Public Entities Case Studies Eliminating Retiree Health Liability While Preserving Benefits CALPELRA 2017 Conference December 6, 2017 Thomas M. Morrison, Jr. Senior Vice President, Health and Retirement Plan Consultant Copyright © 2017 by The Segal Group, Inc. All rights reserved.

Agenda Case Study 1 Background

Case Study 2 Background

Factors leading the client’s need to address its Post-Employment Liabilities:

• Utilizing Existing Benefit Funding Sources • Health Reimbursement Arrangements (HRA): More Flexible for funding Retiree Accounts • Other Solutions: Utilizing Medicare Advantage Plans to Your Advantage

• Process—those things that were utilized in the decision process • Things that were tried in the process • Ultimate solution finding process

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Case Study 1 ØPublic Entity’s benefit was to pay 85% of the premium cost of the plan selected ØReimburse the cost of Medicare Part B premium ØBoard established target ARC that was sustainable in the longer term ØTarget was set to 7.5% of active payroll ØCurrent ARC was approaching 13% of payroll ØClient established a Joint Labor-Management task force to review all of its alternatives to achieve its goal

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Initial Actuarial Calculation as of June 30, 2007 Prior Plan

Total Actuarial Accrued Liability

$414,418,582

Value of Assets

$7,000,000

Unfunded Actuarial Accrued Liability

$407,418,582

30-Year Amortization of Unfunded Past Service/ Actuarial Accrued Liability

$21,643,711

Normal Cost

$13,971,022

Interest for Timing of Payment

$1,424,589

Total Annual Required Contribution (ARC) to Achieve Full Funding in 30 years Annual Required Contribution (ARC)

$37,039,322 $37M 12.92% of Payroll

Expected Benefit Payments to Retirees

$22.6M

Net Additional Contribution

$14.4M

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Joint Labor-Management Task Force ØExtremely time consuming ØRequested pricing for a significantly large number of variations on: • Plan design • Contribution scenarios • Eligibility changes

ØAt certain points variations on design and contributions were producing miniscule reductions to the actuarial liability ØTask force ended with no recommendation for changes ØThe process was more the destination than a recommendation ØManagement developed its own recommendation and presented it to Executive Board 5

Management Solution

Existing Retirees and Current Actives ØDefined contribution amount for existing and future retirees of $500 per month excluding new hires ØTransition plan to get to the $500 per month from current contribution of 85% of lowest cost plan over a five-year period to ease the transition burden on existing retirees ØMajority of retirees that were Medicare eligible actually benefited from $500 benefit

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Management Solution New Hires

ØNew defined contribution plan for employees hired after January 1, 2009 of a fixed amount, $1,200 per year for full-time employees or pro-rata amount per hour worked: • Amount deposited into retiree-only HRA • Vesting occurs upon retirement from the Employer, or if terminated, at age 50 • Vesting rule establishes the focus on retiree medical cost • Funding is made on a per payroll basis so no additional funding is required post-employment • There is no OPEB liability for the HRA plan

ØClient had linked Retirees to active, non-bargained employees by past actions 7

GASB OPEB Cost as of June 30, 2009 Prior Plan and Current Plan

Prior Plan Total Actuarial Accrued Liability

$451,213,675

Value of Assets

Flat $500 (Current Plan) $268,453,913

$9,716,355

$9,716,355

$441,497,320

$258,737,558

30-Year Amortization of Unfunded Past Service/Actuarial Accrued Liability

$23,454,111

$13,745,178

Normal Cost

$14,805,001

$7,200,607

Unfunded Actuarial Accrued Liability

Interest for Timing of Payment

$1,500,923

$821,713

$39,760,035

$21,767,498

$39.8M 12.88% of Payroll

$21.8M 7.05% of Payroll

Expected Benefit Payments to Retirees

$23.1M

$23.1M

Net Additional Contribution

$16.7M

$0

Total Annual Required Contribution (ARC) to Achieve Full Funding in 30 years Annual Required Contribution (ARC)

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Unfunded Actuarially Accrued Liability (UAAL)

$407,418,582 $258,737,558

2007

2009

$297,691,344

$311,670,195

2011

2013

$270,517,336

2015

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Case Study 2 Background ØPublic Entity previously allowed employees to surrender unused sick leave to purchase months of retiree medical coverage ØRedemption rate was 8 hours for 1 month of coverage ØAlternatively, employees could surrender unused sick leave for pension credits ØAlthough benefit was funded through surrender of unused sick leave, Public Entity had to calculate and book OPEB liability ØBargaining parties met to jointly develop workable defined contribution solution 10

Case Study 2 Components of Solution ØTransition benefit to a program with no OPEB liability for the public entity ØExpand available funds to be used to include unused vacation time (vacation time is vested in California and must be paid in cash at separation) ØBuild in incentives to encourage prudent use of paid time off (sick leave and vacation) 11

Case Study 2 Plan Design ØClient established minimum amount of sick leave and vacation time that must be maintained by employee ØAnnually, amount of sick leave and vacation time in excess of the minimum is converted to cash ØVacation time is surrendered at 100¢ on the dollar ØSick leave is surrendered on a graduated scale

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Case Study 2 ØSurrender of sick leave is graduated based on years of service, after 5 years for example: Years of Service 5 – 10 50% 11 – 15 65% 16 – 25 75% 25 or more 90% • Minimum sick leave balance was 120 hours • Vacation minimum was 80 hours • Excess converted at the fiscal year end

ØContribution made each year into a retiree only HRA ØOPEB liability was reduced to zero 13

HRAs Defined ØBenefits not used may be carried forward to the next year (no use-it-or-lose-it rule or maximums) ØHRA accounts can be unfunded (bookkeeping accounts only) or funded (like a 401(k)) ØThe HRA is vested when the plan determines it is vested ØHRA funding by time of retirement has no OPEB liability ØParticipation in an Active Employee HRA must be linked to medical plan participation under ACA but not a retiree only HRA 14

What an HRA Can Do For You HRAs are a flexible tool to: ØReimburse current medical expenses not covered otherwise ØAccumulate money to pay for COBRA and/or retiree health care ØReceive cash-out from other programs, such as sick leave or vacation ØHold employer contributions for current or future use ØProvide for surviving spouse and children

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Tax Treatment of HRAs ØContributions to HRA are not subject to income or payroll taxes ØHRA reimbursements of medical care expenses defined in IRC § 213(d) are not subject to income or payroll taxes ØHRA contributions are generally not pensionable earnings (subject to pensionable earnings definition of the public entity) ØReimbursements from HRA are not pensionable earnings 16

HRA Funding and Contribution Levels HRA accounts can be funded with employer contributions at rates set by the collective bargaining agreement: ØThere is no maximum limit on contributions under HRA rules ØMay be percent of pay, percent of premium, or fixed dollar per month or hour ØAllocating interest to accounts is permissible but not required

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What Participants Like About HRAs Balances can be used for premiums, long-term care, passed onto the spouse or dependent child at death of member It is funded with employer or plan sponsor’s money because no employee contributions are allowed

Carryover feature allows unused amounts to accumulate without use-it-or-lose-it rule Can accumulate cash out of sick leave or vacation balances tax exempt, subject to bargaining agreement

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Medicare Advantage Plan ØMedicare Advantage plans are sponsored by federal legislation and receive federal funds to provide Medicare benefits in lieu of Medicare: • May add benefits to the minimum benefits paid by Medicare • Recently have expanded from the traditional HMO model to national PPO network model • Coverage can be obtained in all 50 states • National vendors can offer coverage to non-Medicare retirees and spouses for seamless transition to Medicare

ØCost are reduced due to federal subsidies 19

Case Studies

Carve Out Medicare Retirees to MAPD North Carolina State Health Plan Ø 135,000 Medicare retirees auto enrolled in MAPD Ø Two Medicare Advantage carriers contracted Ø Each offers “Base” plan (default randomly assigned 50% to each)—$0/month for retiree Ø Each also offers “Buy Up” plan—$33/month, some carrier flexibility on plan design and features Ø Option to elect out and go back to 70/30 PPO (also $0/month) Ø Outcomes: 100% auto enrolled in MAPD Base plans: • 46% stayed in MAPD Base plans • 27% bought up to the MAPD Buy Up plans • 27% opted to return to the 70/30 PPO

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Additional Solutions for Retirees What is a Medicare Connector? ØA company that has contractual relationships with many insurance companies and provides high level assistance to enroll retirees into individual plans (Medigap or Medicare Advantage and Prescription Drug Plans) ØIt remains available to retirees throughout their life for any plan changes or claims issues ØIt manages the reimbursement process for the retiree’s premium or out-of-pocket medical expenses 21

Who Would Want to Use a Medicare Connector ØYour Group Plan may not be competitive on premium or coverage level with the individual Medicare market (What % of your retirees don’t take your plan?) ØYou want to give your retirees more affordable choices ØYou want to eliminate the risk of large claims ØYou want to stop being a benefits expert (CMS, EGWP, PDP, RDS) ØYou want to reduce your FASB or GASB liabilities

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Thomas M. Morrison Jr. Senior Vice President Segal Consulting 818-956-6777 [email protected]

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