Health insurance and pensions are two local budget busters that are posing a very real threat to other municipal services, creating a situation that cries out for significant reforms.

This was the consensus of a range of panelists during a discussion sponsored by The Boston Foundation on May 5.

“What we are doing” said Boston City Council President Michael Ross, “is cannibalizing the core services to make up for systemic problems.”

“The status quo cannot [continue] without crowding out all the other services that we care about,” said Joel Barrera, deputy director of the Metropolitan Area Planning Council.

“These are the most important issues … for the preservation of services that we value at the local level,” said Michael Widmer, president of the Massachusetts Taxpayers Foundation. “The case for reform is overwhelmingly compelling.”

Salem Mayor Kim Driscoll speaks during a May 5 panel discussion at The Boston Foundation. Also pictured are (l-r) Mass. Taxpayers Foundation President Michael Widmer, Boston City Council President Michael Ross, and Joel Barrera of the MAPC.

Salem Mayor Kim Driscoll speaks during a May 5
panel discussion at The Boston Foundation. Also
pictured are (l-r) Mass. Taxpayers Foundation
President Michael Widmer, Boston City Council
President Michael Ross, and Joel Barrera of
the MAPC.

Pensions and health care are consuming greater and greater shares of the municipal budget pie, leaving less available for services such as public safety, education, libraries, and public works.

Ten years ago, for example, health insurance for city employees and retirees accounted for 8 percent of Boston’s budget, according to a report published by The Boston Foundation. By fiscal 2004, health insurance accounted for 9.4 percent of city spending. Today, that number is 12.1 percent.

Boston’s health insurance costs increased by 54.4 percent between fiscal 2004 and fiscal 2009, nearly twice the total inflation rate (28 percent) over the same period. Statewide, municipal health insurance costs climbed 84 percent from fiscal 2001 to fiscal 2006, according to the Legislature’s Special Commission on Municipal Relief.

In Salem, health and pension cost increases this year ate up the entire increase in the city’s property tax levy, Mayor Kim Driscoll said. In some cities, she said, health and pension cost increases exceed the annual levy increase allowed under Proposition 2½.

“The only way I can make all the numbers work [to balance the city’s budget] is to lay people off,” Driscoll said.

There was universal agreement that the time has come to “level the playing field” – that is, to give cities and towns the same authority that the state has to adjust employee health care plans (e.g., co-pays, deductibles and tiered networks). The state is able to make changes in order to control costs, while cities and towns are required to go through the collective bargaining process to make similar changes.

“This is a problem that there’s a solution to,” Driscoll said. “There’s a tool. It can be fixed. … It’s common sense.”

The Boston Foundation event focused on two recent reports: “Providing Pensions in Difficult Times: A Comprehensive Study of the Massachusetts Pension System and Its Impact on the City of Boston,” which was published this month by The Boston Foundation and the Boston Municipal Research Bureau; and “Leveling the Playing Field: Giving Municipal Officials the Tools to Moderate Health Insurance Costs,” published in February by The Boston Foundation and the Collins Center for Public Management at the University of Massachusetts Boston.

According to the health insurance report, health plans offered to municipal employees and retirees in Massachusetts provide “first-dollar coverage” for most services, with no – or very low – member costs beyond the monthly premium contribution.

“These health benefits are among the most generous offered by any employer in the Commonwealth, including the state and federal governments, as well as private employers,” the report states. “The difference in plan designs … is the main reason why municipal health insurance premiums are higher than the state’s.

“Despite the cost savings available during a time of fiscal stress, reducing premiums by altering health benefits and increasing point-of-service cost sharing has proven particularly difficult for many municipalities. This is due, at least in part, to the statutory requirement that the health benefits provided by a municipality must be negotiated with, and approved by, the municipal unions.”

The report examined health insurance costs in four communities – Boston, Cambridge, Marshfield and Melrose – and found that those communities could reduce their costs by between 14.6 percent and 16.1 percent if they were able to offer plans resembling what is available to state employees through the Group Insurance Commission.

Complicating matters is the fact that new reporting requirements to recognize the unfunded liabilities of retiree health insurance will require significantly greater spending for health benefits in future years.

The health insurance report points out that communities can lower their health insurance costs – as some have – by requiring Medicare-eligible retirees to enroll in Medicare Part B (i.e., adopting Sect. 18 of Ch. 32B).

The report on municipal pensions also highlights the need for reform.

“The retirement system is financially inflexible for both employees and employers, quietly values some employees more than others, is designed to provide benefits to long-serving employees (and consequently penalizes employees with more limited careers in public service) and is complex, requiring significant administration that leads to inefficiencies,” the report states.

“[O]utdated laws and practices have restricted the ability of cities and towns to respond to these management challenges in a timely and sustainable way. The current fiscal stress being experienced by the state and municipalities makes this the opportune time to address these issues.”

The pensions report’s recommendations include the following:

• Link employee contribution rates to the pension benefit the employee is expected to receive, rather than setting contribution rates by date of hire.

• Increase the salary averaging period, on which pension amounts are based, from three years to five.

• Cap pensions at $85,000.

• Update and standardize the group classification system to determine which position should be included in each group.

• Prorate benefits by time spent in each of the four employee groups, in order to more appropriately represent each employee’s work history.

• Strengthen employer scrutiny of disability retirement applications.

• Require more retirement systems to invest in the Pension Reserves Investment Trust to consolidate investment functions and achieve long-term operational benefits.

The pensions report also noted the drain of municipal health insurance costs on local budgets and called for local authority over plan design.

“The double standard that exists between state and municipal management of health insurance is indefensible and should be remedied,” the report states.

“Incremental change in trying to address these issues is not going to do it,” said Samuel Tyler, president of the Boston Municipal Research Bureau. “It’s got to be fundamental change.”

Widmer warned that without immediate reform, the problems will worsen.

“In fiscal 2012, the state is going to fall off a fiscal cliff, even with an economic recovery,” he said.

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