Detroit is facing bankruptcy, and Chicago wants to cut retiree benefit costs. Both are turning to President Barack Obama’s health-care overhaul in what could become a road map for cash-strapped cities.

The municipalities plan to end or limit health coverage for retirees under 65 who don’t yet qualify for Medicare, with the expectation they can get insurance in the exchanges opening Jan. 1 under President Barack Obama’s health-care law.

With U.S. cities facing rising benefit costs and billions of dollars in unfunded liabilities, more municipalities will consider moving retirees off city rolls and into the exchanges, even if they continue to subsidize the coverage, said Neil Bomberg, a program director at the National League of Cities in Washington.

“Cities and towns will be looking at ways to reduce those costs, and the exchanges may provide a very viable mechanism,” Bomberg said in an interview.

Coverage for about 7 million people expected to enroll in health exchanges next year will cost U.S. taxpayers about $26 billion, the Congressional Budget Office says. That figure nearly doubles a year later, and exchange coverage is expected to total $1.1 trillion through 2023. A spokeswoman for the agency, Deborah Kilroe, said in an e-mail that it has no estimate of how many people in exchanges will be retirees.

Attractive Option

Public and private employers began cutting coverage for former workers long before the 2010 passage of the Affordable Care Act, said Joel Ario, a former director of the federal Office of Health Insurance Exchanges. The new marketplaces, which can’t exclude people for pre-existing conditions and have tax subsidies, provide a safety net, he said.

“That will become an option that I think a lot of employers and a lot of cities would look at,” said Ario, now a managing director of Manatt Health Solutions, a Washington consulting firm that advises insurers.

The trend could reach the state level, said Scott Pattison, executive director of the National Association of State Budget Officers in Washington.

In Detroit, reducing benefits for 30,000 employees and retirees is part of Emergency Manager Kevyn Orr’s plan to avoid the largest U.S. municipal bankruptcy by erasing a $386 million deficit and attacking a long-term debt of at least $17 billion.

The city had 19,389 retirees eligible for health, life-insurance and death benefits as of June 30, 2011, according to Orr’s plan. The insurance benefits cost the city $177.4 million in fiscal 2012. Retirees contributed an additional $23.5 million.

Start Saving

Orr wants to give current and former workers health-reimbursement accounts. The city would pay from $100 to $250 a month to help with medical costs or premiums under the Patient Protection and Affordable Care Act, according to a proposal to city unions.

That would cost the city as little as $27.5 million annually, according to Orr’s plan.

Chicago plans to phase out retiree health coverage by the beginning of 2017, according to a May 15 letter from Comptroller Amer Ahmad.

The city projects that health-care spending would increase to $540.7 million in 2023 from $108.8 million in 2012 without changes, according to a Retiree Healthcare Benefits Commission report in January.

Having exchanges means that “eliminating healthcare benefits for early retirees is likely significantly less onerous on those retirees,” according to the report.

Balancing Commitments

“The retirement health-care system as it stands today is fiscally unsustainable, and we have a responsibility to ensure a secure financial path for Chicago taxpayers,” said Kathleen Strand, a spokeswoman for Mayor Rahm Emanuel. “The mayor also wants to ensure our retirees, who served this city honorably, have access to health care.”

Unions oppose simply shifting retirees into exchanges because insurance will cost more and provide worse coverage, said Steven Kreisberg, director of collective bargaining and health-care policy for the 1.6 million-member American Federation of State, County and Municipal Employees in Washington. Besides, he said, health care was part of the government commitment to employees.

“It’s convenient to say, ‘Well, they can go out and get coverage in the health insurance marketplace,’” Kreisberg said. “The moral obligation to the workforce remains.”

Cities may be able to supplement coverage or cost, but “if their primary interest is to simply shed those obligations completely and walk away, that’s where we’ll have conflict,” Kreisberg said.

Left Behind

The exchanges won’t help all retirees, said Dwane Milnes, a former city manager of Stockton, California, which filed for bankruptcy last year.

The city ended subsidized coverage June 30, and Milnes, who is president of the Association of Retired Employees of the City of Stockton, estimated that as many as 300 won’t use exchanges because they won’t qualify for subsidies or won’t be able to afford premiums.

“They need to look at the issue of who is still going to be left uncovered, even with the exchanges, and to find some way of taking care of those folks,” Milnes said.

John Day, 52, a retired Detroit police officer, said being left to an exchange would be a slap in the face. The police and firefighters are not part of the Social Security system, and those hired before 1986 are not part of Medicare. Benefit plans were supposed to compensate.

“Imagine if they said tomorrow your Social Security, your Medicare is going away and you’re going on Obamacare,” Day said in an interview. “How would you feel?”

Model Cities

Still, municipalities might not have much choice. As of fiscal 2009, the 61 most populous U.S. cities had funded only 6 percent of $126.2 billion in retiree health-care liabilities, according a report in January by the Pew Charitable Trusts.

Even though cities probably won’t be able to just offload retiree costs to the federal government, “you can be sure they will be watching Chicago and Detroit, and the implementation of the exchanges,” said Donald Boyd, senior fellow at the Nelson A. Rockefeller Institute of Government in Albany, New York.

“We can expect other cities to pick up on this,” said Richard Nathan, the institute’s former director who is studying the implementation of the health-care law. “I expect it to mushroom.”