Controlling Municipal Retiree Health Care Costs

1. Controlling Municipal Retiree Health Care Costs Massachusetts Municipal Management Association (MMMA) July 25, 2013

2. The Retiree Health Care Challenge • Cities and towns spend an estimated $800 million per year—and growing—on retiree health care benefits. • Even with this spending, municipalities have $30 billion in unfunded retiree health care liabilities—an obligation that is growing every year.

3. Reform Proposal Falls Short • The Governor proposed reforms based on the OPEB Commission’s recommendations. Although the proposal contains positive eligibility changes, it makes only minimal progress in controlling costs for municipalities. • In a major step backward, the reform strips municipalities of the authority to adjust premium contributions for existing retirees, the most important tool for controlling costs for communities. • The reform fails to pro-rate benefits for municipal part-time employees. In most cases, they will still be eligible for the same benefits as full-time employees after just 10 years of part-time service.

4. Options Under Existing Law • Nevertheless, municipalities have important options under current law to help control costs and reduce long-term liabilities. The options fall into four categories: • Strengthen analysis and public awareness • Tighten eligibility requirements • Adjust premium shares • Control health care costs

5. Improve Analysis and Public Awareness • Create a separate line item in the municipal budget for retiree health care expenses to measure annual spending and year-to-year growth in costs. • Additional metrics may include percentage of operating budget, share of total health care costs, annual growth in retiree health care vs. annual growth in property tax revenues, and the cost per resident to meet the liability. • Raise awareness of the issue for residents by publishing analysis and valuations through selectmen/council meetings, local newspapers, etc.

6. Tighten Eligibility Requirements • Implement a continuous service policy that requires employees to retire directly from the municipality in order to receive retiree health care benefits. • In calculating years of service for eligibility, change local regulations so that part-time service is pro-rated based on a full-time schedule.

7. Reduce Municipal Share of Premiums • Under current law, communities can reduce their share of premium contributions to 50 percent. This adjustment can be made for both current and future retirees. • For every percentage point that a municipality reduces its contribution, it can expect roughly a one percent decrease in the unfunded liability.

8. Reduce Costs: Implement Municipal Health Reform • More than 200 municipalities and regional school districts have adopted modest changes in health plans to achieve savings of $205 million in the first year, double the initial estimate. • Municipal health reform will achieve even greater savings over the long term by slowing the rate of growth of health costs. While important, these savings alone will not make retiree health care affordable.

9. Reduce Costs: Anticipate the Cadillac Tax • Federal health reform includes a tax on especially rich health plans—those with premiums of $27,500 for family coverage or $10,200 for individuals will be subject to a 40 percent tax in 2018. • Some municipal plans offered to both pre-65 retirees and active employees already surpass that threshold. • Communities should begin to eliminate these high premium plans or establish clear rules addressing who is responsible for the tax (employer or employee).