Understanding finances and changes in retiree health care.

• Author: Franzel, Joshua
• Position: Solutions - Statistical data

As of March 2011, 87 percent of all state and local government workers had access to health care through their employer, with nearly three-quarters (72 percent) participating. (1) This employer-provided health coverage often continues once a public employee retires, should they meet tenure, age, and other related requirements. With overall state budgets continuing to feel the effects of the Great Recession, health-care cost trends continuing upward at more than 3 percent annually, annual premiums up 8-9 percent between 2010 and 2011 (2) relatively new accounting rules requiring states to report liabilities associated with retiree health care, and the continued use of pay-as-you-go funding approaches, governments need to understand what has done so far so they can assess their own efforts and determine if their retiree health-care programs are sustainable.

RETIREE HEALTH CARE

All states offer some form of retiree health care to their employees, provided through public employer-provided health plans that are self-insured (funded by the state government) or purchased from a commercial insurer. Often, "states offer a relatively complex matrix of plans and premiums, varied by family size, type of plan (HMO, PPO, indemnity)." (3) The plans retirees participate in may be the same as those they had access to during active employment. (4)

The states vary in terms of when an employee is eligible for retiree health care and how much the public employer and employee or retiree pays for the health care. In some states, all employees are eligible for retiree health care, and in others, they must work for some specified period of time before being eligible, and sometimes the portion of the plan costs the state picks up increases over the course of the employee's tenure. Also, states vary in their approach to providing health care to retirees who are 65 and eligible for Medicare. Some states eliminate retiree health care at this point, and many states continue to provide the benefit, but as a secondary payer, behind Medicare. (5)

GASB STATEMENT NO. 43 AND STATEMENT NO. 45

In 2004, the Governmental Accounting Standard Board (GASB) issued Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, and Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. The statements provide a set of standards for more completely valuing the costs of post employment benefits other than pensions (OPEB), a large portion of which is retiree health care, but can also include dental, vision, and other benefits. The statements outline how state and local governments should report, through actuarial estimation, the costs of providing OPEB that have been and continue to be offered to employees and retirees. This estimation accounts for how many public workers are expected to receive OPEB; how long employees are likely to work before retiring, and then how long they're likely to live afterward; projected future health-care costs; and the expected investment rate of return on funds the government has set aside to pay for OPEB, if they have. The cost of providing OPEB is calculated to a present-day value that has been discounted based on projected long-term rates of return on investments. Some of the key data points that come out of the actuarial estimate are:

* The actuarial accrued liability (AAL), or the present value of benefits employees have earned in prior years and up through the current time.

* The actuarial value of assets (AVA), or the value of cash and investments that have been set aside to cover future OPEB costs, gains, and losses, which are smoothed over a 3-5 year period to reflect the long-term nature of OPEB provision.

* The unfunded actuarial accrued...