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HomeMy WebLinkAbout04.b. Review of presentation given at 2017 CALPELRA Conference titled "Eliminating Retiree Health Liability While Preserving Benefits" Page 1 of 10 Item 4.b. Central Contra Costa Sanitary District February 13, 2018 TO: ADMINISTRATION COMMITTEE FROM: TEJI O'MALLEY HUMAN RESOURCES MANAGER REVIEWED BY: ANN SASAKI, DEPUTY GENERAL MANAGER SUBJECT: REVIEW OF PRESENTATION GIVEN AT 2017 CALIFORNIA PUBLIC EMPLOYERS LABOR RELATIONS ASSOCIATION (CALPELRA) CONFERENCE TITLED "ELIMINATING RETIREE HEALTH LIABILITY WHILE PRESERVING BENEFITS" At a previous Administration Committee meeting, Chair McGill had requested that staff review and evaluate a presentation that was given at the 2017 CALPELRA Conference titled "Eliminating Retiree Health Liability While Preserving Benefits" (Attachment 1)to determine if any of the options presented would be viable for the District. In summary, the case studies that were highlighted in the presentation include ways that an agency can transition to a defined contribution health plan for all active employees and retirees. For purposes of health care, an agency would contribute a set dollar amount into a Health Reimbursement Account (HRA) on behalf of every employee and retiree for the entire term of the benefit. An HRA is an account-based employer group health plan that allows eligible employees to be reimbursed on a pre-tax basis for specified medical expenses, such as monthly medical premiums. The HRA is an account that is solely funded by the employer, provides a reimbursement up to a maximum dollar amount decided upon by the employer, and gives the option to the employer to allow for balances to carry over from year to year. An HRA also offers much more flexibility on how the plan is designed. The employer determines the contribution limits and any vesting schedule(s) and can limit eligible reimbursable expenses through its plan design. This would eliminate Other Post-Employment Benefit (OPEB) liabilities related to retiree health benefits as the agency is 1) paying an amount that is defined for the term of the benefit and not a variable amount that would correspond to any fluctuation of medical premiums or any other assumptions and 2) not required to perform any additional post-employment funding, since the contribution would be made to the HRA on a per-payroll basis. The entire cost of health care, both active and retiree, would become a budgeted pay-as- you-go cost. Implementing any of the options to transition the District from the current structure of a defined benefit health plan to a defined contribution health plan would be subject to bargaining with the District's labor unions. February 13, 2018 Regular ADMIN Committee Meeting Agenda Packet- Page 61 of 74 Page 2 of 10 Staff will be available to provide clarification and answer any questions during the meeting. ATTACHMENTS: 1. CALPELRA Presentation February 13, 2018 Regular ADMIN Committee Meeting Agenda Packet- Page 62 of 74 Page 3 of 10 Public Entities Case Studies eS Eliminating Retiree Health Liability While Preserving Benefits CALPELRA 2017 Conference December 6,2017 Thomas M.Morrison,Jr. Senior Vice President, Health and Retirement Plan Consultant Agenda Case Study 7 Case Study 2 Background Background Factors leading the client's need to •Utilizing Existing Benefit Funding address its Post-Employment Sources Liabilities: .Health Reimbursement •Process—those things that were Arrangements(HRA):More Flexible utilized in the decision process for funding Retiree Accounts .Things that were tried in the process •Other Solutions:Utilizing Medicare •Ultimate solution finding process Advantage Plans to Your Advantage rr Segal Corsultonq 2 Case Study 1 ➢Public Entity's benefit was to pay 85%of the premium cost of the plan selected ➢Reimburse the cost of Medicare Part B premium ➢Board established target ARC that was sustainable in the longer term ➢Target was set to 7.5%of active payroll ➢Current ARC was approaching 13%of payroll ➢Client established a Joint Labor-Management task force to review all of its alternatives to achieve its goal Ar Segal Consultinq 3 February 13, 2018 Regular ADMIN Committee Meeting Agenda Packet- Page 63 of 74 Page 4 of 10 Initial ctuaria a cu a ion as of June 30,2007 Prior Plan Total Actuarial Accrued Liability $414,418,582 Value of Assets $7,000,000 Unfunded Actuarial Accrued Liability $407,418,582 30-Year Amortization of Unfunded Past $21,643,711 Service/Actuarial Accrued Liability Normal Cost $13,971,022 Interest for Timing of Payment $1,424,589 Total Annual Required Contribution(ARC) $37,039,322 to Achieve Full Funding in 30 years Annual Required Contribution(ARC) $37M 12.92%of Payroll Expected Benefit Payments to Retirees $22.6M 7r Sepal Consultinq 4 Joint Labor-Management Task Force ➢Extremely time consuming ➢Requested pricing for a significantly large number of variations on: •Plan design •Contribution scenarios •Eligibility changes ➢At certain points variations on design and contributions were producing miniscule reductions to the actuarial liability ➢Task force ended with no recommendation for changes ➢The process was more the destination than a recommendation ➢Management developed its own recommendation and presented it to Executive Board Y�Segal Consulting 5 Management Solution Existing Retirees and Current Actives ➢Defined contribution amount for existing and future retirees of$500 per month excluding new hires ➢Transition plan to get to the$500 per month * } from current contribution of 85%of lowest cost plan over a five-year period to ease the transition burden on existing retirees ➢Majority of retirees that were Medicare eligible actually benefited from$500 benefit 6 February 13, 2018 Regular ADMIN Committee Meeting Agenda Packet- Page 64 of 74 Page 5 of 10 Management o u ton New Hires ➢New defined contribution plan for employees hired after January 1, 2009 of a fixed amount,$1,200 per year for full-time employees or pro-rata amount per hour worked: •Amount deposited into retiree-only HRA •Vesting occurs upon retirement from the Employer,or if terminated,at age •Vesting rule establishes the focus on on retiree medical cost •Funding is made on a per payroll basis so no additional funding is required V post-employment •There is no OPEB liability for the HRA plan ➢Client had linked Retirees to active,non-bargained employees by past actions �Se al ConsultinC 7 Cost as of June 30,2009 Prior Plan and Current Plan Flat$500 Prior Plan (Current Plan) Total Actuarial Accrued Liability $451,213,675 $268,453,913 Value of Assets $9,716,355 $9,716,355 Unfunded Actuarial Accrued Liability $441,497,320 $258,737,558 30-Year Amortization of Unfunded Past $23,454,111 $13,745,178 Service/Actuarial Accrued Liability Normal Cost $14,805,001 $7,200,607 Interest for Timing of Payment $1,500,923 $821,713 Total Annual Required Contribution(ARC) $39,760,035 to Achiew Full Funding in 30 years Annual Required Contribution(ARC) $39.8M $21.8M 12.88%of Payroll 7.05%of Payroll Expected Benefit Payments to Retirees $23.1 M $23.1 M Net Additional Contribution $16.7M t Segal Consulting e Unfunded Actuarially Accrued Liability (UAAL) $407,418,582 $297,691,344 $311,670,195 $258,737,558 $270,517,336 2007 2009 2011 2013 2015 February 13, 2018 Regular ADMIN Committee Meeting Agenda Packet- Page 65 of 74 Page 6 of 10 Case Study 2 Background ➢Public Entity previously allowed employees to surrender unused sick leave to purchase months of retiree medical coverage ➢Redemption rate was 8 hours for 1 month of coverage ➢Alternatively,employees could surrender unused sick leave for pension credits ➢Although benefit was funded through surrender of unused sick leave,Public Entity had to calculate and book OPEB liability ➢Bargaining parties met to jointly develop workable defined contribution solution 4�Se al Consulling m Case Study 2 Components of Solution ➢Transition benefit to a program with no OPEB liability for the public entity ` ➢Expand available funds to be used to include unused vacation time(vacation time is vested in California and must be paid in cash at separation) r"T ➢Build in incentives to encourage prudent use of paid time off (sick leave and vacation) Yr Segal Consulting 11 Case Study 2 Plan Design ➢Client established minimum amount of sick leave and vacation time that must be maintained by employee ➢Annually,amount of sick leave and vacation time in excess of the minimum is converted to cash ➢Vacation time is surrendered at 100¢on the dollar ➢Sick leave is surrendered on a graduated scale S''' ,2 February 13, 2018 Regular ADMIN Committee Meeting Agenda Packet- Page 66 of 74 Page 7 of 10 Case Study 2 ➢Surrender of sick leave is graduated based on years of service, after 5 years for example: Years of Service 5-10 50% 11-15 65% 16-25 75% 25 or more 90 •Minimum sick leave balance was 120 hours •Vacation minimum was 80 hours •Excess converted at the fiscal year end ➢Contribution made each year into a retiree only HRA ➢OPEB liability was reduced to zero X Se al Consulling 13 HRAs Defined ➢Benefits not used may be carried forward to the next year(no use-it-or-lose-it rule or maximums) ➢HRA accounts can be unfunded(bookkeeping accounts only)or funded(like a 401(k)) ➢The HRA is vested when the plan determines it is vested ➢HRA funding by time of retirement has no OPEB liability ➢Participation in an Active Employee HRA must be linked to medical plan participation under ACA but not a retiree only HRA Se al ConsulGn 14 What an HRA Can Do For You HRAs are a flexible tool to: ➢Reimburse current medical expenses not covered otherwise ➢Accumulate money to pay for COBRA and/or retiree health care ➢Receive cash-out from other programs, such as sick leave or vacation ➢Hold employer contributions for current or future use ➢Provide for surviving spouse and children A,Segal Consull ing 15 February 13, 2018 Regular ADMIN Committee Meeting Agenda Packet- Page 67 of 74 Page 8 of 10 Tax Treatment of HRAs ➢Contributions to HRA are not subject to income or payroll taxes ➢HRA reimbursements of medical care expenses defined in IRC§213(d)are not subject to income or payroll taxes ➢HRA contributions are generally not pensionable earnings(subject to pensionable earnings definition of the public entity) ➢Reimbursements from HRA are not ( k pensionable earnings 16 HRA Funding and Contribution Levels HRA accounts can be funded with employer contributions at rates set by the collective bargaining agreement: );,There is no maximum limit on contributions under HRA rules L� ➢May be percent of pay,percent of premium,or fixed dollar per month or hour ➢Allocating interest to accounts is t permissible but not required Yr Segal Consulting 17 What Participants Like About HRAs Balances can be used for \ / Carryover feature allows premiums,long-term care,passed \ I unused amounts to i onto the spouse or dependent // \\ accumulate without child at death of member use-It-or-lose-it rule = / Can accumulate cash It is funded with employer out of sick leave or vacationbalancestax or plan sponsor's money . . exempt,subject to because no employee bargaining agreement contributions are allowed ti 3 S,—,C;r>_t rr.1s February 13, 2018 Regular ADMIN Committee Meeting Agenda Packet- Page 68 of 74 Page 9 of 10 Medicare Advantage Plan ➢Medicare Advantage plans are sponsored by federal legislation and receive federal funds to provide Medicare benefits in lieu of Medicare: •May add benefits to the minimum benefits paid by Medicare •Recently have expanded from the traditional HMO model to national PPO network model •Coverage can be obtained in all 50 states •National vendors can offer coverage to non-Medicare retirees and spouses for seamless transition to Medicare ➢Cost are reduced due to federal subsidies A Segal Consulting to Case Studies Carve Out Medicare Retirees to MAPD North Carolina State Health Plan ➢135,000 Medicare retirees auto enrolled in MAPD ➢Two Medicare Advantage carriers contracted ➢Each offers"Base"plan(default randomly assigned 50%to each)—$0/month for retiree ➢Each also offers"Buy Up"plan—$33/month,some carrier flexibility on plan design and features ➢Option to elect out and go back to 70/30 PPO (also$0/month) ➢Outcomes:100%auto enrolled in MAPD Base plans: • 46%stayed in MAPD Base plans • 27%bought up to the MAPD Buy Up plans • 27%opted to return to the 70/30 PPO Segal Consultinq 20 Additional Solutions for Retirees What is a Medicare Connector? ➢A company that has contractual relationships with many insurance companies and provides high level assistance to enroll retirees into individual plans(Medigap or Medicare Advantage and Prescription Drug Plans) ➢It remains available to retirees throughout their life for any plan changes or claims issues ➢It manages the reimbursement process for the retiree's premium or out-of-pocket medical expenses S1 CC- 2, February 13, 2018 Regular ADMIN Committee Meeting Agenda Packet- Page 69 of 74 Page 10 of 10 Who Would Want to Use a Medicare Connector ➢Your Group Plan may not be competitive on premium or coverage level with the individual Medicare market(What%of your retirees don't take your plan?) ➢You want to give your retirees more affordable choices ➢You want to eliminate the risk of large claims ➢You want to stop being a benefits expert(CMS,EGWP,PDP,RDS) ➢You want to reduce your FASB or GASB liabilities 4�Se al Consulting 22 Thomas M.Morrison Jr. Senior Vice President Segal Consulting 818-956-6777 tmorrison@segalco.com rr Segal Consultonq 23 February 13, 2018 Regular ADMIN Committee Meeting Agenda Packet- Page 70 of 74