The problem has been building since at least 1983. That year city workers gave up wage increases in exchange for lifetime health coverage, for themselves, their spouses and dependent children. Back then, the costs were no big deal.
Not so today.
According to Duluth Mayor Don Ness, retiree health care eats up a big chunk of a tight city budget.
"Our current city retiree medical claims for 2009 will be up to over $10 million out of an $80 million general fund budget," Ness said. "When you consider that in 1998 it was only $2.3 million, you see the percentage of growth, and it's squeezing out other city services.
Every year there's a bigger pool of retirees, and higher costs for prescriptions and medical care.
We have fifty-cent co-pays on name brand prescription drugs. It's no longer realistic in this day and age, and is a great burden on the taxpayers of Duluth.Duluth Mayor Don Ness
"Our current projection is that it will be rising about $1 million a year, well into the future. And that's not sustainable," Ness said.
Duluth does stand out in Minnesota for it's obligation to retirees, according to Lisa Kushner. Kushner is with the League of Minnesota Cities and she said roughly half of Minnesota cities don't make any retiree contribution at all. Others have capped or phased out retiree benefits.
"I haven't heard from a lot of cities that retiree health care has been a huge problem for them in the same way that I've heard that for in the city of Duluth," Kushner said.
And, Duluth's retiree health plans are a nightmare to administer. The city manages about 100 different plans for some 1,500 retirees and their dependents. That's, on average, a different plan for every 15 people.
Mayor Ness wants to move all 1,500 to the same plan provided to current employees -- a less expensive plan with higher co-pays.
But it's not that easy. Since the 1980s, Duluth has shelled out for the same coverage levels that were in effect at the time someone retires.
"That's why we have fifty-cent co-pays on name brand prescription drugs," Ness said. "It's no longer realistic in this day and age, and is a great burden on the taxpayers of Duluth, but because of that decision made 25 years ago it's created this burden."
But with proposals floating around to change the benefits last year, a handful of retirees struck back.
Don Bye is the attorney for three who filed suit.
"The purpose of the lawsuit is to prevent the city from making changes on its own in the retiree health insurance benefit," he said.
Bye has won the first round in this. A temporary restraining order keeps the city from making any changes, until the lawsuit is settled.
The city would like to move all the retirees to the less expensive plan current employees now have, but Bye maintains that they can't do it, unless they get every individual former employee to agree to it.
Mayor Ness said that's up to the courts to decide. But he does think the final solution will be with the courts.
But Don Bye said the lawsuit could pave the way to a solution. "The court is telling us to take a look at ways in which we might, by agreement, put something together with the understanding that it would apply more broadly than just to the three named plaintiffs," Bye said.
He said the court is interested in applying a settlement to the entire pool of retirees. To that end, the court has scheduled hearing in March to consider expanding the case to a class action suit. Meanwhile, Bye said, the resolution to the lawsuit may come from discussions that occur outside the courtroom.
"We are most interested in pursuing what the court has indicated, which is attempting to work something out between the parties. It would seem to be of equal interest to both sides," Bye said.
If the parties fail to agree to a new plan by summer, the case is scheduled in court in late June.