Cutting Retiree Health CareCategories: California Developments,OPEB/GASB 45/75
The Public Retirement Journal by Amy Brown, May 2015
Municipal bankruptcy rarely produces good news for all involved –debtors, employees, retirees and the public agency itself; there’s no exception in the City of San Bernardino’s recent decision to eliminate its retiree health care. This is a bit of unfortunate news for those relying on that benefit.
According to Reuters, a tentative deal has been struck under which retirees would sacrifice the health benefits they currently receive in exchange for a guarantee that the City continues to fund current pension benefits. Sound familiar? It should. This “deal” is comparable to other municipal bankruptcy deals – Detroit, Michigan and Stockton where most retirees’ health care benefits were either significantly decreased or cut altogether.
Retirees in San Bernardino agreed to be removed from an insurance pool that includes active members – employees who are younger and healthier. A lot of agencies blend their actives and retirees in an effort to lower costs for those who are out of the workforce and would otherwise be paying a great deal more for that coverage. Orange County had a “commingled” plan with their retirees until 2007 when the Board of Retirement decided to separate out the actives and retirees, essentially increasing the costs to those retirees by 50 percent in some cases. That price tag stung so the retirees sued, asserting the County was taking away a vested right. The courts ruled that no such right was established when the benefit was offered so the retirees were stuck with the increased costs of health care insurance.
San Bernardino retirees are now in the same boat – their premiums will increase significantly. To add salt to the wound, a monthly subsidy of $112 that the City provided retirees to help with premiums was also eliminated. Those retirees who don’t yet qualify for Medicare will now have to pay the full freight of their health care. Silver lining? A small number of older employees who are ineligible for Medicare will still receive a small stipend. Retirees have a choice – they can either stay in the City’s plan and pay the increases, or they can get out and find coverage through the state’s Affordable Care Act purchasing exchange.
Now, it’s not a done deal. The City has been negotiating with retirees behind closed doors for several months. The retirees’ group will get a chance to vote on the “deal,” but ultimately the courts will decide if it’s a go. Since retiree health care benefits don’t always pass the vested rights test as we have seen in many court cases throughout California, retirees were right to protect their pension benefits first and foremost. Remember, Judge Klein authored a 58-page opinion paper in the Stockton bankruptcy case arguing that all benefits – health and pensions – could be cut in Chapter 9 proceedings.
The proposed deal includes other concessions including extensive outsourcing, especially for waste, recycling and fire services. It also includes a change to a charter provision that the City’s consultant says is responsible for many of the City’s other problems, like high executive turnover. The City has until May 31st to present its plan.
Published by Amy Brown, the Public Retirement Journal provides a very timely source of valuable information and insight into public retirement, health care and related benefits. The Journal seeks out, and interviews, those people shaping public retirement policy and helps our readers understand just what they have planned in this field.
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