Facing the Challenge of Retiree Health Care: Liabilities and Responses of State and Local Governments-A conference summary

Chicago Fed Letter, May 2008 by Mattoon, Richard H

Nuehring argued that it is particularly important for a government to provide as detailed an employee and retiree census as possible. This allows the actuary to develop more-detailed and accurate assessments of the required funding.

Neighboring states and OPEB

While OPEB liabilities are largely unfunded, there are examples of governments that have moved aggressively to begin meeting the OPEB challenge. The State of Ohio; Oakland County, MI; and Duluth, MN, have all been recognized for their efforts in addressing OPEB.

Karen Carraher, director of finance, Ohio Public Employees Retirement System (OPERS), presented Ohio's OPEB plan. OPERS is a large retirement system with $83 billion in assets and over 900,000 active and inactive members, covering 3,707 government units. OPERS began providing retiree health care coverage in 1962 and established a health care trust in 1974. As the health care liabilities have grown, OPERS has taken steps to control health care costs. Important measures have included providing an HMO (health maintenance organization) and a PPO (preferred provider organization); offering different levels of service, premiums, deductibles, and co-payments; increasing pharmaceutical co-payments; emphasizing preventive services; and adjusting benefit levels to reflect years of service worked.

The key to the OPERS plan has been an active communication strategy with employees. OPERS wants to make certain that employees understand what is driving the funding status of the plan; the retirement system also wants to make sure that any future plan changes are communicated long before they are implemented so that employees will have enough time to adjust.

Carraher noted that, from a funding perspective, the goal of the plan has been to have sufficient assets to meet a solvency target of 15-25 years of liabilities. The plan currently has exceeded this goal and has an estimated solvency of 27 years. This has been accomplished in a relatively short time, given that the fund had 14 years of solvency in 2002. In terms of its funded ratio (the ratio of assets to liabilities), the fund is 39% funded. To help ensure that funding is maintained, the employer contribution rate has been raised from 13% of employee salaries to 14%.

Robert Daddow, deputy county executive, Oakland County, MI, presented the county's plan for funding OPEB. The county began funding OPEB at the ARC in 1987, and has funded at the ARC every subsequent year. Through both its funding practice and modifications to its plan, Oakland County's OPEB liability is fully funded.

Daddow noted that the county has used a variety of cost control strategies to reduce its OPEB liability, including:

* Offering buyouts to deferred retirees in exchange for their renouncing any claims for retiree health care;

* Increasing co-payments and deductibles for health services;

* Implementing tiered pharmaceutical co-payments;

* Issuing competitive bids for pharmaceutical management services;

* Closing the defined benefit health plan to new hires (in 2005) and creating health savings accounts; and