Transcript SF Bay Area Rapid Transit (BART) Retiree Medical Funding

California State Association of Counties
SF Bay Area Rapid Transit District
2005 Negotiations on Retiree Medical Insurance
Darrell Murray
January 25, 2006
Manager, Labor Relations Department
1
BART’S MOTIVATION
• Employee and retiree expectations based on
contract language (benefits not vested)
• Organizational commitment to retiree
medical benefits (recruitment)
• Rising absolute cost of medical insurance
• Accrued unfunded liability
• GASB 43/45 and bond rating
• Union power
2
NORMAL COST and UNFUNDED LIABILITY
SIMPLIFIED
• Normal Cost: What you would pay from this day
forward forever if you promised the benefit today for a
workforce that began to retire 30 years from now – and if
all your economic assumptions were right.
• Unfunded Liability: The additional amount you pay
because you let the workforce begin receiving the benefit
right away, without setting aside money in advance to pay
for it.
3
KEY VARIABLES AFFECTING
ACTUARIAL ESTIMATES OF BART RETIREE INSURANCE
LIABILITY AND FUNDING REQUIREMENTS
• Rate of medical insurance inflation
• Workforce characteristics and dynamics (e.g. age
distribution, retirement behavior, mortality rates, size, etc.)
• Rate of payroll growth
• Portion of insurance premium paid by employees
• Insurance plan design/portion of costs paid directly by
employees
4
KEY VARIABLES AFFECTING
ACTUARIAL ESTIMATES OF BART RETIREE INSURANCE
LIABILITY AND FUNDING REQUIREMENTS
• Rate of return on investment (for pre-funding options)
• Length of amortization period for unfunded liability (prefunding)
• Open v. closed 30 amortization (pre-funding)
• Differences in actuarial judgment and choices
NOTE: The range of permissible actuarial assumptions is generally regulated
by the GASB Statements. This protects investors (e.g. purchasers of bonds).
5
ESTIMATED SIZE OF BART’S PROBLEM
(Normal Cost + Amortizing Unfunded Liability Over 30 Years)
01/01/00 Valuation
% of Base Pay
Assumed R.O.R
4.57%
8.25%
7.58%
5.5%
Estimated UL: $68M to 104M
Assumed 10 years “excess medical
inflation”
6/30/04 Valuation
% of Base Pay
Assumed R.O.R.
12.13%
7.75%
13.64%
6.75%
23.47%
3.00%
Estimated UL: $250M to $380M
6
Estimated BART Pay As You Go
Compared With Pre-Funding June 30, 2003
40%
Would equal approximately ¼ of Operating Budget
X
35%
Percentage of Payroll
30%
25%
20%
15%
ARC line assumes 6.75% R.O.R.
10%
5%
0%
2004
2006
2008
2010
2012
2014
2016
2018
Year
Annual Benefit Payments
Annual Required Contribution
A.K.A. PAYGO v. ARC
7
Bargaining Challenge No. 1: CREDIBILITY
• Important in dealing with both labor and management decision-makers
• Complicated by:
– Complexity of subject matter
– volatility of professional estimates
• Aided by:
–
–
–
–
–
–
Annual actuarial studies
Complete transparency
Adherence to PERS assumptions except where clearly justified otherwise
Prolonged educational efforts
Acknowledging that managers and non-managers face the same risks
Agreeing to second opinion actuarial studies in negotiations
8
BART Pre-Negotiation Strategies and Tactics
• Gather data and analyze
• Educate, educate, educate
• Adopt Retiree Health Benefit Trust (fund management, not
benefit management)
• Amend investment policy
• Develop/share “discussion” options (including “tough
love” options)
• Secured availability of actuaries for negotiations
9
BART Strategies and Tactics During Negotiations
• Define issue as non-partisan (math is math)
• Appeal to employee self interest
• Aggressive opening proposal
– Maximizes creative options
– Creates downside risk for union
• Tough opening proposal on active and retiree medical - but
not enough to solve the problem
• Flexibility on possible solutions
• A “real” solution (no smoke & mirrors)
• Coordinated solution with all 5 unions and non-represented
employees
10
The BART Retiree Insurance “Solution”
• Defined benefit plan – not vested
• 30 year closed amortization schedule for UL
• Ramp up: Pay as you go + a gradually increasing annual
payment into a fund management trust until 2013
• District pays full ARC beginning in 2013
• Employee contribution increased to $75/mo + 3%/yr.
beginning 1/1/06
• 1.627% MPPP contribution “retained” by District and
District pays a like amount to Trust beginning 2013 to
compensate for “ramp up” cost
11
BART Retiree Insurance “Solution” (continued)
• Future PERS “superfunding” to flow to trust to retire
unfunded liability
• Key Trust amendments:
– No expenditures from trust until 2013
– Assets usable only for retiree insurance benefits and Trust
administrative costs
• Trust Review Committee to ensure transparency
• Deal is renegotiable, within practical limits (e.g. GASB)
– Wage pressures from newer employees/market competition
– Adjust to economic realities
• Possible substitute plan for new hires
12
Be Careful Out There
• Study the GASB implementation guide
• Effect on discount rate assumption under GASB
• Tax and governance implications of co-mingling
employer and employee money in a trust
• If in CalPERS medical, carefully weigh all
benefits of staying in and getting out
• Guard against raids on retiree insurance funds
• Beware of over-extending the organization
• BEWARE VESTING
13
G
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