A panel appointed by Mayor Rahm Emanuel to review taxpayer-subsidized health insurance for retired government workers suggested the city could drop coverage to help erase a financial shortfall.

The option is the most severe of many the group offered Monday as part of a list that gives Emanuel potential leverage to force compromise from wary unions during talks about painful fixes of Chicago's severely underfunded employee pension systems.

Whatever course the city chooses, the report states, the numbers "very strongly suggest that continuing the existing financial arrangement is not a viable course of action."

Last year the city spent nearly $109 million on health care for nearly 37,000 retired workers and their spouses and children, according to the report. Enrollment is expected to grow to more than 47,000 in the next 10 years, which would balloon costs to $541 million, it states.

To soften that financial blow, the report offers options to cut current subsidies by $17.5 million to $69 million, most of which would trigger higher costs for most retired workers that range from $16 to $749 a month. The panel also suggested an option for a two-year complete phaseout of city subsidies for most retirees.

Two groups would be exempted: Retired police and firefighters who are not yet eligible for Medicare but have guaranteed coverage during that period under union contracts, and workers who retired before Aug. 23, 1989, a group protected by a settlement in a court case. Many covered under the so-called Korshak case are not eligible for Medicare.

Phasing out coverage for most retired city workers would leave the bulk of retirees dependent on the Affordable Care Act, also known as Obamacare.

The report goes to Emanuel for review. "Any proposal the city chooses will strike the right balance between meeting the needs of the retirees and providing them healthcare choices with protecting the interests of the city's taxpayers," read a statement from the mayor's office.

Unions were not pleased. "City workers who devoted their lives to serving Chicago should not face the loss of health care in retirement," countered Anders Lindall, spokesman for the American Federation of State, County and Municipal Employees Council 31.

Clint Krislov, the attorney representing retired workers in the Korshak case, questioned whether the city cost projections were too high, as they have been in the past. He sought to put the current expenses in perspective, noting that the city plans to spend $6.5 billion this year.

Release of the report came Monday, three days after the commission voted 3-1 to approve it. William Irving, president of the Laborers Local 1001 union and a pension fund representative, voted no.

Irving did not return a call asking for comment, but in a Nov. 2 letter to his fellow board members he said retiree health care benefits should be extended for another 10 years with "reasonable and up-to-date modifications."

Emanuel appointed the commission last summer as required under a 10-year legal settlement agreement in the Korshak case. The report now goes to the mayor, who will weigh the options as the city continues to discuss pension fixes with city unions.

As dictated by the settlement, the city is covering 40 to 55 percent of the health insurance costs for retirees and their families. But the settlement expires at the end of June, leaving the subsidy's future clouded.

That uncertainty gives the mayor an edge during talks with unions about ways to restore the financial health of the city's four pension systems, which have about $20 billion in unfunded liabilities that threaten to eat away at the city's ability to provide adequate services absent a huge tax increase.

The pension tab does not include an $805 million shortage in retiree health care funds, which ends up putting the pension funds that also pay a portion of the insurance costs in an even more precarious financial position.

"Retirees have to realize that there has to be either changes in one or the other or lesser changes in both in order to address the fiscal problems that we have," Ald. Pat O'Connor, 40th, the mayor's City Council floor leader, said last week in anticipation of the commission's report.

Using Korshak as a lever, however, could have its pitfalls. The case, first filed 25 years ago, never settled the issue of whether the city is required to subsidize health care and, if so, at what levels. If the city tries to scale back the benefit after June, retired city workers could return to court to argue that any health care cutback impairs or diminishes their pension benefits in violation of the state constitution.

hdardick@tribune.com

Twitter @ReporterHal