chambers to speak. Following nearly an hour of public comment, councilors took up the discussion among themselves. Councilor Jennifer Julsrud spoke of her love for horses, and her desire to open the trails at once. Like the detail-oriented person she is, Julsrud also sought to put the issue in context. President Krug did not appreciate this. Without warning, she snapped.

Jennifer Julsrud: The other problem that I’d like to bring up—

Linda Krug: Councilor Julsrud, you’re addressing this resolution, right?

Julsrud: Yes.

Krug: Okay.

Julsrud: So the other issue that I want to address is that when you read the city code in relation to this issue, it becomes very clear that all of our user trails throughout the city and our parks must be designated for that specific use. Bikers can’t bike on certain trails in the city unless it’s specifically designated by a resolution or ordinance of the council. And so it is—

Krug: [cuts in] Councilor Julsrud?

Julsrud: You know, I don’t like being cut off by you on a regular basis.

Krug: [snaps angrily] Councilor Julsrud, you are out of order!

Julsrud: No, I’m not.

Krug: Yes, you are out of order!  Will you please—

Julsrud: I was elected by the people of my district—

Krug: [screams] Councilor Julsrud, you are OUT OF ORDER!
[starts pounding her gavel on the table]

Julsrud:—and you cut people off  on a reg— [Krug cuts off Julsrud’s microphone]

Krug: [red-faced and wild-eyed]
Councilor Julsrud, you are out of order! We have a resolution in front of us! If you would like to address that resolution, you can speak! If you want to talk with the administration about city codes, then you want to make an appointment afterward to talk with them about it! I’m sorry! Mr. Johnson? City Attorney Gunnar Johnson looked up like a deer caught in the headlights. Why was the crazy lady calling on him?

Krug: Mr. Johnson, would you please instruct Councilor Julsrud to address the resolution?

Gunnar Johnson: Councilors, there, um...[clears throat]…I…I don’t, um, do the…run the meetings, but, uh, I’m happy to address any…and I…the…the meeting is run by the president of the council. In other words: Don’t drag me into your nut-ball universe, lady. I’m just sitting here.

Krug: Thank you, Attorney Johnson. Councilor Julsrud, I’m going to move on to Councilor  Gardner, and I will come back to you to address this resolution.

All in all, a very bizarre minute or two in council chambers—the more so because Krug’s actions were so unjustified. At other meetings, perhaps, such as agenda sessions or committee hearings, it makes some sense to keep councilors on track, for the sake of conducting business efficiently. But on Monday nights, councilors are in the public eye. This is their moment to say what they want to say in public. No matter how much rambling may be involved—and I have heard councilors wander off into entirely different time zones—councilors have the right to speak their mind.
But Julsrud wasn’t rambling. At all. By describing her thoughts on the resolution and drawing on her knowledge of city code to explain her position, Julsrud was staying remarkably on task. It was President Krug, pounding her gavel and screaming like a third-world dictator, who was the big distraction of the evening. In Councilor Julsrud’s place, I would have walked out of the room.
Fortunately, we only have to tolerate this tyranny for another two months. In January, as they do every year, the council will pick a new president.  With any luck, it will be somebody who’s not insane. Relieved of her duties, Councilor Krug will have more time to focus on the consulting company that she owns, which specializes in (I’m not kidding) “conflict management and mediation.”

Yes, sir—this town is the gift that keeps on giving. How could I possibly live anywhere else?