In most cities and counties in California, “OPEB” (other post-employment benefit) costs are a growing expense. While OPEB costs do not amount to nearly as much as costs for pensions, they are significant, and like pension costs, they are increasing every year. And unlike pensions, cities and counties usually have more flexibility to modify OPEB benefits. The most significant OPEB cost is for retiree health care. What the City of Glendale did to address their OPEB costs provides an example that can potentially be emulated in other cities and counties.
By the end of 2015, the City of Glendale, California had accumulated Other Post Employment Benefits (OPEB) liabilities of $250 million as of the end of the 2015 fiscal year. Over the coming decade, projected annualized benefits subsidies to be paid by the City were predicted to nearly triple. Not only did these escalating liabilities translate into higher expenditures each year, but a new GASB (Government Accounting Standards Board) ruling was about to require OPEB liabilities to be recorded on municipal balance sheets. This, in turn, could jeopardize the city’s credit rating and result in higher interest rates on their bond financings.
In order to address this growing financial challenge to the city, council members and city staff worked with Keenan, a privately held insurance brokerage/consulting firm with offices throughout California. Keenan developed an approach to transition pre-age-65 and Medicare retirees from the City-sponsored plans into health care benefit exchange services. This allowed the City of Glendale to “unblend” the retiree costs from the premium rates for the active employee population.
In plain English, this means the city decided to no longer guarantee that retirees would pay no more than active employees for their health insurance, by no longer subsidizing the higher premiums that typically apply with older participants. Involving the affected retiree population in the discussion and development of the proposed solution, according to Keenan, the retirees were ultimately provided with a coverage solution giving them greater flexibility and lower premium costs than participating in the City’s plans.
As reported in the Los Angeles Times, in October 2015 the Glendale City Council gave unanimous approval to the new benefit arrangement. The solution effectively reduced the City’s unfunded OPEB liability by $200 million. As noted in Glendale’s 2017 Annual Financial Report:
“In October 2015, the City Council approved unblending medical insurance premium rates between active employees and retired employees effective June 1, 2016. Accordingly, City’s actuarial liability decreased from $214
million from the June 30, 2013 valuation to $16 million from the June 30, 2016 valuation, due to the fact that there is no more “implied subsidy” after June 1, 2016.”
According to the Los Angeles Times, “A two-party PPO plan under Anthem, for example, costs $2,454 per month with the city [Glendale] covering $1,049. The decision means retirees would pay the full amount.” This represents a monthly savings of around $1,400 per retiree. According to Transparent California, in 2016 the City of Glendale had 1,729 retirees receiving pension benefits. Assuming all of these retirees are also receiving OPEB benefits, this means the city is saving around $22 million per year. As noted, this amount was projected to triple within the next ten years – hence the $198 million reduction in liability.
Determining a fair and financial sustainable level of employee benefits requires striking a difficult balance. What may be fair is not only highly subjective, but may be easily perceived as in conflict with what is financially sustainable. The City of Glendale, along with most cities and counties in California, had the ability to modify retiree health insurance benefits. They, along with most cities and counties in California, do not have the ability to exercise nearly as much latitude to modify pension benefits. So they took a significant step towards ensuring ongoing financial sustainability for their city using the option that was available to them.
In this context, it is relevant to observe that the average pension (Cntl F “Glendale”) for a City of Glendale retiree with 30 years of service is $84,578.