Now that most communities have valued and reported their employees’ post-employment health care benefits, local officials are searching for ways to fund and reduce those liabilities.
The employee benefits structure and work force demographics contribute to the development of an appropriate strategy. The first possibility is to do nothing about funding the liability and leave the problem to the next administration. However, that may result in a lower credit rating and place retired employees at risk because post-employment health care benefits are not guaranteed the way pensions are. Nevertheless, retiree benefit plans can be structured so that only minimal changes are needed to satisfy auditors and rating agencies. An actuary can evaluate plan design options and their effect on a government’s financial situation.
Cities and counties also can pre-fund the liability by paying the current year’s cost plus a payment to amortize the liability for past service, depositing the annual payments into an irrevocable retiree trust. Alternatively, a Government Accounting Standards Board bond in the amount of the liability for past service can replace amortizing the liability. The bond proceeds can be deposited into an irrevocable retiree trust and invested in high-quality investments. When the return on investments is greater than the interest the entity is paying bondholders, the interest gain can help defray the current year’s trust payment.
Local governments also can adjust retiree benefits to reduce future costs. A large liability can stem from generous benefits, low retiree contributions and eligibility requirements. While the most common method to limit benefit costs is to increase deductibles, copays or coinsurance, local governments also should consider revisiting the benefits structure. For example, they could provide retirees a stipend, which could be used to purchase coverage through a group plan, a Medicare Advantage plan, an individual plan, or to pay Medicare B and D premiums.
Local governments also could create retiree medical savings accounts (RMSAs). With RMSAs, employers deposit a specified amount into employees’ accounts each year of their employment. RMSAs are fully funded, providing security for employees. The only liability on an employer’s financial statements is for any unpaid contributions at the end of the year.
Retiree or spousal contributions also can be increased. The contribution level can be related to years of service, giving senior employees the greatest benefit. The increased contribution creates a dollar-for-dollar offset to the employer’s liability.
Some plans award full eligibility (30 years of subsidized medical care) at age 55 with 15 years of service. That, however, creates a large expense for employers. Increasing eligibility to age 60 with 20 years of service or age 65 with 25 years of service can greatly reduce a government’s liability, while still delivering valuable benefits to long-term employees.
Actuaries can help design the best combination of approaches to meet a city’s or county’s goals, and demonstrate how alternative plan designs affect the size of the liability and the annual cost. By adopting new strategies, employees can receive valuable benefits at retirement at a cost that is manageable and fair to taxpayers.
The author is the senior actuarial consultant with Cleveland-based CBIZ Benefits and Insurance Services.