How to Save a Billion Dollars in Other Post-Employment Benefit Costs

August 20th, 2010 by admin Categories: Issue Papers No Responses
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IP-3-2010 (August 2010)
Author: Barry W. Poulson

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Introduction

This study focuses on the retiree health plan administered by the Colorado Public Employees’ Retirement Association (PERA). The PERA Health Care Program is a cost sharing multiple-employer plan. The “employers” in this context are the various governments that hire most public employees, such as public school teachers, fire fighters, police officers and state employees. Under this program, PERA subsidizes a portion of the premium for health care coverage, and the retiree pays any remaining amount of that premium. The Colorado legislature created the Health Care Trust Fund in 1999 to provide state subsidies to the Health Care Program.

The issue has become more critical with repeated restraints being imposed on the State of Colorado’s budget and the need to prioritize spending. The State government continues to promise public employees that the retiree health care benefit will be part of their total remuneration. As the predicted shortfall in funding for the retiree health plan materializes, taxpayers will be on the hook to make up the funding deficiency.

More than $1 billion in unfunded liabilities have been incurred in the retiree health plan. An additional $79 million in unfunded liabilities was incurred in 2008, reflecting a rapid growth in retiree benefits and losses in the assets held in the Health Care Trust Fund. Prospects are for continued volatility and deterioration in the funding status of PERA’s retiree health plan.

PERA’s retiree health plan should be replaced by a defined contribution plan, similar to the plan enacted in Idaho. We estimate that in the short run this reform would reduce the employer annual required contribution to the plan from $72.6 million to $29.0 million. In addition, the annual subsidy from the State to the PERA Trust Fund would be reduced from $24.6 million to $14.5 million, a savings of $10.1 million. More importantly, this reform would reduce the accrued actuarial liabilities in the plan, and enable the state to pay off the $1 b