Transcript Negotiating HealthCare

Retiree Healthcare and
the GASB 45 Standard
District Field Service Representative
Training
Atlanta, Georgia
November 2006
The HealthCare
Problem
State of HealthCare in the U.S.

Skyrocketing Costs
Since 2004, Costs increase nearly 8%
annually
 4 times rate of inflation
 4.3 times the amount spent on National
Defense
 4 Consecutive years of double digit
increases in premiums

State of HealthCare in the U.S.
Since
2002 premiums up 73%
compared to inflation (14%) and
Price Increases
wages (15%).
Premiums
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
Inflation
20.0%
10.0%
Wage Growth
0.0%
2000
2001
2002
2003
2004
2005
2006
Premiums and Prescriptions
Current
premium costs for single
employees average $4,024 while
premium costs for those with family
plans average $14,500 annually.
Prescription spending has increased
more than 14% over previous years,
more than triple the annual rate of
inflation.
These increases are across all plan
types including HMO, PPO, POS and
indemnity plans.
Active Employees and Retirees
(Overall)
Active Employees- the average
family premium is $12,500 annually
regardless of plan type, while the
average annual premium for single
coverage is $4,800.

Annual Premium Health Care Costs
$13,200
$15,000
$9,400
$10,000
Retirees- the costs are usually
higher. While the average premium for
Single
single coverage holds at $4,800, the
costs for employee and spouse
coverage average $9,400 and
premium costs for an employee with
family average $13,200.

$5,000
$4,800
$12,500
$4,800
Retiree
$0
Married
Family
Active
Top 30 Cities in the US
Active employees
have access to
various plan types
including HMO
(66.75%), PPO
(56.7%), Indemnity
(20%) and other
(33.3%)

Availability of Active Health Care Plan
Types
80.0%
66.75%
56.70%
60.0%
33.30%
40.0%
20.00%
20.0%
0.0%
HMO
PPO
Indemnity
Other
Top 30 Cities in the US: Active
The
average
employer/employee
contribution for single
coverage is $4,273/$760
(84%/16%).
The average
employer/employee
contribution for family
coverage is ($10,252/$2,729)
(79%/21%).
Employer and Employee Active
Health Care Premium Costs
$12,000
$10,252
$4,273
$6,000
Employer
067$
927,2$
$-
Single
Family
Employee
Top 30 Cities: Dental and Vision
The
average premium for dental coverage for a
single firefighter is $288 with the employee
contributing $84 (30%).
The average premium for dental coverage for family
coverage is $672 with the employee contributing $300
(45%).
The average premium for vision coverage for a single
firefighter is $366 with the employee contributing $66
(18%).
The average premium for vision coverage for family
coverage is $487 with the employee contributing $168
(35%).
All US Cities: Active Employees
IAFF HealthCare Database (n=326)
Active
employees have access
to various plan types including
HMO (44.4%), PPO (71%),
Indemnity (7.9%) and other
including POS (21.9%).
Availability of Active Health Care Plan
Types
71.00%
80.0%
60.0%
44.40%
40.0%
21.90%
7.90%
20.0%
0.0%
HMO
PPO
Indemnity
Other
All US Cities: Active Employees
IAFF HealthCare Database (n=326)
The plans typically
selected by firefighters are
PPO (56.9%), HMO (26.8),
other (including POS)
(14%) and Indemnity
4.6%).

Selection of Active Health Care Plan Types
Indemnity
14.00%
Other
4.60%
HMO
26.80%
PPO
56.90%
All US Cities: Active Employees
IAFF HealthCare Database
(n=326)
The average
employer/employee
contribution for single
coverage is $4,772/$600
(88%/12%). The average
employer/employee
contribution for family
coverage is $9,269/$1,895
(83%/17%).

Employer and Employer Active
Health Care Premium Costs
$12,000
$9,269
$4,772
$6,000
Employer
006$
598,1$
$Single
Family
Employee
Top 30 Cities in the US: Retirees
the top 30 US cities, all
employees have access to
retiree healthcare.
Plan types available
include HMO (36.7%), PPO
(26.7%), Indemnity (13.3%)
and other including POS
(16.7%).
Availability of Retiree Health Care Plan Types
In
40.0%
36.70%
26.70%
20.0%
13.30%
16.70%
0.0%
HMO
PPO
Indemnity
Other
Top 30 Cities in the US: Retirees
There
are various funding
mechanisms for firefighter
retiree health insurance in
the top 30 US cities.
These include city/state
(36.7%), city trust (36.7%),
pension plan (13.3%), or
self pay (13.3%).
Funding Methods for Retiree Healthcare
Self Pay
13%
City/State
37%
Pension Plan
13%
City Trust
37%
Top 30 Cities in the US: Retirees
The
average employer or other
provider/retiree contribution for
single coverage is $2,893/$1,937
(59%/41%).
The average employer or other
provider/retiree contribution for
retiree/spouse coverage is
$7,107/$4,324 (62%/38%).
The average employer or other
provider/retiree contribution for
family coverage is $9,496/$5,683
(62%/38%).
Employer and Employee Retiree
Health Care Premium Costs
$12,000
$7,107
$6,000
$9,496
$2,893
739,1$
423,4$
386,5$
Employee
$-
Single
Married
Employer
Family
All US Cities: Retirees
IAFF HealthCare Database (n=326)
Only
80% of all IAFF members have
access to retiree healthcare.
Plan types available include HMO
(27.2%), PPO (54.3%), Indemnity (4.6%)
and other including POS (33.5%).

All US Cities: Retirees
IAFF HealthCare Database (n=326)
The average employer or other
provider/retiree contribution for
single coverage is $2,935/$1,718
(63%/37%).
The average employer or other
provider/retiree contribution for
retiree/spouse coverage is
$5,673/$2,593 (68%/32%).
The average employer or other
provider/retiree contribution for
family coverage is $7,263/$4,122
(63%/37%).

Employer and Employee Retiree
Health Care Premium Costs
$12,000
$2,935
$6,000
817,1$
$5,673
395,2$
$7,263
221,4$
$-
Single
Married
Family
Employer
Employee
All US Cities: Retirees
IAFF HealthCare Database (n=326)
Sixty-seven percent of
respondents to the IAFF
healthcare survey report that
Medicare becomes the primary
medical plan at age 65.

At Age 65, Does Medicare Become the Primary
Source of Health Care for Retirees?
Seco ndary
33%
P rimary
67%
All US Cities: Retirees
IAFF HealthCare Database (n=326)
Nearly 32% of respondents
report a reduction of benefits
offered post Medicare while two
thirds report no reduction in
benefits.
Those experiencing a reduction in
benefits also note as much as a
50% reduction in the employer’s
contribution to the premium.

Post Medicare Benefits
Reduction in
benefits
32%
No Reduction
68%
Retiree HealthCare
New Accounting Requirements
Under GASB #45
GASB Statement 45: New Rules

In 2004, the Governmental Accounting
Standards Board (GASB) released Statement 45
(GASB 45) concerning health and other nonpension benefits for retired public employees.
These benefits may also be called “other postemployment benefits” and retiree healthcare
programs are by far the most costly.
GASB Statement 45: New Rules



The intent of GASB 45 is to bring governmental
accounting standards more in line with private company
standards.
Though GASB has no power to change ‘how’
governments fund retiree health, pension and other
benefits, it does govern the rules that auditors must
follow in providing options on the reliability of
governmental financial statements.
Audited financial statements prepared according to
GASB are scrutinized by investors in state and local
bonds and rating agencies that make judgments on the
likelihood those bonds will be paid off is required.
Retiree Healthcare Compared to
Pensions

Retiree health benefits, like pensions are a form
of deferred compensation.


the employee earns the compensation during their
working years but is paid after they retire.
Pension systems typically are funded by
governments paying normal costs each year as
employees earn the compensation and the funds
are invested to generate returns and grow until
required to be paid to the employees following
retirement.

Known as “Prefunding”
Retiree Healthcare Compared to
Pensions


To the extent the funds set aside each year for
pensions are insufficient to cover the projected
benefit costs, the system is said to have an
‘unfunded liability’.
Retiree health benefit programs under GASB 45
standards are very similar and will result in the
calculation of an ‘unfunded liability’ similar to
that of pension systems.
GASB Standards 45: Why is this an
issue?


Causes the reporting of OPEB liabilities
Unfunded liability is likely significant and could
impact




Healthcare Plan design and benefits
Local government cash flow
Potentially --- Bond ratings
Effective dates approaching so planning time is
short
GASB Standard 45





The effective dates of the GASB 45
requirements will be phased in over three years
based on state/local government annual
revenues in fiscal year 1998-99.
Effective Date
Annual Revenue
12/15/06
$100 million or more
12/15/07
$10 million or more
but less than $100
million
12/15/08
less than $10 million
GASB Standards 45:
Requirements Explained


The GASB accounting standard 45 requires an
employer to accrue the costs of other postemployment benefits (OPEB) over the career of
an employee and to disclose the amount of any
unfunded liability.
For employers who choose to fully fund their
OPEB liabilities, the annual expense is called the
Annual Required Contribution (ARC).

ARC is the sum of the annual costs for benefits
earned during the year plus an amortization, or
costing out, of expenses for benefits earned before
the adoption of GASB 45.
GASB Standard 45: What does it
require?



Actuarial reporting of annual required contribution
(ARC) to post-retirement benefit costs during period
of active employment
 Normal costs + amortization of unfunded
actuarially accrued liability
 Also required to report liability for terminated
employees with benefits not yet received and retired
employees and beneficiaries currently receiving
benefits.
Disclosure of unfunded actuarially accrued liability
Encourages but DOES NOT require funding
GASB Standard 45: When Employers
DO NOT Fully Fund Benefit Costs


For employers who do not fully fund the costs of these
benefits, the annual expense also includes further
adjustments because there are no investment earnings
to offset the liability.
Under this scenario, the reportable annual expense for
an unfunded benefit plan could be as much as twice
the annual expense for a funded plan. These increased
costs are the primary reason that GASB 45 is so
significant to public sector employees, since most
OPEB are not fully funded for the anticipated liability.
GASB Standard 45



Today, most public sector OPEB are funded on a ‘payas-you-go’ basis
GASB 45 DOES NOT REQUIRE advanced funding.
The decision whether to fund the benefits has no
impact on the actual cash costs eventually paid out as
plan benefits.
The impact of the decision whether to pre-fund will
however have a significant impact on…
 accounting process
 bond rating agencies as they may look unfavorably
on governmental employers that do not have a plan
for funding their OPEB obligations.
GASB Standard 45: What
Employers Need to Know


Public sector employers need to develop a course of
action to:
 Meet the reporting requirements under the
accounting standards and
 Manage their financial and political impact.
In order to develop a course of action, public sector
employers need to:
 Understand whether the accounting standards apply
and if so, to understand the legal and benefit design
aspects of the plan;
 Conduct a preliminary actuarial analysis to determine
whether the liabilities and annual expense require
any action;
GASB Standard 45: Actuarial
Valuation




Determine the potential monetary liability of the
retiree health plan;
Budget for GASB costs and to properly distribute
costs among employee classifications;
Aid in developing strategies for managing costs
through funding or managing plan costs; and
Employers may use data contained within these
actuarial valuations to “aid” them in union
negotiations.
GASB Standard 45: What
Employers Need to Know



All employers will need to understand the impact on
their bond ratings and decide on a funding strategy.
Some employers will rely solely on funding strategies to
manage the expense, while others will develop strategies
to manage costs through benefit plan changes or cost
management.
All employers will want to anticipate questions from
bond rating agencies, taxpayers, and retirees.
GASB 45: What Do Bond Raters Say?

Investor services will use a series of questions to
review management criteria.
 Is the jurisdiction actively pursuing alternatives to
soften the impact of OPEB?
 Where does the OPEB problem rank in relation to
other planning priorities?
 How conservative (or aggressive) are the methods and
assumptions being used to determine OPEB liabilities
and plan for the future?
GASB 45: What Do Bond Raters Say?

Investor services will ask questions to review
financial criteria:
 Are there other areas in the budget to cut to make
room for increasing OPEB costs?
 Will total carrying charges of bond debt service,
pension contributions, plus OPEB contributions be
sustainable given existing (or projected) resources?
GASB 45: What Do Bond Raters Say?

Investor services will ask questions to review
the debt criteria:
 What is the legal obligation of the employer to
meet retiree health care obligations?
 How does OPEB alter the long-term liability
landscape for the employer?
 Does OPEB put the employer at a comparative
disadvantage in relation to its peers from the
standpoint of total long-term liabilities?
GASB 45: What Do Bond Raters Say?

Investor services written statements:





Standard and Poor’s
Moody’s
Fitch
All recognize GASB 45 does not present
‘new’ liability
All are looking for a ‘plan’ for the future
GASB 45: Likely Employer Actions


Move to “employee pay” or Reduce benefits
Reduce or alter future employee post retirement benefits
 Change the current contribution formula for the
retiree and family benefits
 Increase the share of retiree health benefits costs
paid by employees during their working years.
 Raise the number of years required to vest in retiree
health benefits.
 Establish a defined contribution program to which
state and/or local governments would agree to
contribute a set amount of money thus shifting the
financial risk to the employee.
GASB 45: How will IAFF Members
be Affected?


Affiliates will most likely be faced with employer
proposals to reduce OPEB liabilities by:
 Lowering the level of retiree health care benefits
granted;
 Offering new employees (or new retirees) a reduced
benefit level; or
 Placing a cap on total OPEB employer provided
benefits.
Affiliate leaders should insist on labormanagement discussions to develop alternative
solutions to these proposals.
GASB 45: Recommendations/Options for
IAFF Members


Prefunding retiree health benefits to begin
addressing unfunded liabilities
Partial prefunding retiree health benefits
 Prefunding results in a reduction in costs over time
as investment earnings would supplement employer
and employee contributions for retiree health costs.
 Prefunding also helps secure expected benefits for
employees by creating a pool of assets strengthening
the ability to continue to offer benefits over time.
 Prefunding contributes to higher bond rating as
bond rating agencies monitor the funding status of
the retiree health program, and help determine the
interest rates paid on debt.
GASB 45: Recommendations/Options for
IAFF Members

Legislative action
Actuarial valuation information should be made
available to legislators to enable them to
appropriately address the magnitude of state and
local government unfunded liability
 Creation of a working group to address;
 retiree health care costs
 types of prefunding vehicles
 investment guidelines
 viability of issuing bonds to reduce liability
 increasing funding from Federal government

GASB 45: Recommendations/Options for
IAFF Members

Establishment of Retiree Medical Trusts
(RMTs).


An RMT is a hybrid health plan with features similar
to defined benefit and defined contribution plans.
IAFF affiliates may consider the incorporation
of OPEB bonds as an alternative means of
funding healthcare benefits.

The OPEB bonds issued to date have been taxable,
thus affording investment flexibility of proceeds.
GASB 45: Recommendations/Options for
IAFF Members

Establish irrevocable trust arrangements, such as a
Versatile Employee Benefit Alternative (VEBA)
Trust.
 A VEBA is a tax-exempt trust primarily used to fund
eligible medical expenses.

Section 115 integral part government trusts offer
another alternative that provides a tax-exempt base for
reimbursing health expenditures.
Questions or
Comments