Will ACA Bail Out Unfunded Municipal Retiree Health Benefits?

Detroit and Chicago have announced plans to offload their unfunded retiree health plans onto the Affordable Care Act exchanges. The Detroit announcement predated the July 18th filing for bankruptcy protection. These cities believe they will save tens if not hundreds of millions in expenditures annually if they are successful in their intentions.

 

 

For the 61 largest cities in the nation, Pew Research has found that retiree health obligations under current contract or policies are only 6 percent funded.  In Detroit that number is close to zero.

 

While the Affordable Care Act requires employers with 50 or more employees to offer health insurance to employees or pay a fine (presumably municipalities are covered, but it does not matter, they almost all provide insurance anyway), the Act does not cover retirees. So cities-and perhaps states-might look at what Detroit is planning and decide to follow suit. Many private companies and some governments stopped paying for retiree health care years ago.

 

There are two levels of the issue.  Retirees and employees who have worked under contracts promising the health benefits in their retirement presumably cannot willy-nilly be deprived of those benefits by a unilateral cancelation by the employer. Folks already retired would have little incentive to make large concessions since they cannot lose their jobs if they refuse.  Eliminating future retiree health benefits for current employees would require contract renegotiation.  Therefore, for these groups, it would appear bankruptcy of the city might be the only way to have the promised benefits nullified.  Health benefits for retirees and current employees who have no protection of a contract might be offloaded with or without filing bankruptcy.

 

For new employees who will be on labor contracts, the city could negotiate to eliminate retiree health benefits. And for non-contract employees it could simply adopt a no retiree health benefit policy. There are local Pennsylvania examples.  In the City of Pittsburgh, police and fire personnel hired after 2005 do not get retiree health care the way employees working in those departments and employed prior to 2005 do.  The Port Authority’s largest union (its 2008 contract called for the union and the Authority to “jointly issue a statement with regard to their support for national health care”) has language in its 2012 contract stating that employees hired on or after July 1, 2012 would be eligible for three years of retiree medical coverage, as opposed to previous stipulations that allowed coverage until Medicare eligibility if the employee had 25 years of service or had reached age 55 and had ten years of service.

 

Government employee pension benefits are sacrosanct in many states to the point of being constitutionally protected.  That is certainly the case in Pennsylvania and Michigan.  Whether Federal bankruptcy judges will use Federal law to set aside state constitutions in the pension issue remains to be seen. At the same time, health benefits for retirees could be more easily dealt with in bankruptcy.  But, for cities looking to dump retiree health benefits for employees and retirees working under contracts containing such provisions, get ready for lawsuits and labor unrest. Bankruptcy or threats of massive layoffs will almost certainly be needed to get meaningful results.

While the offloading of retiree health care onto the exchanges might be appealing to many hard pressed cities and towns, it might be more complicated than they think. On the other hand, if they have a strong enough case to file bankruptcy, retiree health costs might be the trigger to file.

 

In the larger picture, if cities are able to offload their retiree health promises to the Affordable Care Act, then US taxpayers will get a big share of the tab.  Watching 58 year olds enjoy retirement from Detroit or Chicago city jobs and get Federally-subsidized health care until they reach 65 might not sit well with 60 year olds in the private sector who have no retiree health care until eligible for Medicare and have to keep working and keep paying taxes to subsidize the Detroit retiree’s health benefits. Further, if this strategy turns into a flood of unexpected exchange participants, what happens to the projected expenditures?  Undoubtedly, they will be off. And what if a bunch of private sector companies follow suit?

 

If a few large municipalities such as Detroit and Chicago are successful in reducing their expenses substantially by pushing retirees into the exchanges, there will undoubtedly be a flood of other municipalities around the country rushing to do the same. Moreover, there could be a number of school districts that could benefit from dumping retiree health benefits.  In short, taxpayers might find themselves on the hook for funding much more health care than Affordable Care Act drafters imagined. 

 

This is another unforeseen consequence of a health care law with seemingly unlimited ramifications and complications.

The Recovery Road Show

Friday marked the release of what will likely become the final Act 47 recovery plan for the City of Harrisburg and a lot of work lies ahead on debt levels, worker benefits, and financial management for the state’s capital community.

Is there anything Harrisburg can take from the largest city in Act 47 status, western Pennsylvania’s own Pittsburgh? A lot of the situation is going to be unique. But Harrisburg, like many local governments, is a labor-intense enterprise so much of the change on the cost side is going to be focused on headcount, salaries, and benefits. Based on the employee headcount and Census population, Harrisburg has 10.7 employees per 1,000 people this year. Five years ago the rate was 13.4; the City’s headcount fell while population bumped up. By comparison in Pittsburgh, where population fell and headcount went up a tiny amount over that same time frame, the per 1,000 person employee count stands at 10.9, up slightly from 10.6.

The similarity in employee to population right now is likely to diverge as the Act 47 plan comes into effect. As with many changes to employee benefits like post-retirement health care, change often comes to new hires. That’s what Pittsburgh did in 2005 when post-retirement health care coverage was ended for police and fire coming into the employment ranks and those retiring after the adoption of the plan would have higher coverage obligations. That too, is what is proposed for Harrisburg under their Act 47 plan.

Finally, on pensions the ability to collect benefits is virtually identical between the cities (50 years of age, 20 years of service for police and fire, though non-uniformed employees in Pittsburgh can retire with benefits at age 60 where in Harrisburg it is 65) but there is a big difference in the funding health of the plans. Pittsburgh has a funded ratio (AA/AAL) of 34% on average for its three plans, while Harrisburg has more assets than liabilities and has a funded ratio of 116%.

Who Rained on Labor’s Parade?

Newspaper reports on the Labor Day parade Downtown noted that something was missing from the march: spectators. In fact, people walking in the parade outnumbered people watching. What gives?

Was it the economy? One union official flippantly noted the bad economy and remarked that people who would normally be there were probably out looking for jobs. Was it the weather? We can rule that one out as Monday stood in stark contrast to the 2009 affair when it was noted "the cool, drizzly weather appeared to thin the parade crowd considerably".

Or could it be a sign of taxpayer disenchantment with unions and theirnever ending quest to make government bigger, more inefficient andcostlier?

Except for union members and their immediate families andthe hardest of the hard left, labor’s all out support of Obamacare,stimulus spending to save government jobs, card check, and higher taxes on the national level and the presence of their influence in state and local policy including the lack of Right to Work or prevailing wage reform, continuing threats of teacher and transit strikes, and opposition to outsourcing and privatization is finally getting through the public’s consciousness as being a majorcause of the ongoing funk in the economy.

Soon, PAT Benefits will Outpace Wages

According to a budget presentation made to the Port Authority this month, the agency’s two largest expenditure categories of wages/salaries and employee benefits are expected to grow at rates of 24% and 71% respectively from their audited FY08 amounts of $133 million and $108 million through FY15.

What does that mean? It means that in FY08 PAT paid $1.23 in wages/salaries for every $1 in employee benefits. This year the ratio fell to $1.10/1. By FY13, if projections hold, the ratio will be less than $1/$1 with $0.97 in wages/salaries to $1 in benefits. Two years later it will be $0.89/$1.

It would be hard not to argue that PAT is becoming a place for dispensing legacy cost payments instead of providing mass transit service. Pension costs and current healthcare expenditures are going up. Note that the category of benefits does not include the $30 million paid toward its unfunded retiree health care liability. Was this the future that the 2008 contract negotiations envisioned?

The New Teachers’ Contract

Articles in yesterday’s papers delivered the news that there is a tentative five-year contract between the Pittsburgh Public Schools and the Pittsburgh Federation of Teachers on the table. If ratified, the deal would extend through June of 2015 and, if current trends hold (enrollment falling by 3% annually, and average growth in expenditures of 3% annually), the District will be spending about $662 million and serving 23k students by the time the contract expires.

It appears as though employees will see no changes in health care insurance benefits in the years of the contract and will enjoy annual salary bumps, with those at the top of the salary schedule getting $1,500 each year of the agreement. Not bad considering the rising cost of health care and the massive pension spike that is headed our way.

And what of pay for performance? The possibility of tying teacher pay to student achievement, though a remote possibility given union opposition to the idea, was raised first in November of 2008 when the school board outlined goals for the 08-09 school year. One board member said "people need to see the reward because it gives them the incentive to do more" while the head of the PFT said many performance pay models were "tremendous failures".

The award of $40 million by the Gates Foundation this past fall certainly gave the idea momentum, and the District at that time had a few years of experience with a performance pay model for all of the school system’s principals (around 70) who no longer get salary step raises but are instead "compensated based on their performance" according to the website of the office that oversees the program.

So the District and the teachers appear to have settled on a "voluntary" arrangement for teachers instead of a widespread adoption of performance pay. Consider that principals are not unionized and their pay system did not have to be collectively bargained, whereas the teachers are and it does. If there is a five year contract with only minimal movement to performance pay for teachers then it appears the union, not surprisingly, won on this issue.

Bumpy Road Ahead for PAT

The Port Authority’s FY2010 budget projection shows the agency spending $362 million, up from $328 million just two years ago. Not surprisingly, the area of employee benefits has far outstripped any expenditure category, growing 15.6 percent from FY2008 (audited numbers show a $108 million expense) to $128 million this coming year.

Sure, PAT and County officials would be quick to say "well, we would have been much worse off without that contract agreement!" but that is a dubious claim. Union employees are due a 2% increase in January (sandwiched between 3% annual raises) and "pension and healthcare [costs are] projected to continue to exceed the rate of inflation" according to the budget document.

Like the City of Pittsburgh’s legacy cost situation, PAT’s does not look rosy. There is basically a 1 to 1 ratio in active to retired employees; the 2010 pension contribution is expected to grow by $10 million to over $25 million (in FY2005 it was under $5 million), and medical premiums are projected to grow 11.8%.

And as of now budget forecasts show operating deficits of $29 million and $44 million in FY2011 and FY2012. So much for the drink tax and the "tough contract" solving the problem. Now the saving grace will have to be the tolling of Interstate 80, a proposal that got a negative reaction the last time it was proposed.