It was just before Christmas 1983 when Duluth's risk management officer, Bob Healey, told city councilors that a policy allowing retirees to bank unused sick leave to cover medical costs -- a common practice then -- had become an unfunded liability to the city.

In other words, the city could end up owing millions more than it had. New government accounting rules would require the city to put the liability on its books, drastically affecting how it could borrow money.

Mayor John Fedo's solution, which came out of negotiations with all of the city's collective bargaining units, was to make benefits free for nearly all retirees, dozens of whom crowded council chambers. The council discussed the matter at four meetings in December 1983 and January 1984.

That solution has mushroomed into a $300 million-plus unfunded liability that threatens to crush city finances for years to come.

"Does this sound like deja vu all over again? Yeah, it does," said local contractor Arno Kahn, who served on the City Council at the time.

In an effort to understand and explain the events leading to the city's financial crisis, the News Tribune spoke with key players and reviewed documents from late 1983 and early 1984. The catalyst was a contract change with city labor unions providing retirees and their spouses with free lifetime health care.

The goal was eliminating a sick leave bank for retirees that would have cost the city an estimated $5 million over five years.

"It was a lot of money then, but a minuscule amount compared to what it is now," said Duluth Human Rights officer Meg Bye, an At Large city councilor when the decision was made.

"Councilor Bye felt that the city is trading in a given, known quantity for an unknown quantity and most likely that costs will be higher in the future," according to the Dec. 27, 1983, council minutes.

Bye also warned that payment would be difficult. She voted for it, though, because she said she always supported negotiated contracts.

In an interview last week, Fedo said the liability was so negligible back then -- because health costs were so low -- that it was not an issue. Everyone was doing it because coverage for a single person cost about $100 a month.

WHAT HAPPENED

The City Council at that time was led by President Michael Paymar, now a state representative from St. Paul. Rep. Tom Huntley, DFL-Duluth, also was a councilor at that time.

Other councilors included Neill Atkins, who served off and on for 17 years; M. George Downs, who recently was co-chairman of the DECC expansion initiative; former assistant city attorney Cynthia Albright; UMD administrator Jim Shearer; Bye and Kahn.

Councilor Kjell Rodne introduced the resolution and would later serve as Fedo's administrative assistant.

Huntley said the city must set aside money for future costs because those benefits accumulate for retirement.

"(Then-Administrative Assistant Richard) Ives related that the city will budget annually for these costs," according to the Jan. 23, 1984, minutes.

Ives and Healey also told councilors that health care would continue to be paid from the sick bank for 2 1/2 years before it was budgeted by the city.

Both Huntley and Shearer expressed concerns about what the "real expenses" would be to the city five years down the line or further.

Huntley was satisfied with administration assurances that costs for retiree health care would be budgeted that fall. Only Shearer and Albright stood against the plan.

The measure was approved 7-2.

BLAME GAME

"Apparently, we all forgot to look for it in the budget (2 1/2 years later)," Shearer said in an interview last week.

In a recent interview, Bye said councilors were "flat-out lied to" by the Fedo administration.

A few also blamed the strong influence of labor unions in Duluth.

"Once you give a benefit in a contract, it's hard to get it back out," Shearer said.

Atkins had few recollections of the vote, but he remembered clearly the bleak atmosphere in the city.

"People forget what was going on in Duluth and the economy in 1983," Atkins said. "Interest rates of 18 to 20 percent and inflation at 12 to 13 percent was killing us. We were losing businesses and federal aid right and left.

"Someone had purchased a billboard on the Interstate asking the last person to leave Duluth to please turn off the lights."

Fedo was a political powerhouse, elected three times. He never raised taxes.

At the same time, Fedo's administration charged employees premiums below what Blue Cross Blue Shield recommended, further burdening the health insurance fund, said Genie Stark, the former city auditor and current finance director.

"It's interesting to note all these quote-unquote historians who have not taken the time to reconstruct all of the issues that the city was facing at the time," Fedo said.

He said the city put an annual contribution away equal to the cost of insurance. He also said he believes the city set aside money for future costs and put the liability on the books.

"My understanding is that we were doing all that," he said. "But that certainly does not belie the whole issue that, as terms and conditions change, why wouldn't you look at changing this system if it was a further burden to the city? That's like saying, 'Gee, should we keep having buggy whips in the budget because it was always there?' "

DOTY STILL TAKES HEAT

In 2007, once again, new national accounting requirements will require Duluth's unfunded health-care liability to go on the city's financial reports.

The City Council-appointed task force concluded in December that city officials, Fedo and former Mayor Gary Doty either ignored or contributed to the liability as it snowballed from about $34.2 million in 1998.

To date, Doty has received the bulk of criticism from vocal retirees, some of whom are longtime Fedo allies, who say he ignored annual double-digit health-care cost increases that nearly coincided with his 12-year reign.

Karl Nollenberger served as administrative assistant to Doty from 1992 to 1998. He ordered the first actuarial study on the problem in 1997. Before leaving his post, he announced that Duluth faced an additional $5.5 million annual debt for 20 years to cover retiree health benefits.

"When I realized what it was all about, I was very, very concerned about the financial implications to the city and voiced those concerns on numerous occasions to the mayor and city councilors," said Nollenberger, now at the Illinois Institute of Technology in Chicago.

"I made it the subject of negotiations at the bargaining table, but got no response from the unions and no support from the mayor or council," Nollenberger said.

Some in City Hall today say Nollenberger also made decisions that contributed to the problem.

Another study, this one in 2002 during Doty's third term, stated that spiraling costs, early retirement and longer lifespans had increased the liability to $178 million.

Doty has said he tried numerous times to resolve the problem through union negotiations.

"No one wanted to set aside a million a year in a budget that was already tight," Atkins said. "And you have to remember that at that time (during Doty's administration), people were skeptical this was really the mounting problem it was going to become."

Since leaving office in 2003, Doty has been mostly silent on the issue, only saying that he is one of many people responsible for a problem that needs resolution today.

MAKING PROGRESS, NOT FRIENDS

Mayor Herb Bergson also has been taken to task for not funding the problem as soon as he took office in 2004. He said last week that he wants to get concessions from employees and retirees before he asks the public to pay.

Bergson also has heard complaints from fiscal watchdogs who accuse him of dawdling to enact the task force's 14 recommendations.

For Bergson's part, he says if Doty had set aside $1 million each year, the problem would not exist.

"I guess when you're busy building pretty projects like aquariums, Northwest (Airlines) maintenance facilities and Omnimax Theaters -- projects that the public sees and appreciates -- you're going to win elections," Bergson said. "This is like the sewers. Nobody wants to spend money on the sewers until one breaks in your neighborhood."