Retirement healthcare could bust the budgets of many US cities [Brookings Institution]

While the deficits of public pension plans have been widely discussed, much less attention has been given to the obligations of US local governments to supply healthcare for their retired employees.

The unfunded liabilities for retiree healthcare for the 30 largest US cities exceeds $100bn, according to the Pew Charitable Trusts, a Philadelphia-based non-profit organisation. The unfunded liabilities for the 50 US states exceeds $500bn, according to Standard & Poor’s, the rating agency.

Retiree healthcare plans are uniquely American. They exist because the US has never offered universal healthcare before Medicare, the national social insurance programme, at age 65.

Many employees of cities and states retire between 50 and 55, so local governments usually provide them with highly subsidised healthcare between retirement and Medicare, and sometimes beyond.

Yet retiree healthcare plans of local governments, on average, have less than 10 per cent of the funding they need to meet their future obligations. By contrast, if a public pension plan were less than 60 per cent advance funded, it would be considered to be in dire straits.

Read the rest at brookings.edu…

Retiree health care a budget buster [Boston Herald]

Like most American cities, Boston has promised to pay most of the health care premiums for its employees after they retire — which can be as early as age 45 or 50. Boston also subsidizes the Medicare premiums of its retired employees after age 65.

As a result, Boston reported an unfunded liability for retiree health care in 2013 of over $2 billion (that is a B!). This equated to a liability of over $3,000 per city resident — the fifth highest per capita of large American cities. And these figures did NOT include Boston’s share of another almost $2 billion in unfunded health care liabilities
for retired employees from the MBTA.

The good news. In fiscal 2014, Boston contributed $154 million toward retiree health care — more than 10 percent of its total payroll (including schools) for that year. This sum covered its current benefit premiums plus $40 million to help pre-fund its future liabilities for retiree health care. Moreover, Boston committed to keep contributing current benefit premiums plus $40 million to pre-fund such future liabilities.

The bad news. Boston is using two overly optimistic assumptions in estimating what it would take to address its future costs for retiree health care.

Boston is assuming that it can meet its commitment by making large payments out of each year’s budget despite more retirees and rising premiums. This works out to be an average increase of 4.5 percent per year according to Stanford professor Josh Rauh. Can Boston really devote $400 million out of its 2035 budget to retiree health care given competing priorities like police and schools?

Read the rest at bostonherald.com…

China’s pension problems will not be solved by more children [Financial Times]

On October 29, China adopted a policy of two children per family, instead of one. This change is, in large part, intended to mitigate the adverse demographic trend plaguing China’s social security system: the rapidly declining ratio of active to retired workers. The ratio is falling from over 6:1 in 2000 to under 2:1 in 2050.

However, the new two-child policy is not likely to have a big impact on the worker-retiree ratio, so China’s retirement system will remain under stress. To sustain social security, China needs to implement other reforms — moving from a local to a national system and expanding the permissible investments for Chinese pensions.

The one-child policy always had exceptions, such as for rural and ethnic communities. These exceptions were broadened in 2013 to cover couples where both were only children. Yet the birth rate did not take off.

Why? A combination of rising levels of urbanisation and housing costs, more education and jobs for women, and rapidly increasing expenses for child rearing. These factors have driven fertility rates down in other south-east Asian countries, such as Singapore and South Korea, without any government restrictions on family size.

Read the rest at ft.com…

How Obamacare Inadvertently Threatens The Financial Health Of Small Businesses, And What States Should Do About It [Forbes]

Starting in 2016, push comes to shove for small businesses under the Affordable Care Act, better known as Obamacare. As of January 1, small businesses, broadly defined as firms with 50 to 100 full-time employees, must comply with the ACA’s employer mandate and provide qualified health insurance to their workers or face stiff penalties. But this requirement poses a big threat to the financial stability of small employers—and not for the reasons you might think.

Obamacare includes a myriad of regulatory incentives and exemptions that define the parameters of the employer mandate. However, these have inadvertent consequences. Most important, exemptions in the ACA encourage small firms to self-finance their health care plans—that is, pay their workers’ health care bills directly, rather than covering them through a traditional insurance policy. Most large companies in America (above 3,000 employees) engage in self-funding, but that is done now by only about 16% of small companies of between 50 and 100 employees. According to my research, that number is set to rise.

It’s understandable that small companies see self-funding as the superior option. By financing their own health care plans, they stay exempt from the community rating requirements that restrict how much insurers may vary premiums based on factors like age and smoking status; they also stay exempt from the federal and state taxes on most health care premiums that are paid to traditional insurers.

But these benefits pose significant risks for small businesses. While a big company usually has a diversified employee base and financial resources that can help absorb substantial overruns in health care expenses, a small company has neither. One big claim can wipe out a small company.

Read the rest at forbes.com…

Self-Funding of Health-Care Plans by Small Firms: Risks and Reforms [Risk Management and Insurance Review]

Small employers that offer health insurance have usually offered fully insured products through traditional health plans. Recently, the Patient Protection and Affordable Care Act (ACA) has created new requirements for fully insured products that will entice more small firms to fund their own health-care benefits. However, self-funding poses significant risks to these small firms, their employees, and state exchanges. To mitigate some of these risks within current political realities, we recommend advance disclosures—to small firms of material changes in their stop-loss policies, and to their employees that premium subsidies are available only on ACA exchanges. We also suggest strengthening Small Business Health Options Program exchanges by broadening the availability of subsidies and building partnerships with brokers. Finally, we recommend an expanded role for brokers and third-party administrators in helping small firms improve their choice of health-care insurance.

Read the rest in the Risk Management and Insurance Review

Relief for Cities’ Budget-Busting Health-Care Costs [Wall Street Journal]

Co-authored with Joshua Rauh

The budgets of many cities and states will soon be disrupted by new accounting rules for retiree health plans. Local governments pay most of the health-insurance premiums for their retired employees—for example, from age 50 until Medicare at age 65, and sometimes for life. Nationwide, the total unfunded obligations of these plans are close to $1 trillion, according to a comprehensive recent study in the Journal of Health Economics.

The accounting rules, adopted in June by the Government Accounting Standards Board (GASB), require local governments for the first time to report their obligations for retiree health care as liabilities on their balance sheets. Local governments must also use a reasonable and uniform methodology to calculate the present value of these liabilities. These are both steps forward, enhancing transparency and accountability.

The new rules further provide an incentive for local governments to establish a dedicated trust with assets invested today to help pay health-care benefits in the future. But here the GASB takes one step backward, by allowing local governments to make overly optimistic assumptions, including excessive returns for the trust.

Read the rest at wsj.com…

Obamacare’s ‘Cadillac Tax’ Will Soon Hit Many Cities and States [Real Clear Markets]

While much has been written on the ACA’s implications for private sector employers, only a few commentators have focused on the ACA’s implications for cities and states. Like any for-profit employer, any local government with 50 or more full-time employees (100 or more in 2015) must offer an ACA-compliant healthcare plan, or pay significant penalties. Moreover, under current law, the healthcare plans of many local governments will become subject in 2018 to the “Cadillac” tax – an excise tax on healthcare costs above specified annual amounts. The idea behind the Cadillac tax is to help rein in the spiraling cost of health care by putting pressure on employers to offer less generous health insurance plans.

Most states and cities offer generous healthcare plans to their civil servants during their working years and through their retirement until they go on Medicare. In general, local governments offer their employees a broad range of high-quality medical services with little or no co-payments and minimal deductibles. And local governments pay most, if not all, of the annual premiums for such generous healthcare plans.

But this situation will change dramatically because of two factors. Earlier this year, the US Supreme Court unanimously decided that a collective bargaining agreement should not be construed to provide workers with free healthcare benefits for life — unless that agreement explicitly required the employer to pay all healthcare premiums for the lifetime of its employees. Instead, the Supreme Court declared, the healthcare benefits included in a collective bargaining agreement presumptively end when that agreement expires. As a result, local governments will have the opportunity to renegotiate their healthcare benefits with the public unions as their collective bargaining agreements end.

Read the rest at realclearmarkets.com…

Renegotiating Retiree Health Care Plans After New Supreme Court Guidance [Health Affairs]

Although many commentators have criticized the underfunding of public pension plans, relatively few have focused on the huge underfunding of retiree health care plans of states and cities. At the time of Detroit’s bankruptcy, for example, its pension plan was underfunded by over $3 billion, but the unfunded deficit in its retiree health care plan was close to $6 billion.

The good news is that retiree health care plans can legally be revised more easily than pension plans. In specific, the US Supreme Court has recently issued an opinion setting forth principles of contract interpretation that will lead local governments and public unions to reach explicit agreements on the scope of such plans. Those agreements will probably have to include some cost reductions because the health care plans of many local governments will otherwise be subject to the Affordable Care Act’s 40 percent “Cadillac” tax starting in 2018.

This post will be divided into four parts. It will explain

  1. the reasons why retiree health care plans have stayed under the radar screen and how that is changing;
  2. the magnitude of underfunding of retiree health care plans and the implications for state-city budgets;
  3. the principles of interpreting collective bargaining agreements recently enunciated by the US Supreme Court; and
  4. the various ways local governments are now trying to manage down their health care obligations over time and strategies that governments and public-sector unions can use to address this challenge.

Read the rest at healthaffairs.org