MOORLACH UPDATE — Retiree Medical Reform — March 3, 2014

The topic of retiree medical benefits may sound esoteric, but the future costs of this promise to the taxpayers is rather dramatic. In 2006, the unfunded actuarial accrued liability (UAAL) to Orange County for its retiree medical program was $1.4 billion. In 2004, most of the nonpublic safety bargaining units at the County negotiated a substantial increase in pension benefit formulas (2.7 @ 55), retroactive to the date of hire, in lieu of pay raises for the next three years. The pension increase was substantial (more than 50 percent), and now it’s hard to find many long-term employees at the County that are older than the age of 55. Just two years after receiving this pension increase, with the housing bubble and a rise in the price of gasoline, a plea was made for a raise in pay by these same public employee unions. That was 2006 (not 2008), the year that I was elected to serve as the Second District Supervisor.

I was open to granting employee raises if the retiree medical UAAL could be reduced, thus also reducing the annual required contribution (ARC), a requirement for a disciplined effort to have the funds fully available when required (as opposed to paying the ever increasing actual costs as they are incurred out in the future). So I served on a committee to restructure the retiree medical plan. The County had obtained a legal opinion that the retiree medical plan was not vested and that it could be renegotiated through the employee bargaining process. Up until that time, employees were contributing 1 percent of salary toward the funding of this benefit, which the County matched. This funding source was woefully inadequate, as the large UAAL indicated. In fact, it was becoming unaffordable and the best solution was to eliminate the benefit all together. However, after a few months of negotiations, the following changes were agreed to:

· The County would assume the employee contribution and increase the combined total by 1.2 percent, committing to contribute 3.2 percent of employee payroll. The 1 percent that the employees were contributing was redirected to the pension system to address the increased pension costs that the granting of retroactive benefits had created.

· The County would establish what is known as a Government Accounting Standards Board (GASB) 45 Trust, into which the ARC would be paid.

· The County agreed to move the Trust corpus from the Orange County Treasurer, which was earning an average historic yield of 4.25 percent (remember those good old days?), to the Orange County Employees Retirement System, which had an interest rate assumption at the time of 7.75 percent.

· Employees retiring before age 60 would see a reduction in the annual grant of 7.5 percent per year, and if they retired after age 60, would see an increase of 7.5 percent for each year. This was an incentive to keep long-term employees at the County past the age of 55.

· The lump sum benefit feature, upon termination, was to be phased out over a ten-year period.

· The insurance premiums for the current employees and the retirees would be segregated. This is referred to as splitting the pool. The current employees would pay medical insurance premiums at their rates and retirees would pay insurance premiums at their rates. As medical insurance rates rise as you get older, the retirees would not benefit from the subsidy of blending the costs. This provided a cost reduction for the County, but would mean higher costs for retirees. Eliminating the subsidy would have a dramatic impact on the UAAL. As a side story, the Orange County Transportation Authority (OCTA) does not have a medical retiree plan. However, it does have a retiree medical UAAL because some retirees are exercising their rights under COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985), an IRS continuation of coverage of group health plans where the retiree pays the premiums to the former employer in order to stay in the plan. As the premium is in a blended pool and averaged out, the subsidy is recognized by OCTA as a liability for GASB 45 purposes.

· The annual cost of living adjustment (COLA) for grant increases was reduced to 3 percent from 5 percent.

· The grant would be reduced by 50 percent once the retiree becomes Medicare eligible.

· The County granted a 4.75 percent pay raise.

Yes, the proposal was complex and had numerous moving pieces. And I did not even discuss my efforts to prevent the large UAAL while I was County Treasurer and an OCERS Board member. But, the new retiree medical plan was cutting edge and resulted in a number of benefits. The largest was the reduction of the UAAL from $1.4 billion to $412 million, nearly a $1 billion elimination of debt! The ARC was reduced from $130 million per year to some $26 million per year (reducing costs by more than $700 million since the January 2008 effective date!). With the Great Recession on the horizon, this was more than a God-send, it kept the County solvent. And the rating agencies were thrilled to see a plan implemented, a rarity at the time around the nation. In fact, I recall receiving an invitation to explain our efforts, which had garnered national attention, at a conference in Chicago in March. We didn’t call it a “Polar Vortex” at the time, but the idea of traveling to Chicago in March was not something I really wanted to do. The downside was that the changes were negotiated with the current employees and the retirees felt excluded from the process. They were vociferously opposed to the splitting of the pool and sued. Fortunately, the courts have been ruling against the retirees and in the County’s favor. The history of their efforts is provided in the Calpensions piece below, which was also published in


CalPERS, CalSTRS and other government pensions

Three new rulings on retiree health care cuts

A federal appeals court last week gave Sonoma County retirees another chance to show that an implied contract gave them vested rights to retiree health care, preventing the benefit from being cut to $500 a month.

The majority ruling in a 2-to-1 vote of a 9th Circuit panel said retirees have a “heavy burden” showing county intent to create a lifetime contract, which the dissenting justice said is not supported by dozens of labor agreements submitted to a lower court.

Another 9th Circuit federal panel unanimously ruled Feb. 13 that Orange County retirees do not have an implied contract preventing the county from separating their health care from a pool with active workers, sharply increasing premiums paid by retirees.

And a state Appellate panel published a unanimous ruling Jan. 23 that upheld a cap on San Diego retiree health care payments, rejecting an attempt to relitigate a federal court ruling that the city’s police retiree health care is not a contractual vested right.

“After five years of litigation with the POA (Police Officers Association), making the city expend time, energy, money and resources to defend the exact same case in this action is an example of precisely the type of vexatious litigation the doctrine of collateral estoppel was designed to prevent,” said the state Appellate panel.

Compared to the attention given public pension costs, retiree health care has been a sleeper issue. Most government employers did not calculate or report retiree health care debt until accounting rules changed a decade ago.

Most still do not pre-fund retiree health care like pensions, investing annual payments to get earnings that reduce long-term costs and debt passed to future generations.

An example of what can happen is a generous state worker retiree health care plan: It’s long-term debt is already much greater than pension debt, and in five years it may be taking more money from the state general fund than pensions.

Over the next 30 years, the state worker retiree health care unfunded liability is $63.8 billion, state Controller John Chiang reported last year. The state worker pension unfunded liability is $45.5 billion, a CalPERS actuarial valuation said last year.

A forecast from the nonpartisan Legislative Analyst’s Office last November projected that a $2.3 billion general fund pension payment to CalPERS (special funds boost the total payment to $3.8 billion) will grow to $2.8 billion in fiscal 2019-20.

State general fund spending on retiree health care for state workers, $1.8 billion this fiscal year, is projected to grow more than 10 percent a year during the same forecast period, nearly doubling to $3.3 billion.

How generous is the state worker retiree health care plan? When the typical state worker retires, they pay less for full health care coverage than they paid while working on the job.

State worker retiree health care pays 100 percent of the premium of the retiree (the average cost of several of the largest health plans) and 90 percent of the premium for dependents.

For the health care of active workers, the state usually pays 80 or 85 percent of the premium for the worker, depending on labor contract bargaining, and 80 percent of the premium for dependents.

State pension law seems settled. A widely held view is that a series of state court rulings, a key one in 1955, mean the pension offered at hire becomes a vested right, protected by contract law, that can only be cut if offset by a new comparable benefit.

Retiree health care law may still be evolving. And unlike the main pension rulings that are all in state courts, the legal battles over retiree health care are being fought in state and federal courts.

Some think state court judges have a conflict when they make rulings on pensions that can affect their own pensions. A nationally known lawyer, David Boies, wanted to move Rhode Island pension reform litigation from state to federal courts.

As Orange County unsuccessfully tried to overturn a large retroactive pension increase for deputy sheriffs, the attorney for the deputies, a retired Court of Appeal justice, told her former colleagues their ruling would affect every pension in the state.

“(I)t would affect yours, it would affect mine,” said Miriam Vogel, as quoted by Orange County Supervisor John Moorlach in the Orange County Register in 2011. He said it was Vogel’s only argument before she took a couple of questions and sat down.

As with pensions, state judges have a similar conflict when they rule on retiree health care. With 10 or more years of service, state judges are eligible for state retiree health care that pays 100 percent of the premium.

In San Diego, a federal district court ruling that a police retiree health care cut in 2005 did not violate vested rights was upheld on appeal. A state superior court denial of relitigation of the federal ruling was upheld by the state appellate ruling in January.

“The constitutional issue of vested benefits is both state and federal, so a choice can be made,” said Jan Goldsmith, San Diego city attorney.

If the plaintiffs had been successful in the state courts, said Goldsmith, it could have affected a cut in benefits negotiated with unions in 2011 that is expected to save the city more than $700 million over 25 years.

“I was on the bench for 10 years, and I frankly don’t see it,” Goldsmith said of a state court conflict on public employee retirement rulings. “I’m a true believer.”

In Orange County, an agreement negotiated with unions in 2008 separated active and retired worker health care premiums, ending a pool begun in 1985 that raised county costs but cut payments by retirees because their age-related coverage costs more.

When the cut was upheld by a district court and appealed by retirees, the federal 9th circuit court asked the state Supreme Court: “Whether, as a matter of California law, a California county and its employees can form an implied contract that confers vested rights to health benefits on retired county employees.”

In a benchmark ruling, the state Supreme Court said in 2011 that a contract with vested rights “can be implied under certain circumstances from a county ordinance or resolution” if an intent to do so can be shown by evidence.

A federal district court, following the new state guidelines, again ruled that Orange County can end the retiree health care pool. The federal 9th circuit panel upheld the ruling last month.

Last September, a superior court judge overturned a freeze on retiree health care for Los Angeles city attorneys, finding an implied contract. And a federal judge tossed a suit to overturn Sacramento County retiree health care cuts, finding no contract.

The split vote of a 9th circuit panel last week gives Sonoma County retirees a chance to return to federal district court and present evidence showing, under the new guidelines, the county intended to create a contract for lifetime retiree health care.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Posted 3 Mar 14

Disclaimer: You have been added to my MOORLACH UPDATE communication e-mail tree. In lieu of a weekly newsletter, you will receive occasional media updates, some with commentary to explain the situation, whenever I appear in the media (unless it is a duplication of a previous story).

I have two thoughts for you to consider: (1) my office does not usually issue press releases to get into the newspapers (only in rare cases); and (2) I do not write the articles, opinions or letters to the editor.

This message should appear at the bottom of every e-mail you receive. If these e-mails should stop arriving in your mail box, it will be because your address has changed and you did not provide a new one. If you do not wish to receive these e-mails, then please e-mail back and request to unsubscribe.