Unfunded Retiree Public Sector Health Benefits
State and local governments typically pay most of the retiree health-care obligations with insurance premiums for employees who retire before they are eligible for Medicare at age 65. This can be a long commitment, as many workers, i.e. safety officers (police and firefighters) who retire as early as 50. Many governments also pay a percentage if not 100% of Medicare premiums once retired workers turn 65. Generally the majority of states do not set aside monies for future funding of these healthcare obligations unlike pensions. Governments usually finance health-care spending with current revenues from property taxes and other sources. This is problematic, given the fact as more and more local government employees retire, less revenue is available for current government service operations and essential services.
Public-pension funds have garnered attention in recent years for being underfunded, but a more precarious situation has received much less notice: health-care obligations for public retirees. Unlike pension plans, governments are not required to contribute to separate trusts to support “future” health-care promises. Only eight out of the 30 largest U.S. cities have funded more than 5% of their retiree health-care obligations, according to a study released last March by the Pew Charitable Trust. As a result, only 11 states have funded more than 10% of retiree health-care liabilities. Total U.S. unfunded health-care liabilities exceeded $530 billion in 2009, the Government Accountability Office estimated, but the current number may be closer to $1 trillion, according to a 2014 comprehensive study released by the National Bureau of Economic Research. (1)
For years, state and local governments would promise more health-care benefits, through collective bargaining with the employees unions without much accountability. To provide more transparency, the Government Accounting Standards Board since 2006 has required governments to disclose retiree health-care benefits in their financial reports. In 2014 the GASB proposed a major revisions to the disclosure requirements. The new rule would require state and local governments to include these liabilities on their balance sheets, rather than in financial footnotes.
In reference to City of Glendale’s “Other Post Employment Benefits” (OPEB), per its 2013-2014 Annual Report, the City said, that operational (day-to-day staffing and maintenance & operation), long-term employment obligations (PERS and OPEB), organizational infrastructure (Internal Service Funds), and capital replacement – can largely be met by even modest and sustained growth in our revenues. Meeting these obligations, however, requires an average 3.2% annual revenue growth rate in the General Fund; while the expected average annual rate is 2.3%. It also said, “The past several years have reinforced an important lesson: the fulfillment of expectations is an elusive and unpredictable goal that dictates reasonable restraint in our future planning”.
- This sounds like one of Ochoa’s Op-eds or his web page Rumors vs. Facts. One of the phrases Ochoa likes to use is, “To paraphrase Daniel Patrick Moynihan, everyone is entitled to their own opinion; they’re just not entitled to their own facts”. Was Ochoa’s comments about suppose to be opinion, facts, or wishful thinking. Irrespective of the preceding, this clearly appears to be a disclaimer if the rosy projection does not materialize.
In Glendale’s Comprehensive Annual Finance Report (CAFR) ending June 30, 2014, the City said ” Glendale must continue to focus on fiscal discipline as the City is challenged to think of new ways to restructure and reshape the organization and consider the policy intersection of service provision, cost of doing business, revenue generation and quality of life”. This is RHETORIC at its worst, the art of effective or persuasive writing, the use of figures of speech and other compositional techniques, often regarded as lacking in sincerity or meaningful content. What is clear, the City is facing a mounting uncontrollable financial debt obligation, that will continue to get worst and substantially reduce city services, every year as more and more city workers retire, by failing to properly address the problem now. Presently, the city has a $214 million OPEB obligation. The City’s retiree health benefits contribution is currently based on a “pay-as-you-go” funding method, that is, benefits are payable when due.
Scott Ochoa, City Manager, per the 2014 CAFR, suggests that it’s “OPEB obligations” will be reduced immediately, or can be reduced incrementally over the next several years. This is made possible with the implementation of the “Affordable Care Act” as the retirees will now have access to more affordable medical plans offered by the City’s medical insurance broker or the State’s exchange program. The city’s unfunded pensions alone totaled $411.9 million.
The City’s net OPEB obligation at the end of the fiscal year was as follows:
Fiscal Year Ended Net OPEB Obligation Unfunded Actuarial
End of the Fiscal Year Accrued Liability
6/30/2009 $103,947,000
6/30/2011 $191,063,000
6/30/2012 $ 38,242,000
6/30/2013 57,997,000 $214,014,000
6/30/2014 75,922,000
The City’s Net OPEB Obligation increased from $38.2 million in 2012 to $75.9 million in 2014, a 98.7% increase. The City’s Unfunded OPEB Actuarial Accrued Liability increased from $103.9 million in 2009 to $214.0 million in 2013, a 105.9% increase.
This flies in the face of reality! Many Americans with health insurance bought under the Affordable Care Act could face substantial price increases in 2015 — in some cases as much as 20 percent — unless they switch plans. The Washington Post on November 17, 2014 reported that Obamacare’s premiums are going up — at the same rate as everyone else’s. “Cost of Coverage Under Affordable Care Act to Increase in 2015.” The consensus is that premiums will be rising across the country for the typical marketplace customer. (2)
Starting the New Year, Gov. Jerry Brown says he wants “state workers” to begin contributing toward their retiree health benefits and that he will take up the issue at the bargaining table beginning this year. (W)ithout action, the state’s unfunded liability will grow to $100 billion by 2020 21 and $300 billion by 2047 48 For the most part, the state sets nothing aside for those anticipated costs. The pay-as-you-go method is the most expensive way to handle the obligation, say experts and state Treasurer John Chiang. Retiree health benefits are “one of the fastest growing areas of the state budget,” according to a summary of the governor’s budget plan. (3)
- Given the fact that CalPers manages the pension funds for the majority of local government, including Glendale, it was disappointing that the Governor did not include all local government in his plan whom are contracted with CalPERS. Is each city expected to fend on their own with their MOU’s with each union?
A federal health insurance law takes effect in 2018 that will levy a tax on the most generous medical insurance plans, leaving “the state – and local government employees – vulnerable to the pending Cadillac Tax,” Governor Brown, said that The state would begin offering a high-deductible health plan and health savings accounts, the budget summary states, and lengthen how long employees must work to qualify for lifetime benefits. The administration is proposing changing the structure of health benefits, establishing a health savings account and extending how long state workers must serve to receive subsidized retiree medical coverage. (4)
- Why hasn’t Glendale’s 2013-2014 Annual Report or its CAFR’s Comprehensive Annual Financial Report already addressed this pending financial obligation, under the Cadillac Tax set to begin in 2018, as Governor Brown has already done on behalf of state employees ?
Approximately a week later, it was reported that Gov. Brown wants state workers to begin paying half the cost of their future retiree health care — a big change for workers making no payments for coverage that can pay 100 percent of the premium for a retiree and 90 percent for their dependents. The state pays more of the health care premium for retirees than for active workers (80 to 85 percent workers, 80 percent dependents). The governor also wants state workers to be given the option of a lower-cost health insurance plan with higher deductibles. The state would contribute to a tax-deferred savings account to help cover out-of-pocket costs not covered by the plan. If no action is taken, the debt by 2047-48 grows to $300 billion. Under his plan, the debt by 2044-45 drops to zero. (5)
Thus far, the City of Glendale’s solution to the problem per its 2013-2014 annual report was as follows: “During this year’s budget study sessions, a five- year General Fund forecast was presented to the City Council. Many variables were taken into consideration as it is difficult to predict economic booms or bursts that will impact the forecast”. “Meeting these obligations, however, requires an average 3.2% annual revenue growth rate in the General Fund; while the expected average annual rate is 2.3%”. However, nothing was said about the GCBG pending lawsuit against the City that may preclude the City from transferring $10 million annually from the GWP revenues to the General fund.
The city’s annual report further said, “Glendale must continue to focus on fiscal discipline and is challenged to think of new ways to restructure and reshape the organization and consider the policy intersection of service provision, cost of doing business, revenue generation, and quality of life”. That about sums it up, the city really does not have any real concrete specifics how it plans to address their pending financial obligation problem, other than accounting gimmicks, i.e. in the City’s 2014 CAFR’s it said, “Historically, the City subsidized the retirees’ medical premiums by including them with the active employees’ medical plans. By including the retirees with the active employees, an implied subsidy is created where the risk is spread over an entire population versus a specific population, and thus creates unfunded OPEB obligations. According to the actuarial report, if the City eliminates the blending of rates, the entire OPEB obligations will be reduced immediately, or can be reduced incrementally over the next several years”……………. Only time will tell whether this approach has any merit.
What is evident is that the City is not making any attempt to ask City employees to start contributing towards their future retiree health benefits especially when the City is obligated to pay 100% of their health benefits in post retirement vs. 80% to 90% when active. Nor has the City attempted to address the Cadillac tax, that would penalize employers by up to 40%. The Cadillac Tax is an excise tax scheduled to take effect in 2018 to reduce health care usage and costs by encouraging employers to offer plans that are cost-effective and engage employees in sharing in the cost of care.
Source Reference:
(1) http://www.wsj.com/articles/robert-c-pozen-the-other-debt-bomb-in-public-employee-benefits-1421367030
(2) http://www.washingtonpost.com/blogs/monkey-cage/wp/2014/11/17/obamacares-premiums-are-going-up-at-the-same-rate-as-everyone-elses/
(3) file:///C:/Users/kenneth/Documents/Vanguardian/KL%20Contributions%20Vanguard%20News%20Service/Pending/Jerry%20Brown%20wants%20state%20workers%20to%20pay%20ahead%20for%20retiree%20benefits%20_%20The%20Sacramento%20Bee.htm
(4) http://www.sacbee.com/news/politics-government/the-state-worker/article5718192.html http://www.sacbee.com/news/politics-government/the-state-worker/article5718192.html
(5) http://calpensions.com/2015/01/12/brown-plan-to-eliminate-retiree-health-care-debt/
