Unblending The Retirees

Last night, the Council decided to provide one more transition year to the City’s 140 retirees who purchase medical insurance from the City. It’ll cost us $220,000 – but it will provide a softer landing for the retirees who have traditionally counted on favorable City medical insurance rates, and it will save us a lot of money in the long run.

This story is a good example of the financial pressures the City faces, and the hard decisions that we on the Council have to make as those financial pressures grow. It’s also a good story about collaboration and about innovative solutions within government.

Many city employees retire before the age of 65, meaning they are not yet eligible for Medicare. Faced with the question of what to do about medical insurance in the meantime, about 140 of these younger retirees currently buy it through the City’s program. Traditionally, the retirees and the current employees were put into the same pool and purchased insurance at the same rate – a rate that was lower for the retirees than they otherwise would pay (because their medical costs generally are higher) but higher for the employees than they would otherwise pay (because they were subsidizing the retirees). The City is not required to provide retirees with medical insurance at the same rate as current employees, but it was longstanding practice and most of our younger retirees had come to depend on it.

In the last few years, of course, the price that everyone pays has gone way up. And, more recently, the Government Accounting Standards Board (GASB) has changed its practices and will soon require that the City (and all other government agencies) calculate the cost of all retiree medical benefits as a liability on our books. A quick calculation by the city’s staff concluded that this figure would currently be $5 million. In the years ahead, as more and more people retire, it would grow to $24 million. This liability would harm the city’s overall balance sheet and could hurt our credit rating. And, of course, it would mean the rates for our current employees would just keep going up and up.

This is kind of like Social Security. The more retirees there are, the harder it for those still working to pay the bill.

So last fall, we voted to “unblend” the rate, meaning current employees paid a rate based on their own actuarial and risk factors and retirees paid a separate rate based on their factors. We did it, frankly, without a whole lot of discussion. The result was a big hit for some of our younger retirees. The typical individual saw his or her rate double, from about $500 to $1,000 per month, under Blue Shield. (Kaiser, which had just taken over Buenaventura Medical Group, had not yet unblended the rates and so their rates were still low.)

Not surprisingly, this caused a backlash. In November, Councilmembers Neal Andrews and Jim Monahan proposed reconsidering this action – and more than 100 out of the 140 retirees packed the council chamber in support. We agreed to subsidize 50% of the increased rates for one year (calendar year 2007) – a hit of about $400,000 on the General Fund. We also agreed to create a task force, including Councilmembers Andrews and Ed Summers, to work out a longer-term solution.

And we did. The proposal that came before us last night was a pretty good solution, and included a tolerable increase for most people. Kaiser has now unblended the rate and so the typical individual will now pay $500 a month, up from $300 a month last year. (It’s more than $1,000 a month for two or more people.)

But the task force also found another solution to the high Blue Shield costs. Riverside County has negotiated low rates with Blue Shield and has now offered this program – known as Exclusive Care Select – to other government agencies as well. Ventura County is likely to join, as are Orange and San Bernardino Counties. By joining this program – essentially, contracting with Riverside County to join their program – it looks like we’ll be able to soften the blow, and bring the retiree premiums to around $530 a month for an individual and $1,000 for a couple.

This is a pretty good application of a theory floating around in public administration circles these days. The theory suggests that government agencies should not try to do everything. Rather, they should specialize in what they are good at, and then contract with each other for the good stuff. For example, if the County’s better at 911 than we are, let’s contract with them. Our deal with Exclusive Care Select is a good example. Riverside County is good at this stuff. So we’re going to contract with them to help provide more affordable health insurance for our younger retirees.

And we’re giving the retirees a bit of a soft landing besides. We agreed to subsidize their transition for one more year – at half the previous level, or $220,000. That works out, on average, to about $130 per month per retiree. (We rejected another alternative, which was to phase the subsidy out over four years, at a cost of almost $1 million.)

Our subsidies are real money, of course; this is money we will have to come up with in the short run from existing sources of funds. And we weren’t contractually obligated to provide this transition period.

But our own employees clearly believed we had a moral obligation to them. We did not want to risk our long-term credit rating. And by working together with the retirees, we found an innovative solution that, we hope, will maintain affordable medical insurance premiums for them in the long run. Who says government can’t be innovative?