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Retiree Health Reform

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    FY 2014 Budget Recommendation:
    Issues in Brief
    Deval L. Patrick, Governor
    Timothy P. Murray, Lt. Governor

 

The Patrick-Murray Administration is committed to building on past success in reducing the Commonwealth’s long-term pension costs. The Administration has worked with stakeholders to develop a retiree health benefits reform proposal to save the Commonwealth and municipalities $20 B over 30 years.

The Problem

Currently, the estimated unfunded liability for retiree health benefits in Massachusetts is estimated to exceed a combined $40 B for both the Commonwealth and municipalities.  Our cost of retiree health is among the highest in the nation when compared to other states, and public employee benefits are more generous than what is provided by over 90 percent of private employers in the Commonwealth.  Massachusetts, similar to most states, has not set aside significant amount of resources to fund retiree health care.  This contrasts with pension funding, in which the Commonwealth and most other states set aside significant funds to provide sustainability.  In Fiscal Year 2013 (FY13), Massachusetts budgeted $415 M for retiree health care.  Funding the Commonwealth’s Annual Required Contribution which represents both the value of benefits earned during the year and an amortization of the Unfunded Actuarial Accrued Liability over a 30-year period, would require $1.3 B annually.  Additionally, the cost of the benefit is increasing due to the cost drivers shown below. 

Modifications to the current system are essential to keep it sustainable for future state and municipal employees.  This is vital to the Commonwealth’s effort to attract and retain quality employees.  In 2012, the Other Post-Employment Benefits (OPEB) Commission diligently researched and considered these issues and recommended changes by an 11-1 vote, including support from the executive branch members, legislators from both parties, the Treasurer, labors unions, and a retiree association.

Retiree Health Reform

The Patrick-Murray Administration is filing legislation informed by the recommendations of the OPEB Commission to save the Commonwealth and municipalities up to $20 B over 30 years.  Future retiree health care benefits provided by both the Commonwealth and municipalities will be amended by:

• Increasing the minimum years of service requirement from 10 to 20 years;
• Increasing the minimum eligibility age by five years for each Group to 60 (for most employees and elected officials), 55 (for specified hazardous duty employees) and 50 (for public safety employees); and
• Prorating benefits on a scale from 50 percent premium contribution after 20 years of service to the maximum available retiree benefit (e.g. 80 percent of premium for State retirees) at 30 years of service.

The Legislation will also direct the Group Insurance Commission (GIC) to investigate the adoption of an employee group waiver program for prescription drugs which would result in increased Federal subsidies and resulting savings to the Commonwealth.  The expected savings total $20 M for the Commonwealth in the first year of implementation.

The Commission recommended preserving the existing system for current retirees and workers close to retirement, in order to avoid unfairly changing benefits for workers who have very limited flexibility in retirement planning.  Current workers would be exempted from the above changes if they are:

• Within five years of retirement age for their Group and have completed 20 years of service as of the effective date of the legislation;
• Within five years of Medicare eligibility (currently 65 for most people) and within 12 months of vesting as of the effective date of the legislation;
• Current teachers participating in Retirement Plus upon reaching at least 57 years old and the maximum retirement benefit of 80 percent; or
• Receiving an accidental disability retirement.

For current employees, the Commission recommended phasing-in reforms to allow time to adjust to the new benefit structure as follows:

• Any current employee who, at the time of the legislation, is at least age 50 and has completed 15 years of service would be eligible to receive a 50 percent premium contribution upon retirement;
• Any current employee who, at the time of the legislation, is at least age 55 and has completed 10 years of service would be eligible to receive a 50 percent premium contribution upon retirement; and
• Ordinary disability retirements would be exempt from the reform until the 2014 Affordable Care Act (ACA) Exchange is available, at which time ordinary disability retirees would receive a 50 percent premium contribution for 10 to 20 years of service; beyond 20 years, prorating would apply.

The Commission further recommended freezing municipal retiree contributions for three years from the effective date of any OPEB reform.  Following this period, municipalities could exercise the right to reduce employer premium contributions, provided that any changes not affect existing retirees.

The Commission also recommended that future retirees be provided with information about the availability of coverage under the 2014 ACA Exchange and with the information necessary to determine whether coverage under the ACA exchange may be of comparable quality at a lower price.  The Administration supports these recommendations and will continue to work with municipalities to achieve savings.

Background on the OPEB Commission

The OPEB Commission was established in the 2011 pension reform bill.  The Commission’s charge was to: (i) consider the range of benefits that are or should be provided, as well as the current and future cost of providing them, (ii) consider how to best divide costs between the Commonwealth and employees and (iii) study the operation and structure of the Group Insurance Commission or any other aspect of employee healthcare.  The Commission sought to find savings while protecting current retirees and employees who are close to retirement age and maintaining a quality benefit for employees who spend their careers in public service.  Additionally, the Commission aimed to avoid deferring costs to future generations.