Memorandum DRAFT
City of Lawrence
Human Resources
|
TO: |
David L. Corliss, City Manager |
|
FROM: |
Lori Carnahan, Human Resources Manager Michelle Spreer, Benefits Specialist |
|
CC: |
Diane Stoddard, Assistant City Manager Casey Toomey, Budget Manager Ed Mullins, Director of Finance |
|
Date: |
May 30, 2014 |
|
RE: |
Retiree Healthcare/OPEB |
Background
According to Kansas law, statute KSA 12-5040, as a local government entity, the City of Lawrence must make coverage under our group healthcare plan available to retirees (up to Medicare eligibility) and their dependents. The statute also states that coverage shall be available for only those retirees that were employed by the City for not less than 10 years.
Furthermore, the statute provides that each retired employee who elects coverage can be required to contribute (premiums) to the group health plan, including administrative costs, not to exceed 125% of the premium cost for other similarly situated employees (active employees).
The City offers coverage under its healthcare plan to retirees and those that apply for Long Term Disability benefits through KPERS. The premium structure for retirees/disability contains a 20% subsidy for individual and family coverage tiers. The retiree + spouse and retiree + child tiers are not subsidized by the City. The City also does not require the minimum 10 years of employment.
In 2004, the Governmental
Accounting Standards Board (GASB) released Statement 45
(GASB 45) which issued a new set of accounting rules concerning health and
other non-pension benefits for retired public employees. These benefits, also
referred to as “other post-employment benefits” (OPEB), include non-pension
benefits such as life insurance, dental coverage and long-term care, as well as
retiree health benefits. The OPEB liability as defined by GASB 45 includes
explicit and implicit costs.
The explicit costs of the city’s OPEB plan are that portion of the premiums charged by the insurance company or in the case of self-funded plans, the premium equivalent, which are not covered by the payments made by the retirees. Currently, the City covers 20% of the individual and family premiums until the retiree is eligible for Medicare for each retiree receiving KPERS/KPF benefits and his/her covered dependents.
The additional implicit cost is determined based on the combined demographics of the active and retired populations. The rates actually charged to the retirees will be lower than the rates that would be charged if the retiree group was rated separately, due to the higher average age resulting in higher medical costs. To measure this implicit cost, GASB 45 requires that OPEB liabilities be determined based on age-adjusted premium or claim amounts.
The actuary study by L & E Actuaries dated February 2014 projects that the annual cost of retiree health care will increase from $909,000 in 2014 to $1.09 million in 2015 and $1.9 million in 2022. Retiree contributions will offset a portion of these costs and are estimated to be $567,000 in 2014 and $663,000 in 2015. The estimated retiree contribution for 2022 is $1.2 million.
As Ed Mullins, Finance Director, wrote in his April 25, 2014 memo, ignoring the OPEB liability will result in future budget constraints as the pay as you go cost of retiree health care continues to increase. The city’s bond rating may be negatively impacted as the liability continues to grow and the city has no plan to address it. A rating down grade will result in higher interest payments on the city’s debt.
Recommended Strategies to Address the OPEB Liability
Strategies identified and recommended by staff for implementation should there be a desire to reduce the City’s OPEB liability includes:
· increasing the retiree’s contribution towards their healthcare cost to eliminate the explicit subsidy with options for reducing most of the implicit subsidy,
· implement the minimum 10 years of service to be eligible for retiree healthcare coverage to reduce the implicit subsidy, and
· as a way for employees to save for future retirement healthcare costs, replace the current Health Reimbursement Account (HRA) with a Health Savings Account (HSA) as deductibles and out of pocket maximums increase.
Retiree Contributions
Current retirees would be allowed to maintain the current contribution level of 80% for individual and family coverage and 100% for retiree+spouse and retiree+children coverage. New retirees beginning on or after January 1, 2015 would be subject to an increased contribution level using a phased in implementation schedule. It is proposed that the newly retired employee’s contribution schedule be increased by 5% annually until it reaches 100% in 2018. Further increases could be phased in until it reaches 125% of the established premium in 2023. This implementation schedule would mean that retiree contributions to their health care would increase 4-6% in addition to annual increases for medical inflation.
Below is a chart illustrating what the various contribution levels would be if implementation begins in 2015. By removing the 20% contribution subsidy, the city will eventually eliminate the OPEB explicit liability. If the plan would move retiree rates to 125% of the blended premium, we would move as close as allowable by statue to eliminating the implicit subsidy as well.
|
Retiree Coverage Monthly Charge |
2014 Established 80/100/100/80% |
2015 Actual Cost for Retirees Projected |
2015 80/100/100/80% of Blended Premium Projected |
2015 85/100/100/85% of Blended Premium Projected |
2015 100% of Blended Premium Projected |
2015 125% of Blended Premium Projected |
|
|
|
|
Current Retirees |
New Retirees as of 1/1/2015 |
Removes Explicit subsidy |
Removes most of implicit subsidy |
|
Retiree |
$ 427 |
$ 753 |
$ 479 |
$ 509 |
$ 598 |
$ 748 |
|
Retiree + Spouse |
$ 1,151 |
$ 1,614 |
$ 1,282 |
$ 1,282 |
$ 1,282 |
$ 1,602 |
|
Retiree + Children |
$ 1,045 |
$ 1,465 |
$ 1,163 |
$ 1,163 |
$ 1,163 |
$ 1,454 |
|
Family |
$ 1,316 |
$ 2,326 |
$ 1,477 |
$ 1,570 |
$ 1,847 |
$ 2,309 |
|
Percent Increase from 2014 |
|
|
|
|
|
|
|
Retiree |
|
76% |
12% |
19% |
40% |
75% |
|
Retiree + Spouse |
|
40% |
11% |
11% |
11% |
39% |
|
Retiree + Children |
|
40% |
11% |
11% |
11% |
39% |
|
Family |
|
77% |
12% |
19% |
40% |
75% |
Minimum Ten Years of Service for Eligibility
Currently the City does not require the 10 years of service minimum for eligibility to the retiree healthcare program. There would be an impact on OPEB liability which would be determined with future valuations. Currently there are no employees who are KPERS/KP&F retirees, elected retiree healthcare and had less than ten years of service. Historically there has only been a handful that otherwise qualified but had less than ten years of service. It is a requirement that will reduce the OPEB Liability but have very little impact on employee retirement choices.
Health Savings Account
Another way the city can address the growing cost of retiree healthcare for future retirees is by offering a Health Savings Account (HSA). These consumer driven plans offer a way for employees to set aside pre-tax dollars, while actively employed, into a savings account. As long as the money is used for healthcare related expenses (including premiums a retiree would have to pay), the individual will never pay taxes on that money. A retiree could also use this account to pay for expenses once covered by Medicare.
There are minimum deductibles for HSA plans that are set by the IRS each year. Currently those are $1,250 for individual plans and $2,500 for family plans compared to our present deductibles of $1,000 for individual and $2,000 for family plans. There are also limits on how much an employee/employer can contribute to an HSA. For 2014 those maximums are $3,300 for an individual and $6,550 for a family. An employee that is 55 or older can contribute an additional $1,000.
An HSA, if implemented, would replace our current Health Reimbursement Account (HRA). It allows the city contributions currently used with the HRA but also allows employee contributions and portability if one leaves City employment. Staff will monitor and evaluate this option for future healthcare plan recommendations as the plan approaches the HSA required minimum deductible levels.
This option has the potential to reduce the implicit OPEB and it will provide a mechanism for employees to save for future healthcare expenses.
Affordable Care Act
With Affordable Care Act now signed into law, state exchanges have been established. The exchanges are set up to facilitate the purchase of health insurance in each state. Individuals can pick from a set of government regulated and standardized health care plans. Purchasing from the exchange has not been an option for retirees in the past. These plans may be less expensive to retirees than the City’s healthcare plan. Retirees selecting this option could reduce future implicit and explicit OPEB liabilities.
Peer City Comparison Data
A brief survey of some of our market cities along with Douglas County was conducted in May 2014. Of the five cities that responded, two currently offer a premium subsidy for retirees that range between 40%-87% depending on coverage selected. Three do not subsidize and charge 100-102% of the premium. No one responded that they charge the state allowable 125%. The respondents were the Cities of Lenexa, Manhattan, Olathe, Overland Park and Topeka. Additionally, Douglas County reported a 65% subsidy for retiree health coverage.
The retiree’s monthly contribution for the plan most similar to our plan ranges from $67 to $655 for individual and $875-1978 for family coverage.
|
|
Requested Action
Forward to Health Care Committee for discussion and if appropriate, place on future City Commission agenda.