When a future benefit, such as a retiree medical insurance, is promised, an employer has two choices. Plan for the future obligation by putting money away in advance or to wait for the obligations to come due and operate on a pay-as-you-go basis. Prior to 1994 the Municipality of Anchorage chose to operate on a pay-as-you-go basis for retiree medical insurance. This meant that as each year passed, the Municipality was incurring an ever increasing future liability to provide health insurance without setting aside the necessary money to pay that liability.
The Municipality was concerned about the unfunded medical liability for two reasons. First, as more and more employees retire, the obligation to pay for retiree medical insurance changes from being a future obligation to a present obligation which the Municipality would be required to pay on a monthly basis. The large amount of unfunded liability would cut severely into the Municipality’s budget and would inevitably require the wholesale layoff of Municipal employees in order to pay for police and fire retiree medical. In all probability, the Municipality would be required to do one of two things in order to continue providing even basic Municipal services: (1) Go to the voters to approve a charter amendment altering or eliminating the “tax cap” enacted in the mid-1980’s; or (2) Try to declare bankruptcy to reduce the retiree medical “debt”.
The second reason for the Municipality’s concern was that within the next two to three years, the Government Accounting Standards Board (GASB) was almost certain to require all governmental bodies in the country to begin showing unfunded liabilities as debts on their balance sheets. If the Municipality were required to post the retiree medical unfunded liability as a debt on its balance sheet, the Municipality’s bond rating would plummet, the interest the Municipality would have to pay to borrow money would skyrocket, and the financial stability of the Municipality would be lessened.
To advance beyond this problem the parties, in accordance with the Letter of Agreement, determined that the best interest of all involved required the removal of the Police and Fire Retiree medical coverage from collective bargaining. This understanding is memorialized in AM 1299-94 which provides in part as follows: "With the passages of AO 94-95 and 94-222(S-1) the Assembly will have addressed the major component of the Police and Fire Retiree medical issue.
Subsequently the Assembly adopted AO 94-222(S-1) is codified at AMC 3.87, which establishes the Police and Fire Retiree medical funding program to provide those retirees with a Health Reimbursement Arrangement (HRA) for medical benefits. The ordinances are intended to create and fund the Police and Fire Retiree medical benefits thorough an HRA to cover the eligible medical expenses of the retiree's spouses, and eligible dependents. It is important to note that AMC 3.87 benefits are subject to Article 12, Section 7 of the Alaska State Constitution which provides that retiree benefits may not be diminished.