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Federal Legislative Review
The months of July and August were, not surprisingly, a bit slow on the legislative front. Congress recessed for most of August, and members focused their attention on the Democratic and Republican national conventions. Upon their return to Washington, D.C., in early September, members of Congress got back to work, although election distractions remain close at hand. Pension issues received considerable attention.
Governmental Plan Compliance
Representatives from the GFOA and other associations in the Public Pension Network (PPN) will be attending a roundtable with members of the House Ways and Means Committee as well as representatives from the Internal Revenue Service (IRS) to discuss concerns associated with the recently announced IRS initiative to increase the agency’s focus on making sure governmental plans comply with the tax-qualification requirements of Internal Revenue Code Section 401(a) to ensure favorable tax treatment for plan participants. The roundtable is being convened by House Ways and Means Committee Chairman Charles Rangel (D-New York) and Representative Earl Pomeroy (D-North Dakota).
Last spring, the IRS announced plans to significantly increase audits of governmental defined benefit pension plans, stating that the size and importance of the governmental plans area warrants more scrutiny. In preparation for the increased auditing, the IRS planned outreach and education efforts to alert the public plan community of the need for compliance, and said it would be collecting information from state and local plans to learn more about these programs, identify compliance issues, and develop tools.
Many in the public pension community agreed that the IRS would benefit from a better understanding of governmental plans and the many differences between public and private sector retirement systems. Organizations like the GFOA, the National Association of State Retirement Administrators (NASRA), and the National Conference of State Legislatures (NCSL), among others, indicated their willingness to help provide the IRS with detailed information on state and local pensions, much of which is already contained in numerous publicly available documents.
However, meetings and discussions with the IRS, as well as a review of a draft questionnaire to be sent to a random sample of public plans, left public pension representatives with concerns, including 1) the process by which the IRS was planning to collect information; 2) the fact that all appropriate parties had not been adequately involved; 3) the broad scope, extending into issues beyond the jurisdiction of the IRS; and 4) the fact that the IRS had no plans to issue comprehensive guidance for governmental plans, nor had it yet provided specific guidance in key areas where public pensions have expressed the need for assistance in order to ensure compliance.
The roundtable should provide an opportunity for IRS representatives to share what they hope to gain through their increased audits in the governmental plans arena. State and local government officials and pension fund representatives will have the chance to relay their concerns regarding the guidance gap that must be closed prior to increasing enforcement, and discuss areas that are particularly unclear or unsuitable for public plans.
The following is an excellent overview compiled by the PPN discussing some areas where IRS guidance is needed, unclear, or problematic.
Final Regulations on Normal Retirement Age. Last year, the IRS issued final regulations defining “normal retirement age.” It is unclear why the IRS felt the need to apply new regulations in this area to governmental plans, as problems have not been identified. Furthermore, the authority to impose a federal definition on the plans of state and local governments is also unclear, as Congress generally exempted governmental plans from the Section of the Code defining normal retirement age. The IRS’s attempt to apply these regulations ignores specific public sector requests that the IRS refrain from creating standardized definitions for early or normal retirement age with regard to governmental plans, and instead defer to the applicable state or local laws, regulations and policies governing such plans. This is also an example of the IRS’s failure to appreciate the complexity of state and local governing statutes and the impact of imposing a one-size-fits-all federal definition onto a diverse community governed at the state and local levels. There has been no response to comments filed with the IRS in December 2007, nor to a subsequent communication from 19 national public sector organizations (see comments and letter).
Credited Interest Cap for Governmental Defined Benefit Plans. Public sector defined benefit plans’ interest crediting features were not specifically identified by Congress or the Treasury Department as a cause for concern in the Pension Protection Act (PPA) deliberations surrounding private sector cash balance plans and conversions. Nevertheless, language in the PPA as well as the Age Discrimination in Employment Act (ADEA) would essentially limit the amount of interest a public employee could receive to no greater than a “market rate of return.” This cap is aimed at issues that arise under ERISA. In the public plan setting – where benefit protections and plan designs are quite different – the application of an interest rate cap may actually conflict with state and local benefit guarantees and undermine efforts to preserve underlying defined benefit features.
Public plans had hoped Treasury and the IRS would work to ensure this language would not be interpreted to cover the vast majority of traditional public-sector defined benefit plans that credit interest on refunds of contributions, provide interest-bearing deferred retirement option plans (DROPs), survivor benefits, or other optional forms of benefits common in the public sector. However, Treasury, and IRS officials ultimately said they did not believe they could accommodate the unique protections and plan designs inherent in state and local government retirement systems in the regulations they were drafting pursuant to the PPA. Thus, a statutory clarification to the PPA was developed and has been included in the Pension Protection Act technical corrections measure (H.R. 6382) recently approved by the House of Representatives. The new language would make clear that governmental defined benefit pension plans that credit interest at rates above the market rate of return are not in violation of the ADEA or the PPA. (See Public Pension Network letter to House Education and Labor Committee.)
Definition of Governmental Plan. Treasury and IRS officials have stated a tri-agency review is underway with regard to the definition of a governmental plan, as there have been inconsistent definitions from the IRS, the Department of Labor, and the Pension Benefit Guaranty Corporation in this regard. The outcome of this review could have serious implications for governmental plans. For example, it could affect treatment of employees and employers whose functions have been privatized or contracted out, treatment of employees and employers where services are brought back into government, and treatment of cooperatives, public associations, volunteer agencies, and sovereign tribal nations and their employees. Despite these potential effects, and recent press reports indicating guidance is imminent, to date, we are unaware of any discussions that have been held with state and local government stakeholders.
IRC Section 415 Regulations. IRC Section 415 regulations pertaining to traditional pension programs were developed to keep corporate executives from constructing unreasonable tax shelters. Their application in the public plan environment has, therefore, proven difficult and Congress has enacted statutory changes over the years to address problems in this area. While it was hoped new regulations released by the IRS in 2007 would reflect these legislative fixes, there are still concerns with regard to the application of ill-fitting regulations to governmental plans. For example, the final regulations create concern with regard to how cost-of-living-adjustments are treated and how employees who return to work will have their benefits tested, even after formal comments were submitted to the IRS on these issues. Deferred retirement option plan calculations, phased retirement programs, and return-to-work provisions are also affected by unclear interpretations on how 415 limits are to be calculated in these instances, and have been the subject of recent governmental plan audits.
Pick-up Contributions. Without any prior discussions with public employee or plan groups, Revenue Ruling 2006-43 was released outlining specific actions that a governmental entity must make to "pick up" employee contributions so that they can be tax-deferred, rather than after-tax contributions. The Revenue Ruling imposed a requirement that employing units must take formal action regarding such contributions and cannot allow employees to either opt out of the "pick-up," or to receive the contributed amounts directly. Whether an action by a statewide plan would be sufficient, particularly if covered employing units would be required to pick-up contributions (not optional), has never been officially addressed. In addition, despite the fact that several IRS private letter rulings have previously allowed employees to purchase service credit on a tax deferred basis using “pick-ups,” recent discussions with IRS officials indicate this Revenue Ruling was intended to limit this ability and require taxation of such employee contributions going forward, even though this conclusion is not spelled out in the Revenue Ruling and there is no indication as to what required such a significant change in tax policy.
Application of 409A Election to Teachers’ Salaries. The application of IRC Section 409A “nonqualified deferred compensation” regulations to teacher salaries is an example of the many unintended consequences that can result from applying regulations meant for the corporate sector to state and local governments. Nowhere in the statute were teacher salaries identified as the type of income Congress set out to limit through 409A. A reasonable interpretation would reflect the fact that teachers spreading their pay over 12 months, even though a typical school-year is only nine or 10 months, is not the same as corporate executives deferring taxable income years into the future. The failure of the IRS regulations to reflect this obvious distinction has resulted in confusion and unnecessary administrative complexity and expense for our nation’s school districts.
Market Value Liabilities
Another interesting debate unfolding in Washington, D.C., focuses on the use of “market value of liability” (MLV) reporting in the public sector. MVL would effectively require that governmental plans report their financial condition as if they were immediately able to terminate. (For further explanation, see NASRA's White Paper: Public Pensions and Market Value of Liabilities.) The Public Interest Committee of the American Academy of Actuaries (the Academy) recently held a public forum to hear “stakeholder views” on the disclosure of MVL for public pension plans. According to the Academy, “the committee will use information obtained through this forum to determine if a statement from the Academy’s board of directors on the issue is in the public interest.”
During the hearing, representatives on both sides of the issue shared their opinions with the members of the Academy’s Public Interest Committee and the audience.
Several members of the public sector actuarial community testified in opposition to the disclosure of the MVL calculation. Public sector opponents warned that a statement in support of MVL would not be in the public interest because it would lead to the termination of defined benefit plans resulting from a misunderstanding of what the new MVL numbers mean. Many expressed concern that the disclosure of MVL would add a level of complexity that could be misconstrued and used against public sector defined benefit plans. One hundred seventy-five pension actuaries signed a letter to the Academy expressing their opinion that it was “not in the public interest for the Academy to advocate for disclosure of MVL measures by public pension plans.” (See actuaries’ letter.)
Also weighing in with the Public Interest Committee was House Ways and Means Committee member Representative Earl Pomeroy. In his letter, Representative Pomeroy expressed concern with the use of MVL reporting noting, “I am very concerned that the reporting of a flawed measurement of a pension system’s funded status will have negative consequences for public plans. Such an outcome would have adverse effects on an employee’s retirement security and would undermine the goal of fiscal responsibility to taxpayers. Simply put, such an outcome would run counter to the public interest.” (See Representative Pomeroy letter.)
Several associations, including NASRA and the National Conference on Teacher Retirement, sent a letter to the Academy expressing serious concerns that the use of the MVL approach in the public sector would be harmful for the following reasons:
- It could lead to the disclosure of plan costs and liabilities that do not accurately represent the dynamics of governmental plans and are therefore unnecessarily high;
- It could lead to the application of investment approaches that would unnecessarily limit the asset allocation and investments returns that can be earned by plans; and
- It would create confusion among decisions makers, taxpayers, and the media about the funded levels of public pension plans, potentially leading to their disuse or abandonment. (See MVL letter.)
Finally, the GFOA and 20 other members of the PPN submitted a letter to both the Academy’s Public Interest Committee as well as the Actuarial Standards Board (ASB) expressing serious concerns with MVL reporting. The letter maintains that “the application of corporate finance measures – which are aimed at companies that can be acquired or go out of business – is simply inappropriate, uniformed and irresponsible” when applied to governmental plans. (See the letter to the ASB.) On the other side of the issue, those supporting the disclosure of the MVL calculation argued to the Academy’s Public Interest Committee that the failure to use the MVL calculation underestimates the cost of public pensions and thus transfers that cost to future taxpayers.
The Public Interest Committee is expected to meet in September to prepare its recommendation to the Academy. Testimony and other written statements offered at the hearing can be found on the Academy's Web site.
Federal Regulatory Review
Department of Labor (DOL) Proposes Regulations to Improve Disclosure of Fees and Expenses for 401(k) Plans
This proposed DOL regulation, issued in late July, requires that uniform, basic disclosures be given to all participants and beneficiaries who direct the investment of assets in their individual 401(k) accounts, and that investment-related information be presented in a format that makes comparisons easy.
Although this regulation does not apply to government plans, it may be useful guidance for governmental plan sponsors when establishing their participant disclosure requirements. For additional guidance in this area, the GFOA’s Executive Board recently approved a Recommended Practice on Monitoring and Disclosure of Fees for Defined Contribution Plans.
Under the proposed regulation, plan fiduciaries must provide participants and beneficiaries with specified plan and investment information, including fee and expense information. Generally, this information must be provided when a participant becomes eligible to participate in the plan, and annually thereafter. Plan fiduciaries must disclose:
- General plan information, including the investment options available under the plan;
- Information concerning the plan’s investment options, for example, fee and expense information, past performance data, comparable benchmark returns, and a Web site address;
- A description of fees and expenses charged to participants and beneficiaries for plan administrative services, such as legal, accounting, and recordkeeping charges, as well as how these charges will be allocated to their individual accounts; and
- A description of fees and expenses charged to a specific participant’s account based on actions taken by that participant, such as charges for processing loans or investment advice.
The proposal also requires that investment-related information, including fees and expenses, must be disclosed in a chart or similar format that will help participants easily compare the plan’s investment options. The DOL developed a model chart that may be used by plan fiduciaries to satisfy this requirement, but the proposal also provides fiduciaries with the flexibility to create their own chart or comparative format.
Governmental Accounting Standards Board (GASB) Issues Draft Guidance to Clarify Reporting of Pension and Other Post-Employment Benefit Contributions (OPEB)
In late July, the GASB issued a proposed Technical Bulletin that would clarify that using actual known amounts, representing amortization of employer past contribution deficiencies or over-payments, for the purposes of figuring the annual required contribution (ARC) adjustment for pensions and OPEB, is both consistent with the intent of existing GASB standards and encouraged.
Comments on this proposal are due by September 30, 2008, and may be directed to:
Director of Research, Project No. 25-16, Governmental Accounting Standards Board, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116.
Electronic comments may be addressed to director@gasb.org.
Medicare Advantage and Managing Retiree Medical Liability
by David Ehrenfried, Director, Group Medicare
Humana
State and local governments that pay for retiree medical coverage face some harsh realities. GASB 43 and 45 require that governments report the cost of their health and certain other post-employment benefits in ways that result in more scrutiny of the liabilities that governments face. Cutting retiree medical coverage may be inevitable for some governments. But the real concern for others is how to better manage and pay for those benefits. Medicare Advantage plans can play an important part in that effort.
Most governments in the United States (70 to 80 percent by some estimates) provide some retiree medical coverage. Nearly all the states and most local governments cover retirees prior to age 65 (those typically not yet eligible for Medicare) under plans that provide the same or similar benefits offered to active employees. Many governments also cover Medicare-eligible retirees, mainly under plans that supplement or coordinate with Medicare, which on its own pays benefits subject to significant deductibles and coinsurance.
For many governments, providing retiree medical benefits had been a pretty straightforward proposition from a financial and administrative perspective. That is until GASB 43 and 45 came along, making the substantial long-term expense of funding retiree medical benefits more visible and retiree medical liability a major public finance issue. Prior to GASB 43 and 45, state and local governments needed to report only their current retiree medical expenditures on their financial statements. But now, governments must report both current retiree medical expenses along with the projected costs for covering both current and future retirees years, and even decades, into the future.
With the new realities, a lively discussion is now underway on how to manage government retiree medical liabilities. The way most governments manage retiree medical benefits has not changed much since the enactment of Medicare in 1965. Now governments are considering options ranging from doing business as usual to eliminating retiree medical benefits entirely, from changing plan designs to altering funding and contributions.
In the GASB 45 environment, even small changes can make a big difference in the actuarial assumptions that can affect a government’s balance sheet. So, especially if the government has the money or if it must – for legal or other reasons – provide medical coverage to retirees, there are alternatives that may help positively affect some of those assumptions. One of those alternatives is Medicare Advantage (MA). MA plans can serve as viable, cost-effective alternatives to traditional state and local government retiree medical plans that rely on coverage that supplements or coordinates with Medicare.
What is Medicare Advantage? Before answering that question, it is important to explain a little about Medicare and Medicare supplements, because MA plans are different. Original Medicare, as the federal government refers to it, is a government-run insurance plan that has two parts: A and B. Part A pays mainly for hospital and other inpatient care. Part B pays mainly for physician and outpatient services, including some limited preventive services. However, Part A has large deductibles for most inpatient stays as well as limits on the number of days of care it will pay. Part B has a more modest deductible but only pays 80 percent of Medicare allowable charges for most services it covers. To fill these “gaps,” additional coverage (i.e., a benefit plan that supplements or coordinates with Medicare Parts A and B) is essential to avoid potentially large out-of-pocket expenses that will occur when medical providers bill beneficiaries for the amounts Original Medicare does not pay.
By contrast, MA is a type of private insurance plan that covers all the same services as Original Medicare and eliminates the need for supplemental coverage. Sometimes called Part C plans after the section of the Medicare Modernization Act of 2003 that makes these plans possible, MA is provided by private insurance carriers. These carriers contract with the federal government to take on the full risk of paying for all the hospital, physician, and other services covered under Medicare Parts A and B. MA plans must cover costs for Part A and Part B services entirely or subject to modest or reasonable copayments, deductibles, or coinsurance. These plans also generally provide benefits not covered under Original Medicare, such as routine annual physicals and other preventive services.
Most MA plans cover prescription drugs as well by pairing MA medical benefits with Medicare Part D prescription drug benefits. Some carriers will provide MA coverage without Part D prescription benefits. In that way, employers can purchase prescription drug benefits separately if they wish through an existing arrangement with another vendor, for example.
In return for taking the risk to provide all this coverage, MA carriers receive a specific amount from the federal government for each MA enrollee based on average Medicare costs in the enrollee’s geographic area. These amounts are eventually adjusted for health risk and other factors.
MA plans are available on both an individual and a group basis. The distinction is extremely important for government employers. With individual plans, the federal government gives MA carriers virtually no medical or prescription drug plan design or pricing flexibility beyond the benefits and rates filed each year by the carriers. However, the federal government gives carriers great benefit and pricing flexibility in offering MA and prescription drug plans (PDP) on a group basis to employers and union health and welfare plans. This means that governments seeking retiree medical alternatives can often get proposals for MA and PDP plans that approximate or even mirror the benefits covered under their current Medicare supplements. Some carriers have multiple standard or “off-the-shelf” MA HMO, PPO, and private-fee-for-service (PFFS) plans for mid-sized or smaller groups but will customize benefits extensively for large groups with several hundred or more retirees. Each carrier sets its own guidelines in this regard.
Carriers price their group MA and PDP business in two basic ways. Some use community rating or rate-manual factors to price these plans for all group sizes, while others will use claims experience or some combination of experience and manual rating. As a consequence, it is not unusual to see rates from different carriers that vary widely for the same piece of business. So, researching your options and carefully questioning carriers on coverage and pricing is quite important. It is essential, for example, to find out if your initial quote is community rated, and if so, whether your renewal will be community rated or experience rated.
MA plans can produce significant savings over traditional Medicare supplement or secondary coverage. For many groups, MA savings for comparable benefits can range from 10 to 50 percent, depending on many factors. These savings can help maintain benefit levels, prevent increases in retiree contributions, and lower GASB 45 liability. They can also play a vital role where governments have created Voluntary Employee Beneficiaries Association (VEBA) trusts for financing account-based solutions, such as Health Reimbursement Accounts (HRAs) and Retiree Medical Savings Accounts. Savings from MA plans can be plowed back into such trusts to help fund these accounts to help pay for future retiree medical expenses.
A common question is how MA plans can provide savings for employers and better benefits for Medicare-eligible retirees. Top MA carriers with effective care management programs, provider-contracting arrangements, and strong experience in managing MA programs should be able to produce efficiencies and cost reductions that are not possible with Medicare supplement plans. For example, the providers of typical Medicare supplement plans, which simply help to pay health-care costs that are not covered by Medicare and generally cost less than $200 per member per month, can rarely justify the additional expense of care management programs. Because Medicare supplement plans usually learn about health expenses only after Original Medicare has processed the initial claims, it is difficult and mostly impractical for Medicare supplement providers to perform care management functions at all. And even if they could perform these functions effectively, the savings they might realize -- perhaps 1 to 2 percent -- will not be enough to pay for care management programs, which include services like inpatient utilization review, discharge planning, and disease management. MA plans, however - which pay for all Medicare Part A and B services and can therefore make use of economies of scale - can save enough money by employing these cost-saving services not only to help contain premiums but to help promote quality care and provide additional benefits, as well. Indeed, these efficiencies are part of what Congress intended in creating MA plans in the first place.
Intuitively, as well, MA plans can make more sense than traditional Medicare supplements. If you were given the assignment to get together with your benefit manager and insurance consultant to design an “ideal” benefit plan for retirees age 65 and over, it is unlikely your design would resemble what you are doing today. If your post-65 retiree medical plan is a Medicare supplement, your Medicare-eligible retirees probably have three entities to deal with: Medicare, your Medicare supplement carrier or administrator, and a Part D carrier or other pharmacy benefits manager. That means at least three different member-service numbers, duplicate ID cards, claims-processing expenses, and explanation-of-benefits (EOB) forms, as well as no meaningful utilization controls, care management, or other programs to contain costs and improve care quality or health outcomes.
Original Medicare’s administrative costs are low, mainly because it merely moves money from the taxpayers to health care providers. Original Medicare makes an effort to catch and prosecute fraud and abuse. However, it has virtually no standard care management programs, such as ones designed to help seniors and their providers manage chronic illnesses or to ensure proper discharge planning so that elderly patients are not readmitted because no one ordered services needed to help them recover properly.
So if quality, efficiency, and care management are important factors for your government, the retiree medical plan you and your colleagues recommend will probably look more like the health plan you offer active employees: a medical plan with one carrier, strong cost controls, incentives to use benefits wisely, good customer service, and perhaps some programs and inducements to stay healthy and fit. And that is generally the way the best MA plans work: a single carrier, ID card and member-service number with preventive benefits, care management, wellness and fitness programs, and excellent customer service.
Your team also might want to suggest offering some choices in plan types. In most states there are multiple types of MA plans. At least three carriers offer group PFFS plans in every state, and in more than 30 states there are Local PPO (LPPO) plans or Regional PPO (RPPO) plans, which cover entire states. Medicare HMO plans remain strong in some areas, particularly in Florida and California. A law was enacted this summer – the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA) – that may affect choices in some areas by requiring that PFFS plans have networks by 2011. Also, the new law will gradually reduce federal payments for all MA plan types, with the greatest impact on plans in urban areas with many teaching hospitals. Nonetheless, a wide range of MA plans should continue to be available in most areas, particularly as carriers continue to expand their PPO and HMO offerings.
In conclusion, Medicare Advantage plans should be considered in any discussion about medical benefits for retired government employees. These plans can serve as viable, cost-effective alternatives or options to traditional state and local government retiree medical plans. Critically, they can help to manage and reduce GASB 43 and 45 liabilities, maintain or enhance benefits, and also improve plan quality, administration, and member satisfaction. At their best, MA plans can provide the win-win-win for government, taxpayers, and plan beneficiaries that government finance officers look for in any benefit plan.
David Ehrenfried is director, Group Medicare, for Humana Inc. He is based in New Jersey and can be reached at 201/595-2582 or dehrenfried@humana.com.
For more information about Medicare and Medicare Advantage Plans, two independent, authoritative sources are www.kff.org, the Web site for the Kaiser Family Foundation, and the federal government’s consumer handbook, Medicare and You, which can be downloaded at www.medicare.gov.
News from the States
The following is a brief summary of some interesting pension and benefits activity occurring in cities and states around the country.
Alabama
In order to encourage participation in its wellness program, the state of Alabama will begin assessing its 37,500 employees a $25 per month premium for health insurance that is refundable for those employees who agree to be screened for common risk factors, such as blood pressure, cholesterol, blood sugar, and body mass. According to the State Employment Insurance Board's Chief Executive Officer, William Ashmore, the primary goal of the program is to alert employees to risk factors for certain illnesses. The Alabama State Employees Association worked in cooperation with the state of Alabama in developing the program, reports BNA's Pension & Benefits Reporter.
California The city of San Diego has negotiated a deal with its labor unions estimated to save the city $22.8 million a year. Under the compromise, both the city and city employees will contribute approximately 8.7 percent of an employee's annual salary toward retirement, about half of what is currently contributed. Pension benefits upon retirement will now be capped at 80 percent of salary, though an employee can contribute to a defined contribution account to increase his or her retirement savings. The agreement affects only new employees; current employees would see no changes to their benefits, nor would any public safety employees, according to a report in the San Diego Union-Tribune .
Although the agreement was widely praised, some, like San Diego 's city attorney, argued that the city was addressing only half its problem by ignoring benefits provided to current employees and public safety workers.
Illinois The Chicago Transit Authority (CTA) is preparing to issue nearly $2 billion of taxable pension-related bonds. This includes nearly $640 million to fund a permanent trust that would be created to cover other post-employment benefits (OPEB), including retiree health care, and nearly $1.3 billion to raise the funded ratio of the CTA pension fund to approximately 80 percent. The CTA's total pension and health care liabilities are $3.5 billion, according to a report in the Bond Buyer.
Massachusetts
A panel created to study retiree health and other post-employment benefits (OPEB) in Massachusetts found that the current pay-as-you-go system will not be adequate to reduce the state's $13.3 billion retiree health care liability. The panel recommended that the state allocate its annual tobacco industry settlement payments toward reducing its OPEB liability over the next 30 years. Such a prefunding plan would allow the state to cut its liability in half, to $7.5 billion. The panel also recommended legislation permitting cities and towns to create retiree health care trusts to prefund retiree health care liabilities, reports BNA's Pension and Benefit's Reporter.
In other Massachusetts news, the Boston Herald reports that the state's governor, Deval Patrick (D), vetoed a pension increase for retired teachers and state employees that could have cost the state more than $3 billion over 20 years. In his veto message, the governor explained that he was concerned about adding costs to the state's already unfunded retirement liability. The Massachusetts Taxpayers Foundation estimated the measure could have cost as much as $3.5 billion by 2026.
Minnesota
Governor Tim Pawlenty (R) has proposed that all Minnesotans create their own online personal health care portfolios by 2011. The governor has instructed the Minnesota Department of Finance and Revenue to solicit proposals for the creation of such a system that the state would be able to implement on a trial basis for state employees in 2009. The voluntary system would allow employees electronic access to their medical records, test results, immunization records, and prescription drug histories and interactions. The goal of the online portfolios would be to control costs, improve health care quality, and enhance patient safety, according to BNA's Pension & Benefits Reporter. The governor also called on private health plans in Minnesota to create a single Web site where pricing and quality data would be available for consumers to compare costs and shop for health care in a single location. The Web site plans to be operational in January 2009. Governor Pawlenty's health care proposals are discussed on the Web.
Nebraska The city of Omaha reports a 17 percent rise in its health care costs in 2009, to more than $44 million, according to an article in the Omaha World-Herald. Omaha provides a generous package to its employees. Civilian employees pay 5 percent of their health insurance premiums, while police and firefighters pay no premiums. This is far less than total health care premiums paid nationally by the average employee, which equal about 27 percent, according to a study by the Kaiser Family Foundation. Omaha attributes the steep increases in health care costs to a combination of factors, including high-cost medical procedures, inflation, and a wave of new retirements, which require the city to pay health insurance costs for both these retirees as well as new employees.
To address these rising costs, the city is considering a contract proposal that would require firefighters to pay 5 percent of their premiums for the next three years and 6 percent beginning in 2011. The city estimates an annual savings of $622,000 should this proposal receive approval.
New York
New York State 's Comptroller Thomas P. DiNapoli (D) is working on a proposal requesting that the state permit a larger share of state pension assets to be invested in less-traditional investments, such as private equity and hedge funds, according to the New York Times. Under current law, 25 percent of the state's pension fund can be placed in these types of alternative investments. In discussing the need to have greater diversification and flexibility, the comptroller noted that in the past year private equity funds and real estate investments grew by a much greater percent than domestic stocks. The state's pension fund had a 2.6 percent return on investments in the fiscal year that ended in March. According to Mr. DiNapoli, increasing investments in alternate fund categories could have produced greater fund growth, perhaps to 4 percent.
Resources Review
Studies, Reports, and Publications
Public Pension Plan Forum on the Disclosure of the Market Value of Liabilities (MVL) for Governmental Plans, The American Academy of Actuaries. Testimony, agenda and speaker lists from the recent forum can be found and accessed at this Web site.
NASRA White Paper: Public Pensions and Market Value of Liabilities, National Association of State Retirement Administrators. This paper explores the use of market value of liabilities for public pension plans, and considers whether public pensions should be required to disclose this figure; the motivations behind the efforts to require this disclosure in the public sector; and the effects this disclosure might have.
A Better Bang for the Buck: The Economic Efficiencies of DB Plans, National Institute on Retirement Security. This new report finds that a defined benefit pension can deliver the same retirement income at a 46 percent lower cost than an individual defined contribution account.
Patience is a Virtue: Asset Allocation Patterns of DB & DC Plans, National Institute on Retirement Security. This issue brief examines how defined benefit and defined contribution plans invest their assets and how these investments have changed over time. The findings evidence that:
- Investments of public and private sector defined benefit plans closely resemble one another.
- Private sector defined contribution plans have lowered their direct stock holdings over the past two decades.
- The reduction of legal and regulatory obstacles to portfolio diversification has enabled public sector defined benefit plans to better balance asset allocations with their long-term investment goals.
- Defined benefit plans are longer-term, patient investors as compared to defined contribution plans.
Financing Retiree Health Care: Assessing GASB 45 Estimates of Liabilities, The Center for State and Local Government Excellence. This issue brief analyzes some key assumptions actuaries use to estimate a government's retiree health care costs.
Pensions and Retirement Plan Enactments in 2008 State Legislatures, National Conference of State Legislatures. This report summarizes select pension and retirement legislation enacted by state legislatures through June 2008.
EBRI 2008 Recent Retirees Survey: Report of Findings, Employee Benefit Research Institute. This survey was undertaken to examine what strategies employers might use to encourage their employees to postpone retirement and remain longer with the company. The survey tested numerous possible incentives for encouraging workers to remain on the job. The most successful included:
- Half of retirees (48 percent) indicate that feeling truly needed for an assignment would have been extremely or very effective in encouraging them to delay their retirement.
- Half of retirees with a defined benefit pension state receiving a full pension while working part time would have been effective in delaying their retirement (50 percent), and almost as many feel this way about receiving a partial pension while working part time (44 percent).
- Thirty-eight percent report that being able to work seasonally or on a contract basis would have been effective in encouraging them to delay retirement.
Saving for Health Care Expenses in Retirement: The Use of Health Savings Accounts, Employee Benefit Research Institute. This brief evaluates the use of Health Savings Accounts (HSAs) as an effective retirement savings tool and finds that HSAs have several drawbacks as a vehicle for funding health insurance premiums and out-of-pocket expenses in retirement.
Losing Ground: How the Loss of Adequate Health Insurance is Burdening Working Families, The Commonwealth Fund. This report examines the status of health insurance for U.S. adults under age 65 and the implications for family finances and access to health care. The report demonstrates that insurance coverage has deteriorated over the past six years, with declines in coverage most severe for moderate-income families. In 2007, nearly two-thirds of U.S. adults, or an estimated 116 million people, struggled to pay medical bills, went without needed care because of cost, were uninsured for a time, or were underinsured.
A Dirty Little Secret Retro Pension, Governing.com by Girard Miller. In this article, Miller challenges the practice of retroactive pension increases.
Needed Stronger OPEB Laws, Governing.com by Girard Miller. Here, Miller reflects on the need for stronger state OPEB statutes like those in Minnesota and Virginia, which would allow states and municipalities to begin to more effectively tackle their OPEB liabilities.
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