History & Cost of the City of Concord s Retiree Healthcare Benefit Program

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1 History & Cost of the City of Concord s Retiree Healthcare Benefit Program Executive Summary Substantially all full-time City of Concord employees and their qualified dependents are eligible for retiree healthcare benefits. This benefit began in 1998, when the City switched health benefits to CalPERS 1 and was required to comply with the Public Employees Medical and Hospital Care Act (PEMHCA), which requires retiree medical coverage. As of June 2015, a total of 418 former Concord employees (plus their dependents) received health coverage through the City s retiree medical program. In addition, nearly all full-time employees (372 individuals as of June 2015) are eligible for retiree healthcare benefits if they retire directly from the City of Concord, with a minimum of 5 years of service with a CalPERS recognized agency. In 1998, the City s maximum cost for healthcare coverage for a retiree who elected family medical coverage was $387 per month. By 2016 the City s maximum cost for healthcare coverage for a retiree who elected family medical coverage had grown to $1,662 per month (a 329% increase). Fully funding the recommended contribution for retiree medical benefits cost the City of Concord $5 million in the current fiscal year (FY ). This represents 15% of the City s current payroll costs and equates to 6% of all General Fund revenues. Back in 1998, an initial actuarial valuation projected that the retiree medical benefit would cost no more that 1% of payroll and in the first year of the benefit (FY ) the cost was only 0.6% of all General Fund revenue. Background on Retiree Medical Benefits for City of Concord Employees Prior to 1998, the City of Concord provided healthcare benefits by contracting with five private insurers for active employees only. By August 1998, all labor groups and the City negotiated to switch health benefits to CalPERS. This action required that the City begin to provide retiree medical coverage due to provisions in the Public Employees Medical and Hospital Care Act (PEMHCA). Prior to implementing the retiree healthcare benefit, an actuarial valuation was completed to assess the cost of the benefit for active employees as well as current and future CalPERS retirees, and it was determined that it equated to 1% of salary to properly fund the current and future 1 CalPERS refers to the California Public Employees' Retirement System Page 1 of 5

2 retiree health benefit. This 1% was included in the cost of the salary/benefit adjustments for the various employee groups in Through the initial PEMHCA resolutions, the City agreed to pay an equal contribution toward healthcare benefits for active and retired members up to 100% of the Kaiser premiums at the member s designated coverage level (single, two-party or family). Through these resolutions, the City also provided identical medical benefits to elected officials during their service to Concord and upon retirement from Concord. While the City s cost was tied to the Kaiser healthcare premiums, employees and retirees have several healthcare plans to choose from (some are lower cost than Kaiser, most are higher). Once a participant (a former employee and/or dependent) in the City s healthcare program becomes eligible for Medicare, the healthcare premium is reduced substantially. The following table shows the Kaiser monthly healthcare premiums in Since the City paid 100% of the Kaiser premiums in 1998, there was no additional cost to employees or retirees who chose Kaiser healthcare. The table also shows the healthcare premium when a participant becomes eligible for Medicare. The Medicare healthcare premiums are shown as ranges, because the cost is dependent on the number of covered individuals that are Medicare eligible. Table 1: 1998 Monthly Healthcare Employer/Employee Cost Single Two-Party Family City s Cost for Employees and Retiree $149 $298 $387 City s Cost for Medicare Eligible Participants* $37 $ $ Employee/Retiree s Cost for Kaiser Coverage $0 $0 $0 *The premium cost is dependent on the number of covered individuals that are Medicare eligible. In FY , retiree healthcare benefits cost the City of Concord $305,000 (or 0.6% of General Fund revenues at that time). 3 Within the first ten years of the program (from ), the City s cost for retiree healthcare benefits grew significantly. These increasing costs were largely influenced by rising healthcare premiums (often increasing more than 10% annually) as well as an increasing population of retired City employees electing to receive healthcare benefits under the retiree healthcare program for themselves and their eligible dependents. In recognition of skyrocketing health care premium costs, the City engaged with two of its labor groups in 2002, as those labor contracts were expiring. The City and Public Employees Local One (predecessor to Teamsters Union Local 856) and the Concord Association of Professional 2 Staff Report: Resolutions Approving Entry Into PERS Health, June 9, 1998 (Council Action Item 3e) 3 In FY , medical benefits for active employees cost the City of Concord $1.9 Million (or 3.8% of General Fund revenues). Page 2 of 5

3 Employees (employee group which was subsequently represented by Local 29) came to agreement on a cost sharing formula. The formula was implemented in 2004, and for the remaining contract period (through 2009). The City agreed to pay in full the first 5% of premium increase, with the parties sharing any increase above 5% on a 50/50 basis. The employee s cost share was reflected primarily through a comparable decrease in COLA. In FY , the City paid $2.6 million for retiree healthcare benefits (up from just $305,000 in FY ). In 2007, in accordance with provisions within negotiated Memoranda of Understandings (MOUs), the City and all its labor groups agreed to actively participate and engage in good faith efforts to establish the parameters of a City-wide effort to address and arrive at a long-term solution to the rising costs in retiree medical benefits and the Other Post- Employment Benefits (OPEB) unfunded liability. 4 This resulted in a joint committee of management and labor that met for almost a year but never produced action items. In 2007, the City also established a Retiree Medical Trust Fund and set aside money to fund the growing unfunded liability of the benefit. Two sizable contributions from the City helped to establish the trust fund ($12 million in FY and $4 Million in FY ). As part of the 2010 negotiations over successor MOUs, the City and its labor unions negotiated changes to the City s contributions towards employee and retiree medical premiums. Effective January 1, 2011, all labor groups agreed to split all future increases or decreases to the Kaiser rates equally between the City and the member. This is commonly referred to as the annual 50/50 split on changes to the premium. This change impacted active employees and retirees equally. The action also reduced the City s unfunded liability for retiree healthcare benefits by $12 million. In August 2014, the City Council established a retiree medical vesting schedule for incoming, newly elected officials who are elected after November 1, The vesting schedule requires 30 years of consecutive elected service to the City of Concord and a minimum retirement age of 65. This effectively eliminated retiree healthcare benefits for future elected officials. In the current fiscal year ( ), fully funding the City s annual recommended contribution (ARC) for retiree medical benefits costs $5 million (or 6% of budgeted General Fund revenues). 5 In total, the annual contribution for retiree healthcare benefits represents 15% of payroll costs 6 and is divided into two components: Pre-funding of benefits for active employees: 7% of payroll or $2.3 million Funding the unfunded benefit liability: 8% of payroll or $2.7 million The following table shows the City s current (2016) share of the Kaiser monthly healthcare premium rate. The City s 2016 rate obligation represents a 329% increase from the 1998 rates (shown in Table 1). Since employees and retirees began picking up 50% of the annual change in 4 Section 18.12: Post Employment Benefit Reopener (POA MOU ) 5 In FY , medical benefits for active employees cost the City of Concord $6.0 Million (or 7% of budgeted General Fund revenues). 6 Independent valuation conducted by Bartel & Associates (June 30, 2015 GASB 45 Actuarial Valuation) Page 3 of 5

4 Kaiser premiums, their contribution has increased from 0% to 14%. Currently, in 2016, the City pays the remaining 86% of the Kaiser premium rate. Table 2: 2016 Monthly Healthcare Employer/Employee Cost Single Two-Party Family City s Cost for Employees and Retiree $639 $1,279 $1,662 City s Cost for Medicare Eligible Participants* $287 $ $862-1,321 Employee/Retiree s Cost for Kaiser Coverage $106 $213 $278 *The premium cost is dependent on the number of covered individuals that are Medicare eligible. As of June 2015, the City s Retiree Medical Trust had a balance of $22 million. This represents a 30% funded status of the total retiree healthcare benefit liability. The unfunded liability was $51 million (or 70% unfunded). 7 Figure 1: Retiree Medical Liability and Trust Fund Status as of June 30, 2015 Over the next 10 years, the City s annual recommended contribution for retiree healthcare benefits is projected to increase from $5.6 million in FY to a minimum of $7.5 million by FY The increase relates to the projected increase in healthcare premiums as well as projected increases in lifespans. This represents a 33% increase by FY Independent valuation conducted by Bartel & Associates (June 30, 2015 GASB 45 Actuarial Valuation) Page 4 of 5

5 Figure 2: Projected Cost Increase for Retiree Medical Benefits FY to FY Page 5 of 5