HomeMy WebLinkAbout(1) RETIREE HEALTH INSURANCECITY OF PORT ARTHUR, TEXAS
TO: STEVE FIT'LGIBBONS, CITY MANAGER ~~////~~~~ ~
FROM: REBECCA UNDERI-IILL, CPA, ASSISTANT CITY MAI~A~',_ INISTRATION
SUBJECT: REITREE HEAL'T'H INSURANCE //'' ~~
DATE: 1/12/2010
The City has been working on the issue of Retiree Health Insurance for the last number of years.
The City- has always had an OPEB (Other Post Employment Benefit) Liability. Over the years, the
City has provided health insurance to retirees and their dependents at a subsidized rate. This benefit,
similar to employee pension benefits, was funded by this city, and most others, on a `pay as you go'
basis. Effectively, the annual cost for the retirees their dependents was included with the cost of the
active employees and paid from annual operating funds.
This method does not recognize the cost which is incurred by the City every day, fox active
employees. Every day that an active employee is at work, the City incurs the cost of the current
salary, the required social security and Medicare contributions, the current cost of health insurance,
and a contribution fox the future retirement benefit and health insurance benefit upon retirement.
The City- has funded all of that, except for the Final piece, the contribution to retiree health insurance.
Fox this city, and most others, historically, the contribution to retiree health insurance was viewed as
a minor increase in cost. However, over the yeazs, the retiree population has increased and the cost
of healthcare has skyrocketed. This combination has dramatically impacted the liability.
In response, and as a part of an ongoing effort to make governmental accounting reflect mare
accurately the entire fmancial picture of the entity, more similar to the private sector, the
Government Accounting Standazds Boazd issued Statement 45. This new accounting standard
requires government to report this liability. This is not an option, it is a requirement This
requirement has been in place for non-govemment entities since 1990.
In 2007,we engaged an actuary to perform our fast study. After receiving the staggering report,
with enormous liability and contribution requirements, we engaged another actuary to `audit' the first
study. The second study confirmed the fast. At October 1,.2007, the OPEB liability (debt) of
the City of Port Arthur was measured at $93,760,224. The annual required contribution was
$10,041,987. This means that in order to fund, over a 30 yeaz period, the liability that has akeady
been incurred, and to fund the ongoing benefits, at the current level, for the current employees, the
City would need to fund $10,041,987 from annual operations. (This would be reduced by the current
cost already being paid by the City for retirees through health insurance subsidies, approximately $1
million.)
During this process, the staff was educated as to the factors driving the enormous liability, and
began reviewing options.
The staff has reviewed various plans throughout the state. The City's plan seems
generous by all measures. Few others offer full benefits for retirees with as little service
as we require. Few offer subsidies For dependents, many offer no subsidy for under 65
retirees, and some cap the contribution at a flat dollar per year level. All of these
options need to be evaluated for the City.
• In the fall of 2009, the Human Resources Director submitted a report on health
insurance rates, whereby the `under 65' retirees rates aze `unblended' from the active
employee group. This is not an unusual action, and according to Blue Cross, is an
approach that has been utilized by other municipalities. This approach was.
recommended by the ICMA (International City Manager's Association) Retirement
Corporation. We have engaged a prominent pension and employee benefits attomey to
assist us in this process. He does not see a legal problem with the action that the City
has taken thus far.
• The recommendation also moves all retirees, and active employees with dependent
coverage, back into a 50/50 cost shaze. T1us has been altered over time, as the Council,
on occasion, absorbed increases for retirees and employees.
• In that report, Dr. Thigpen also discusses options moving forward to revise our policy
for funding levels for future retirees.
• In the November 1, 2009 renewal the City Council adopted a five year phase in of the
unblended rates. This action is estimated to reduce our liability up to 25%:
• The City has engaged a benefit attomey to assist us with legal issues as we review plan
changes, to develop a comprehensive plan document, and to create an OPEB tmst for
the funding of the benefit.
• The 2009 actuazial study is beginning, and the-staff is developing proposed plan changes
for actuarial review.
• The goal moving forward is:
o Have the study complete, and recommended plan changes to the Council by
late spring or early summer
o Have the funding plan adopted and implemented in the 2010-2011 budget
The City must address this real financial issue. During the recent bond rating review, both
agencies (Moody's and Standard and Poor's) expressed concern over the level of our liability.. We
assured them that the City was evaluating the liability and methods of reducing it, and would have a
funding plan in the next budget.
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