Rising retiree ‘legacy costs’ a growing concern

Advocate staff photo by TRAVIS SPRADLING -- Ellis Gauthier, 75, a former educator and assistant principal at Woodlawn High School in Baton Rouge, retired in 1994 after 33 years of service. Photographed Wednesday at his home in Port Allen,Gauthier said he's familiar with the financial strain school districts face in paying for medical coverage for their retirees, thanks to the two terms he served on the West Baton Rouge Parish School Board.
Advocate staff photo by TRAVIS SPRADLING -- Ellis Gauthier, 75, a former educator and assistant principal at Woodlawn High School in Baton Rouge, retired in 1994 after 33 years of service. Photographed Wednesday at his home in Port Allen,Gauthier said he's familiar with the financial strain school districts face in paying for medical coverage for their retirees, thanks to the two terms he served on the West Baton Rouge Parish School Board.

In the accounting world, they are known as “legacy” costs ­— costs associated with retirees whose employers had promised them benefits from the day they retired to the day they die.

For the East Baton Rouge Parish school system, such costs are limited to health insurance for retirees, many of whom receive benefits for decades. Almost 5,000 retirees collectively cost the system $34.8 million in medical bills for the 2011-12 fiscal year, which ended June 30.

Ellis Gauthier is a former educator who at age 75 remains relatively healthy. Although not hurting financially, he relies on the school system for his secondary insurance, particularly the prescription drug coverage he uses to buy at least three medications to keep his diabetes in check.

Gauthier is also a former School Board member, having served two terms in West Baton Rouge Parish. He remembers well the financial strain that retiree benefits placed on that parish’s public school system. At the same time, he says he worries about what any increases in the cost of benefits may mean for East Baton Rouge retirees like school bus drivers and janitors, many of whom can ill afford more out-of-pocket expenses.

“I can see the School Board’s problem,” Gauthier said. “I just hope they don’t abandon the retired people, because some of them are hurting real bad.”

The legacy cost in East Baton Rouge is growing at 7 percent per year and promises to accelerate as current school employees, 45 percent of whom have already worked for 20 years or more, retire. Current teachers who have 20 years of experience can retire at any time.

If the school system had to pay now for all of the future costs of its current and prospective retirees, it would have to pay out more than $1.5 billion, according to a recent actuarial analysis.

This rising expense comes as tax revenue has flattened or declined. The school system has made annual cuts and drained its reserves to stay in the black.

The school system also stands to lose students and more tax revenue, which it can’t easily offset with budget cuts, as it faces increasing competition from charter schools. Private schools that receive public money in the form of vouchers also threaten school system finances. A state district judge in Baton Rouge ruled Nov. 30 that the new voucher program is an unconstitutional diversion of public funds; voucher supporters are appealing the ruling. Similar financial problems loom if one or more parts of the current school system break away and form their own independent school districts.

New Superintendent Bernard Taylor has suggested publicly that the school system may have to seek bankruptcy protection if the system’s financial situation deteriorates enough.

Another worst-case scenario is that the state takes control of the school system’s finances, something that has happened in troubled school districts across the country such as St. Louis and Detroit as well as in New Orleans prior to Hurricane Katrina. Retiree medical coverage could be one of many casualties of such a turn of events.

When Baker, Central and Zachary broke away from the East Baton Rouge Parish school system, they left the parish school system with retiree legacy costs.

The parish school system alone has had to cover the full ongoing financial obligation of the health care costs of its retirees, doing so with fewer active employees paying into the insurance pool than paid in before the breakaways and drawing from both a smaller local tax base and smaller state funding stream thanks to the loss of students to the new districts.

Parish school officials argued, to no avail, that these new districts should shoulder at least some of these ongoing expenses. They argued that retiree health care is an obligation that accumulated while breakaway communities were still part of the larger school system. They also point out that retirees educated children in their communities too, and that some of those children will remain in school for up to 12 years after the breakaway has occurred. Breakaway supporters countered that their new districts should not be saddled with this expense, because they did not produce it.

If new areas likewise break away without sharing in the legacy costs, the financial burden for the parish school system could grow substantially.

Jim Richardson, alumni professor of economics at LSU, and Roy Heidelberg, a visiting researcher at LSU, gamed this out in August in a report commissioned by the Baton Rouge Area Chamber.

They looked at some scenarios in which legacy costs were not shared.

The creation of a southeast Baton Rouge school district — an idea that recently came within four votes of passing in the Legislature, which decides whether to send such proposals to voters — would increase the legacy expense for the parish school system from $866 per student per year to $1,031 per student per year.

The worst-case scenario, involving two breakaway districts and a large state-overseen charter school-heavy Achievement Zone in north Baton Rouge, would nearly double that per-pupil legacy expense, increasing it from $866 per student per year to $1,662 per student per year.

In an interview, Richardson said if a southeast district leaves without some cost sharing, it could spark a domino effect, provoking more breakaway districts while the legacy cost burden for shrinking parish school system grows worse.

The school system’s complaints about legacy costs seem to finally be getting through.

The final version of a bill that ultimately failed this spring called for the proposed southeast district to set aside $2.5 million initially towards legacy costs. Similarly, the parish school system and the state have reached an agreement that new charter schools in north Baton Rouge should assume legacy costs, and they plan to hire a third party to determine how much.

Controlling insurance costs

Even without new charter schools, vouchers or breakaway districts, the East Baton Rouge Parish school system will likely have to make changes in its historically generous medical coverage to keep pace with the cost of medical care, which continues to grow faster than the rate of inflation.

Last summer the School Board, seeking to fill a looming budget hole, nearly agreed to push 2,700 Medicare-eligible retirees like Gauthier into a Medicare supplemental insurance exchange, a move that would have saved the district an estimated $8.7 million a year.

The proposal was complicated, and for some retirees might actually have been an improvement on their current coverage.

In the face of unexpectedly strong opposition, the School Board opted instead to raise monthly premiums for all employees, an average of 18 percent for active employees and about 32 percent for retirees. It was a break from past practice, in which the school system has typically sought more even cost sharing between active and retired employees.

Some retirees got what they wanted — to continue on the school system’s supplemental health insurance, to “stay in the group” as many of the retirees described it, and not be placed into the uncertain and changing world of Medicare.

Their victory may be short-lived.

School Board President Barbara Freiberg said Superintendent Taylor is asking his finance staff to bring him a range of options to control employee medical costs. She said she expects a renewed debate on the topic this spring.

Dick Raether, a former school system finance director and the husband of a retired schoolteacher, was among the most vocal opponents of the proposal to cancel the school system’s supplemental coverage for Medicare-eligible retirees.

The proposal last summer was to give Medicare-eligible retirees $3,280 a year for comparable secondary insurance plans that use Medicare. School officials, however, were vague about the extent to which the school system would increase this $3,280 annual payout to keep up with inflation.

Raether said he doubted whether the $3,280 would really buy comparable coverage now. For instance, federal support of the generous Medicare Advantage plans will decrease over time thanks to President Obama’s 2010 health care law. And while that law also gradually increases financial support for Medicare Part D, the program will for years have a well known “donut hole,” a coverage gap in which elderly individuals have to pay for the entire cost of their prescription drugs until their expenses reach a high enough threshold.

Arthur Lamm, president of the Baton Rouge Federation of Teachers and a former school principal in Baton Rouge, was far less alarmed by the school system proposal. He said much of the concern was based on misinformation.

He said Medicare is a good program with much to offer retirees and dismissed concerns about the future.

“We need to worry about next year, next year,” he said.

Worrying changes

Ellis Gauthier was simply “Mr. Gauthier” during the 33 years he taught at Woodlawn High School in Baton Rouge. He started as an industrial arts teacher in the early 1960s, became a guidance counselor and was an assistant principal at the school when he retired in 1994.

Gauthier now volunteers a lot and travels overseas, but he has to be careful, given his diabetes and a family history of heart disease, so he sees a cardiologist annually. His dad, a plant worker with Ethyl Corp., died at 53 of a heart attack.

Gauthier’s wife, JoAnn, died six years ago after two decades of prolonged illness. She worked for years at Broadmoor High School before retiring in 1993 — an alumni website for the school calls her the “world’s greatest social studies teacher.”

Her final years were traumatic, and also very expensive, Gauthier said. He noted her medical expenses were largely covered by school insurance.

“If I had to put out that kind of money, I would be still be paying off those debts,” he said. Knowing how expensive illness can be makes him worry when he sees proposals like the Medicare shift floated last summer.

“You work all these years, you paid into these things, and they’re going to just drop us?” Gauthier asked incredulously.

Olga Gaines, who retired 22 years ago, is in a similar situation as Gauthier. She remains active, volunteers a lot and is relatively healthy. Yet, like Gauthier, she has diabetes and says she scrupulously follows her doctor’s directives, including getting whatever prescription medication he suggests, drugs that get more and more expensive.

Gaines, like many other teachers, says she received generous benefits in exchange for lower pay during her 36 years in the classroom.

“I’ve been very blessed,” she said. “I can go to the doctor whenever I need to, and can get drugs when I need to.”

She said she felt betrayed when the Medicare shift was proposed.

“I feel that I’ve done what I’m supposed to do, and I have given what I am supposed to have given, and I feel that I should be, not necessarily rewarded … I did what I promised to do, so you do what you promised to do,” Gaines said.

Promises

Raether, the former finance director, said he was an eyewitness to an explicit promise made in the early 1970s.

“The commitment to the employees was that when you retire from us you are going to have the same insurance as the regular, active employees until you die,” Raether said.

Raether said he “looked and looked for that rascal” in School Board minutes from that time period and couldn’t find it, but would swear to it under oath.

Raether considers the Medicare shift proposal a betrayal of that promise. He also considers the ultimate decision, to have retirees pay higher premiums than active employees, a betrayal as well, albeit a smaller one.

Taylor, however, disagreed that such a promise, if made, should hold sway any more.

During a July 19 debate on his Medicare shift proposal, Taylor said times have changed and the board must focus on educating children.

“We are holding out a false promise when we tell people we can continue to do what we’ve been doing when there are not the resources there to do it,” Taylor said.

The seeds of today’s problem were planted in Raether’s tenure.

He said the school system’s generous medical benefits were developed as a way to compete for teachers with parishes like Ascension. That parish paid its teacher a higher salary at the time, thanks to having relatively few students but a large industrial tax base, Raether said.

What Ascension couldn’t do was to offer as high a quality health insurance, and East Baton Rouge tried to use that to its advantage, Raether said.

“We could outdo anyone anywhere with health insurance,” he said. “We had a Cadillac program.”

The school system never set aside funds sufficient to pay for the future costs of that “Cadillac program.”

Raether said the school system did seriously debate a proposal that would have done just that. The idea was to ask voters to pay for a property tax that would have built up a trust fund to cover future retiree medical care.

That proposal, hatched in the early 1980s, was to seek the property tax at the same time the school system sought a millage to fund the new I CARE drug-abuse prevention program, which still exists today.

School leaders at the time, Raether said, postponed asking for an employee benefits millage and went just with the I CARE millage, which was approved by voters and is still collected today.

“They said, ‘We’ll talk about it another time,’ ” Raether recalled. “Well, another time never came.”