Retiree Medical and Bankruptcy: Why Davis Can and Should Cut Back on Its Overly Generous Retiree Medical Plan

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OPEBIn June, City Manager Steve Pinkerton’s pronouncement that the city’s retiree medical costs represent over 20% of payroll, and that number could go up as high as 25%, alarmed the Vanguard.

“Unfortunately, 20% of payroll is probably not going to cut it in the future,” City Manager Pinkerton told the city council back in June.  “We’ve been ramping this up, the council has been responsible and doing the right thing for the last three or four years by beginning to take on retiree medical, ramping it up each year from 6% to 8% to 10%, last year it was 12% of payroll, the original plan was to go 14%…”

“We’re recommending based on some input we got earlier this year to go all the way up to 20%,” he continued.  “The reality is that you’re probably going to see a discussion soon where we’re going to have to ramp it up eventually to closer to 23-24 percent.”

The city manager has since downgraded that projection to around 21%, but the number is still very high for a percentage of the payrolls largely going to people who either are no longer working or will be no longer working when they receive the benefit.

Now comes a report from Calpensions’ Ed Mendel, who reports, “The cost of retiree health care promised state and local government employees, growing at a faster pace than more-publicized public pensions, has become a common target for cuts in a string of California city bankruptcies.”

The three major cities that have incurred bankruptcies are now making huge cuts to their retiree health plan.

San Bernardino has cut $2.2 million from “a deferred retiree health payment in a three-month fiscal emergency plan said to be needed to allow the city to make payroll.”

Vallejo has cut monthly retiree health care payments from $300 to as high as $1500, which will save around $100 million over time.

Finally, Mr. Mendel reports that Stockton will end all payments for retiree health care plans, “citing overly generous and costly benefits: immediate eligibility, uncapped payments, less than half of retirees covered, and a cost equal to 31 percent of payroll for proper pre-funding.”

What is most interesting is this: “Unlike pensions, there is no widely held view that promised retiree health care is a ‘vested right,’ protected by contract law, under a long series of court decisions. Some think promised retiree health care can be cut, depending on circumstances.”

While pensions are largely protected by CalPERS, which Mr. Mendel cites as the reason that Vallejo did not attempt cutting pensions during bankruptcy, “Cutting retiree health care in bankruptcy was upheld last month. U.S. Bankruptcy Judge Christopher Klein in Sacramento denied a temporary restraining order sought by a group of Stockton retirees.”

Mr. Mendel reports that in that case, Judge Klein argues that “Stockton retirees were in a ‘dire situation’ and that a cut in retiree health care could be ‘catastrophic to some of them.’ “

However, “The judge asked the retiree attorney to explain why the court’s hands are not tied by a federal regulation, ‘section 904,’ prohibiting interference with the debtor’s political or governmental powers, property or revenues and income-producing property.”

He notes that Scott Emblidge, who served as attorney for the retirees argued, “His clients want protection of what they believe is a vested right. He said the federal law is broad enough to allow the health care cut to be blocked as the action of an employer, not interference with governmental powers.”

“At a minimum, preserve the status quo,” Mr. Emblidge said.  “If the bankruptcy court cannot block the cut, he urged the judge to lift the ‘stay’ on debt collection automatically obtained by a bankruptcy filing, so retirees can seek a block in another court,” Mr. Mendel reports.

He continues, “Marc Levinson, the attorney for Stockton who also represented Vallejo, said blocking the retiree health cut would interfere with governmental powers, forcing the city council to make legislative budget decisions about layoffs or other revenue sources.

“Levinson said blocking the retiree health care cut would be telling the city how to spend its money. If the stay is lifted, he said, the court also would be telling the city how to spend its money, raising the question: What is the point of a bankruptcy filing?”

Ed Mendel raises the critical issue for Davis: “Lifetime retiree health care from an employer, rare in the private sector, is an important benefit as public employees decide whether to retire as early as 50 or 55 as most retirement plans allow, well before eligibility for federal Medicare at age 65.”

While the city is not currently facing bankruptcy, we believe that the current level of benefits for retirees is unsustainable.

There are two major categories – the full health insurance plan for retirees who are not Medicare-eligible – which means those retirees starting at 50 (for public safety) and 55 (for non-safety employees) up until they are 65.

Second, the city supplements the Medicare plan with its own plan, as well.

The individual plans vary, but at the basic level the city pays up to $1587.14 a month for those under 65 and $833.43 for those eligible for Medicare.

The more typical rate for those under 65 is considerably lower, however.  The typical premium for those under 65 is $600 for single, $1100 for couple and $1500 for family.  However, some singles opt for a plan that is a little over $1000 per month.

Typical premiums for Medicare-eligible are $400 for single, $770 for a couple and $1150 for family.

Currently, the city is paying for 135 pre-Medicare retirees, which includes 52 singles, 56 couples and 27 families.

The city also has 83 Medicare retirees, including 41 singles, 38 couples and 4 families.  Also, there are 21 retirees not on a plan.  Many of those are covered by a spouse.

But this begs two questions.

First, could the city not save substantial money by simply extending employment by five or ten years?

Second, why is the city agreeing to supplement Medicare?

If Vallejo has been forced to cut their payments from $1500 per month downward to $300, couldn’t we at least reduce it down to $500 or $1000?

And given that these rights are not vested, why should we not cut back or discontinue post-Medicare benefits?  We cannot afford what we have been paying.  And we certainly cannot afford to continue to spend 1/5 to one-quarter of our payroll on people not presently working.

—David M. Greenwald reporting

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About The Author

David Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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39 thoughts on “Retiree Medical and Bankruptcy: Why Davis Can and Should Cut Back on Its Overly Generous Retiree Medical Plan”

  1. Rifkin

    [i]”But this begs two questions.”[/i]

    No, it does not beg those questions. It [i]raises[/i] two questions.

    [/i]”First, could the city not save substantial money by simply extending employment by five or ten years?”[/i]

    Yes, of course. One of the two huge problems* with the drastic changes we made in the last decade to our pension formulas for City employees is that we now strongly encourage employees to retire at very young ages, the result of which is a vastly increased cost for their post-retirement healthcare plans, paid for by the taxpayers. (Keep in mind that while a 50 year old is “retired” and having his and his family’s healthcare paid for by us, a 30 year old now has his job and at the same time is getting his healthcare and his family’s healthcare paid for by us.) If the 50 year old employee would stay on the job another 15 years, until he turned 65, that would represent 15 years of cost savings for retiree healthcare for the taxpayers. That is a lot of money.

    *The other huge problem of our pension formulas is simply the great amount they cost to fund.

    [i]Second, why is the city agreeing to supplement Medicare?[/i]

    Because the health plans that City workers get while working, and those that City retirees get, are gold-plated plans. They are far better than what anyone who simply gets what Medicare Part A gets. So if the City did not subsidize the difference between the Kaiser Family Plan and Medicare, those retirees would have dramatically worse medical coverage with a vastly larger amount of out of pocket expenses.

  2. Rifkin

    As all members of the City Council know, I have come up with the solution to the OPEB problem.

    The City can legally pay a minimum amount ($115/mo.) for each retiree’s health plan and still have the retiree covered by their good quality plans under CalPERS. My recommendation to the Council is that for all retirees under 65, the City require that the retiree pay the difference between the minimum amount and the actual cost of his OPEB. Once the person turns 65, the City will pick up the full cost of his plan, less any amount Medicare pays.

    This will have a number of benefits for the City. First, it will [i]discourage[/i] early retirements. Instead of quitting work at 53 or 56, a worker will have good reason to stay on the job until he is 65. Second, because the retiree health plans cover spouses and dependent children (used to be up to age 22, now it is up to age 26), those 65 and over are less likely to have dependent children eligible for coverage, and I would guess more are widowed in their late 60s than those in their early 50s, saving a bit more money.

    My plan, I once calculated, gets rid of 75% of our retiree healthcare debt. However, it does not solve the entire problem.

    We will also improve matters in our new labor deals by changing the pension formulas. For public safety, who now get 3% at 50, they must go to 2% at 55; and for non-safety, they need to go from 2.5% at 55 to 2% at 60. Alas, the new formulas will only apply to new hires. The current employees are legally locked in at their current rates.

  3. Rifkin

    I am not recommending Davis outsource all of its jobs in order to save money on pensions and retiree medical costs. However, The Economist has an interesting article ([url]http://www.economist.com/node/21559633[/url]) about a city of 100,000 people in the Atlanta area which has essentially done that. [quote]What sets Sandy Springs apart from other cities is that it lacks something that most have in abundance: employees.

    Apart from its policemen and firemen—which, under Georgia’s constitution, must be public workers—Sandy Springs has only seven full-time employees: a city clerk, a court clerk, a finance director and four people who work in the city manager’s office. The city manager himself works for Sandy Springs, but his spokesman—like all the communications staff—works for The Collaborative, a Boston-based public-affairs consultancy. Morgan Falls is a lovely park overlooking the Chattahoochee river; this and the other city parks are maintained by employees of Jacobs, a multinational engineering firm based in southern California. Jacobs also administers the city’s court, in which the independent judges are paid a flat hourly rate. Severn Trent Services, based in Coventry, keeps the city’s books. Four other private firms carry out most of the other city functions.[/quote]

  4. E Roberts Musser

    [quote]This will have a number of benefits for the City. First, it will discourage early retirements. Instead of quitting work at 53 or 56, a worker will have good reason to stay on the job until he is 65. [/quote]

    Do you have any idea how often this scenario happens?

  5. E Roberts Musser

    Oops, should have made my question more clear. Do you have any idea how often the scenario of a city employee retiring early and being replaced by a younger employee happens?

  6. Frankly

    The Rifkin plan makes perfect sense.

    One really has to marvel at the strength of the political connections that have led us to this point, and are responsible for continued blocking and delay of these type of sensible solutions. Politicans continue to be either indebted to, or afraid of angering, the public employee unions.

    Those indebted are hopeless. Our first step is top vote them out of office.

    What is needed next is a new grassroots PR effort to lay cover for the rest.

    Political leaders with the motivation to go againt the unions to solve these problems need our support. They need us to counter the union tactic of starving services as a kind of blackmail compelling voters to demand nonsensical continuation of unsustainable union pay and benefits through dreams of higher taxation. They need us to point out the drastic level of unfairness comparing public sector pay and benefits to their private sector counterparts. They need us to explain the tradeoffs for continued unsustainable public sector pay and benefits: fewer services, and fewer public sector jobs. They also need us to establish the clear connection between education funding shortfalls and the run up in state and local government employee spending and commitments… especially retiree benefit spending and commitments.

    At its core, this argument is about fairness. It simply is not fair that public-sector employee have total compensation (including their pay and the real cost/value of all their tangible benefits) that is 1.5 to 4-times greater than what private-sector employees receive. It is also not fair that public-sector employees get to retire 10-15 years earlier than private-sector employees. These things are not fair even in abscence of our drastic fiscal problems. Maintaining them in the face of a looming fiscal cliff and impending municiple bankruptcy is madness.

  7. Frankly

    Related to Outsourcing, apparently cities in Oregon are outsourcing some service to neighboring cities as a cost saving measure.

    This approach appeals to my entrepreneurial senses. The problem Davis has in pursuing this type of solution is that no surrounding cities trust us to partner with us. Also, our relatively nutty and demanding population make us a poor customer/service provider match for the surrounding cities.

    Nevertheless, it is an idea to pursue. For example, can Davis “sell” municiple services to other cities at a lower price-point?

    It does make sense thinking about this. We have all these cities providing similar services. There is an opportunity for leveraging the economies of scale. Private providers are one option. But why don’t we see cities developing a platform that could be marketed to and sold to other cities?

    Answering that second question should help shed light on some of the reasons public-sector business is generally always several steps behind private-sector business in terms of efficiency.

  8. Robin W

    Rich — In light of the cuts you propose to employee health care benefits, I do not understand why you feel the City should continue to pay 100% of the Medicare supplement policy for retirees. I am not aware of any private employers who provide retiree health care benefits. The City retirees have very generous pension plans (another thing few private employees have) which should provide them with adequate income to pay for their own Medicare supplement policies if they opt to have such policies in addition to Medicare Part A. At the very least, retirees should have to contribute to the cost of their Medicare supplement policies if they opt to have them. This is a cut that can take place immediately, thereby helping with the budget immediately, unlike the many cuts that can only be imposed on new employees.

  9. Robin W

    Correction to my first comment above: ” . . . in light of the cuts you propose to the City’s funding of health benefits for retirees who are under 65 . . .

  10. Michael Harrington

    I know there are savings galore in all of the programs associated with city employees.

    However, when are we going to see 3 crewmembers riding around on this trucks racing to non-injury accidents? Going to 3 (indutry standard) immediately saves the tax payers huge amounts of money.

    I really dont take seriously any changes in city budget issues until I see 3 member crews. When I see that, I know someone in City Hall has guts and is willing to make real-money changes.

  11. Frankly

    Robin W: Why do you think that going the way of Sandy Springs is not a better solution? From what I understand, city residents claim their services are better. The city has a balanced budget with zero debt obligations.

  12. PRO Davis17

    Jeff Boone said

    08/06/12 – 10:57 AM

    Related to Outsourcing, apparently cities in Oregon are outsourcing some service to neighboring cities as a cost saving measure.

    This approach appeals to my entrepreneurial senses. The problem Davis has in pursuing this type of solution is that no surrounding cities trust us to partner with us. Also, our relatively nutty and demanding population make us a poor customer/service provider match for the surrounding cities.

    Nevertheless, it is an idea to pursue. For example, can Davis “sell” municipal services to other cities at a lower price-point?

    It does make sense thinking about this. We have all these cities providing similar services. There is an opportunity for leveraging the economies of scale. Private providers are one option. But why don’t we see cities developing a platform that could be marketed to and sold to other cities?

    Answering that second question should help shed light on some of the reasons public-sector business is generally always several steps behind private-sector business in terms of efficiency.

    Jeff,

    This suggestion is genius. I have never heard of such a thing proposed before, but I agree that all the surrounding communities basically provide the same services. Why not consolidate, retain the best and brightest and have them work for Davis, Woodland & West Sacramento.

  13. Don Shor

    We can’t even merge the two redundant local fire departments, so I see the likelihood of cooperation between autonomous cities as being very slim.

  14. Michael Harrington

    Pro Davis: So far as I know, the Davis Waste Removal contract has never been competively bid. That company is a big Chamber of Commerce member, and is viewed by many to be “untouchable.”

    Their contract came up for the 5 yr renewal when I was on the CC, and I brought up the issue of why was it sole source and not out to bid, and staff and Suzie Boyd and others treated me like I was a village idiot, and that contract could not possibly be put out because Davis is “special” and has “special recycling” programs and DWR has been in town forever, so I was totally shot down, quietly.

    In those days, there were a lot of sacred cows around town, and DWR was one of them.

    Maybe someone who knows the status of that contract can update all of us?
    Was it ever put out to bid since 2004? I doubt it.

    Once, when I was on the CC, I was flying to Dallas for my aviation work, and there was a guy next to me who owned a large muni waste pick up and recycling company in Sacramento. I told him my civic job, and asked what he knew about DWR, and why wasn’t it ever bid. He told me that DWR was well known to already have the political “fix” in, and that they charged several times what other companies would charge, if allowed to bid. Maybe sour grapes, I dont know, but that conversation stuck with me over the years.

    Someone should look into this. Rich, what do you know about the DWR contract?

  15. Michael Harrington

    Don: good point. I like regional cooperation in a general sense, but its pretty case specific. The main point about merging Davis and UCD Fire was we pay our employees vastly higher sums of money, and UCD said they are not going to enter into a deal with Davis where UCD has to up its pay to unsustainable levels to match us. Meaning, our fire fighters are not going to give up any part of that huge difference.

  16. SouthofDavis

    Robin W wrote:

    > Rich — In light of the cuts you propose to employee health care
    > benefits, I do not understand why you feel the City should continue
    > to pay 100% of the Medicare supplement policy for retirees. I am
    > not aware of any private employers who provide retiree health
    > care benefits. The City retirees have very generous pension plans
    > (another thing few private employees have) which should provide
    > them with adequate income to pay for their own Medicare supplement
    > policies if they opt to have such policies in addition to Medicare Part A.

    I think Robin is on the right track and we need to ask “do we need to pay government employees pay and benefits that is close to (or in some cases more) than double what people in the private sector are paid?” I don’t know if Davis had a hard time finding anyone qualified to fill the 4th spot on the fire trucks, but over the years I’ve read that some Bay Area Fire departments have over 1,000 people apply for a single open firefighter position.

    It would be great if we could promise everyone that ever worked for Davis that we would pay health care for life, but we just don’t have the money. San Francisco is still (until they city goes BK) paying full healthcare for life to people that worked for the city for as little as a year (I am still kicking myself that I did not work for SF for a year in the 90’s since I am paying close to $6K a year for my own personal health insurance that has been up by ~10% a year)

    I recently read that Stockton (like SF) gave “free” health care for ‘life” after working for a relatively short period of time. When I did a quick Google search I found an article that said that in Vallejo “After one year of service, public employees could get health care coverage for life, and so could their families.” Quite a few CA cities are on track for BK (it would not surprise me to see Vallejo “back” in BK in the next 10 years) and I hope Davis can make the changes they need now to avoid the fate of so many other cities.

  17. PRO Davis17

    Don Shor said

    08/06/12 – 12:24 PM

    We can’t even merge the two redundant local fire departments, so I see the likelihood of cooperation between autonomous cities as being very slim.

    Don,

    I believe the fire departments have differing retirement plans not to mention one is State ran and one Local. I believe these facts make a merger more problematic. Sharing services between cities should be easier to accomplish. Sharing seems logical, but as you know logic doesn’t always prevail.

  18. Rifkin

    JEFF: [i]”Related to Outsourcing, apparently cities in Oregon are outsourcing some service to neighboring cities as a cost saving measure. … The problem Davis has in pursuing this type of solution is that no surrounding cities trust us to partner with us.”[/i]

    I think the bigger problem is that almost all of our neighboring cities (of comparable size, such as Woodland, Vacaville, Roseville, Elk Grove, etc.) spend as much or more on their municipal employees as we do*. So it is unclear to me where we might save by having one of those other cities provide our services in Davis. Perhaps, Jeff, you have something in mind in this regard I have not considered?

    An area where Davis can certainly save a lot of money–as Michael Harrington likes to point out–is with fire staffing, returning from the current model of 4 per engine back to our prior standard of 3 men per engine. Vacaville and Woodland use the 3 per standard, today. However, we don’t need a merger with them to accomplish that.

    I suspect, politically and maybe even legally (in terms of being sued by Local 3494), it will be easier to return our staffing model to 3 per truck than it would be to fire all Davis firefighters and replace them with others hired under the leadership of the Vacaville FD, if that is what might be on the table).

    It seems to me that outsourcing to other municipalities only can offer real benefits if our management structure is expensive–I think it is in some cases–and economies of scale would help to reduce that management cost. Again, I cannot think of an area of municipal services in Davis where this would be the best approach to reform. But I am open to convincing.

    By contrast, if money were our only concern–I don’t think it is our only concern–the best outsourcing models, I suspect, are to be found by hiring private contractors and for us to set up a structure such that the bidding and contracts remain competitive for the long run.

    I should add that my personal ethical and moral concerns (in my case informed by my religious/moral/ethical background as a Jew**) tell me that we should not be callous in firing City employees when we have more modest routes we can save money. I would far rather a half a loaf than a full loaf if it means the person we are now excessively compensating can be cut back some so that they still get enough to support themselves and their dependents.

    *On garbage services, however, they have costs which are about 70% of what we are charged, but their service levels may be, in fact probably are, less than what DWR provides.

    **This may be politically incorrect to say, but I think at its heart, Jewish ethics lead almost all Jews to be somewhat liberal in this regard, more than most other religions (though certainly many Christian sects have the same tenets). And while I am not a political liberal, my bias is toward trying to not screwing people over whenever we can help it, and not pulling the rug out from people, if we can help that.

  19. Ryan Kelly

    I’m really confused. Mike would like to put a Davis company out of business by putting our trash collection service out to bid and potentially contracting out our trash collection to another company from another city and alleges that there is a “political fix” at play.

    If we contracted with, say, the Waste removal company from Sacramento, just how many Davis jobs would that lose? Would DWR be put out of business? What would be the impact of sending our purchasing dollars out of town on other small local businesses? What would be the environmental impact of out of town trucks driving to Davis to collect trash, or would they have to build a duplicate plant to stage in Davis with additional trucks?

    Mike Harrington claims that he is pro-Davis business and is arguing for local control, expanding the number of Davis public employees, but then creates distrust in local businesses and City staff and argues for sending control of City services out of town.

    Mike, if you were wondering why you lost your last election, it was your inconsistency and thoughtlessness that drove people away.

  20. Rifkin

    ROBIN W: [i]”Rich — In light of the cuts you propose to [s][b]employee health care benefits[/s] retiree healthcare funding for young retirees[/b], I do not understand why you feel the City should continue to pay 100% of the Medicare supplement policy for retirees [b]65 years of age and older[/b].”[/i]

    Here is my thinking, Robin. Workers for the City of Davis get a certain standard of healthcare. It is a very high standard, granted, based on the “Kaiser Family Plan.” It is better than my own plan. But it is the standard we give to all City workers (save perhaps some part-time employees). We give that same standard to all retirees, regardless of their age. So unless we are going to reduce that standard for all employees, I don’t favor reducing that standard for our oldest retirees.

    To be clear, the reduction in cost I favor for those retirees aged 50-64 is partly to save money and partly to discourage early age retirement. But it is not to reduce the standard of health plan the workers or retirees and their families get.

    If the City instead paid no amount of supplement for our retirees who are 65 and older, this would have (in my opinion) two negative results: 1. Save the highest paid City workers, such as fire captains and the like, whose pensions would allow them to afford to cover the rest of the cost for their Kaiser Family Plan benefits, many City retirees, including those who worked all the way up to age 65, would not have enough in retirement income to cover that benefit, and thus in their elder years would have worse coverage than they had while working; and 2. it would, for some, reduce the incentive to keep working up to age 65 for the City of Davis. Why? Because, in contrast with what I propose, where they get a full medical benefit upon retiring at age 65, this “Medicare only” system would not make our retirees that much better off staying on the job. I am sure this would not be the actual case with all employees. But it does seem to me that logic of staying on to age 65 would be reduced for those who could retire younger and move to an agency or other employer where they might “earn” this supplement.

  21. Ryan Kelly

    So, what would happen to the employees who retired at 50-65? Do we only cover the Medicare supplement amount and they would have to cover the rest until they started being eligible for medicare?

  22. Michael Harrington

    Ryan: What concerns me is cost effective and fair provision of municipal services. I just raised an issue I heard of years ago, and asked anyone if they had heard anything about it. I can see paying a bit of a premium for higher levels of service, by a Davis company, but not a huge amount. Sorry.

    But again: your posting above continues your relentless attacks on the messenger, rather than dealing with the message. Our city contracts should usually be put out to bid. That is the default. So far as I know, years ago it did not happen with the DWR contract. I was asking if anyone knows on this Blog what the status is. My questions are reasonable, and responsible to ask.

    If you want to contact me, you have my email and phone and address. Come by anytime and chat. Your sitting at home or office or whereever you are and posting attack after attack from your opaque screen really has little merit or substance. Contact me if you have a personal problem with me. If it deals with the substance of what I post, then post away. But dont kill the messenger, the way you tried to do with the water referendum last fall. Your viscious attacks then dont encourage me to take you seriously here.

  23. Michael Harrington

    Ryan: about DWR again. I dont have a problem with them happily accepting what may be basically a political gift every renewal: sole source, no competative bid. Wish the FAA would callme up and give me a non-bid legal contract every year. But I do have a problem with our electeds and senior staff if they dont take a hard look at these big contracts when they come up for renewal and make sure the services provided meet the standards, at a reasonable price. I dont know if DWR currently is in this situation or not. I will tell you that they were overcharging me for years at one of my rental houses, and refused to deal with it or refund. Finally the city stepped in. But DWR (and I was dealing with the owners, BTW) was contentedly charging me for services they were not providing. It was black and white. THey charged the city, and were paid, but they were not using their staff to provide the services that were on my bills. So it was close to free money for DWR. They did it to my office building for awhile, but eventually fixed it.

    I suspect an audit would turn up some interesting findings. And Ryan, I say this from personal experience.

  24. Michael Harrington

    Don Shor: hope this DWR thing is not too far from topic. The thread topic is health insurance, as a huge cost item to the city. Sorry, but I got off on the vendor contracts for providing muni services. It’s all money, and it’s our taxpayer money, and I get to banging away on the computer. But DWR as a cost os not specifically health insurance. If you think I went too far afield, let me know and I will try harder to avoid doing it?

  25. Rifkin

    RYAN: [i]”So, what would happen to the employees who retired at 50-65?”[/i]

    Happen to retire? Or chose to retire?

    If someone chooses to quit working before age 65, he would be offered the same level of benefit he and his dependents are now getting. The City would pay the minimum amount ($115/mo.) and the retiree would have to pick up the rest to cover the cost of that benefit. If it was coverage for just himself, that would be much less than if he had his spouse and a kid covered, also.

    They key here is choice. If someone is disabled on the job or for some other good reason is forced to retire before age 65, I think he should be treated the same as young retirees are now treated. My plan applies to those who choose an early retirement.

    For those who have high incomes and good work options after retiring from the City of Davis–for example, a lot of cops “retire” at age 50 or so and then go to work for a district attorney as an investigator; some “retired” firefighters get work as arson investigators, also; or they work as consultants (such as the firefighters who make up the ranks of the consulting group, Citygate, which the City of Davis hired to tell us about appropriate fire staffing). However, most City employees, who make less money in salary and hence will make less in pension, they will choose to stay on the job until age 65.

    RYAN: [i]”Do we only cover the Medicare supplement amount and they would have to cover the rest until they started being eligible for medicare?”[/i]

    No. Until someone is eligible for Medicare Part A ([url]http://www.socialsecurity.gov/pubs/10043.html#a0=2[/url]), there is no Medicare supplemnt.

    What I propose is that for those who choose to retire young, the City shall pay the bare minimum allowed by the rules of CalPERS (which is now $115/mo.) and the early retiree shall, out of his pension, cover the rest, until he is age 65. At that point, the retiree will have no out of pocket expenses (unless he chooses a PERS plan which includes co-pays, etc. His health benefits plan from age 65 on will be paid for by his Medicare benefit and the rest will be paid for by the City of Davis. (Note: that is exactly what happens now for all of the City retirees who are 65 and up.)

  26. Don Shor

    David Thompson is having trouble logging on, so he sent me this:

    Numerous municipal and county governments and school districts in the midwest and east operate many cooperatives composed of their local government members. We wrote a specific chapter (Chapter 12) in our book “Cooperation Works *Nadeau and Thompson) on the subject, entitled Local Governments” Forging Partnerships and Leaving Old Rivalries Behind.

    Many local governments have numerous tasks done by just a few people. A county or regional cooperative could easily take on theses tasks, obtain a stronger professional capacity and continue to be responsive to local government for service levels.

    In the Emilia Romagna region of Italy cooperatives (composed of employees and users) now run most of the social services. I went to visit a number. In particular, I visited one co-op composed of workers and people with disabilities. Not only did they do all the printing for the municipality but for nonprofit and private firms as well. There could be lots of savings through cooperation.

    David Thompson, Twin Pines Cooperative Foundation

  27. Ryan Kelly

    @Mike – It sounds like you have a personal gripe against DWR.
    In response to your other statements regarding me: Again, I never worked against the water referendum. Ever. I signed my protest form and sent it in, but I stayed away from signing the referendum when you started attacking people. I have never worked for any particular design for any water project. Please stop spreading/repeating lies about me.

    @Rich – Wouldn’t it be fairer to contribute to the early retirees at the same level we would contribute to the medicare-eligible retirees (around $800/month)?

  28. Don Shor

    For some reason, various folks are having trouble accessing this thread. So here’s a reply to Ryan from Rich Rifkin:

    [i]”@Rich – Wouldn’t it be fairer to contribute to the early retirees at the same level we would contribute to the medicare-eligible retirees (around $800/month)?”[/i]

    In my opinion, no. We face a huge and potentially devastating OPEB liability, not to mention our huge and devastating pension underfunding liability. Added together, they account for around $145 million in debt for the people of Davis. (And, of course, we have a lot of non-labor debts which require monthly payments; and we are not fixing our roads, building up tens of millions of dollars of liabilities, there.) As such, we desperately need to reduce our costs in both areas, pensions and OPEB.

    Our best, and thus I think our “fairest” solution to the retiree medical liability problem is to discourage early retirement. Without having to lay anyone off, that gets rid of most of our problem. Saving jobs is the fairest solution.

    What you suggest will directly cost roughly 7 times as much as the plan I offer. What you suggest will lead to mass layoffs. Your idea will not discourage anyone from choosing to retire young. As such, your idea will have other bad consequences: Namely, it will force us to pay for a new worker’s healthcare and his family’s healthcare, when the 53 year old chooses to retire, unless we just keep cutting back on all City services by never hiring replacements. That is what we have done in our dwindling police force.

    In the end, making bad choices like that will bankrupt the City of Davis. We are getting very close to bankruptcy. If we simply renew all of the contracts we now have in place and there are no major reforms in them, Davis will either go out of business in 5 years or less, or we will have to lay off most of the City’s employees.

    You might think this is bluster. But you should look at the numbers. The City’s revenues are dead flat, and with no new residential growth, they might not grow for a long time, even if California’s economy recovers (as I expect it will).

    The City’s costs for pension funding and for medical care and for OPEB are skyrocketting. Just like the half dozen other California cities which have now filed for bankruptcy–all of them have worse non-labor debt problems than Davis has, but similar labor debt problems–we are well on our way to bankruptcy.

    I think Woodland will go bankrupt before we do. Yolo County likely will, too. But without major reforms, now, Davis is going to join the crowd.

    Believe me, a hundred California municipalities in the next 4 years will file for bankruptcy. Those will be cities which take half-measures, cities which don’t understand that they need very serious reforms.

    The problems that excessively generous and irresponsible labor contracts that government agencies in California have engaged in since the mid-1990s are heading everyone along this same path. The only good way out is to substantially reduce costs right away and to cap the growth of costs going forward.

    Rich

  29. jimt

    Rifkins recommendations are right to target; to bad something like these weren’t implemented 20 years ago–easy to give away these lucrative retirement packages as a politico when your constituents won’t be paying the price tag for another ~20 years.

    I would further propose moving the age of retirement benefit collections to 65-70 years of age (at ~2%/yr formula); you’re welcome to retire earlier; but don’t collect the benefits until age 65-70.
    Also implement Chevy or Ford health plans (which is what most people live with); retire the Cadillac plans.
    Looking at the examples of bankrupt cities; don’t ask for too much or you might end up with very little indeed; I think the taxpayers responsibility is to provide modest retirements to public employees; enhancement to a golden retirement is the watch and responsibility of the employee thru careful planning and saving or extra jobs.

  30. Mr.Toad

    “They key here is choice. If someone is disabled on the job or for some other good reason is forced to retire before age 65, I think he should be treated the same as young retirees are now treated. My plan applies to those who choose an early retirement. “

    But who decides what is disabled? I get your points and the math too, but, on that rare occasion when there is a fire call you want some 64 year old firefighter huffing and puffing his breathing equipment going into a smoke filled room to get the cat out because he is worried that PERS is going to deny his disability claim. Fifty may be too young for public safety workers but 65! While we may be living longer we are not going to be able to work forever in jobs that require heavy lifting or breathing. During a debate with Meg Whitman, Jerry Brown said something to the effect of, if everybody waited as long as Jerry Brown to retire there wouldn’t be a pension problem. Problem is being a firefighter or cop is a lot more strenuous than being a politician.

  31. Frankly

    I mostly agree with Rich Rifkin’s recommendations except of the need to manage the motivations and impacts related to retirement age.

    I would change the entire design of the system…

    – The defined benefit would be changed to be 1% @ 30-45, and would be completely optional and self-funded by the employee from pre-tax payroll withholdings. The money paid by the employee would earn money market rates. If the employee terms before 30 years, they would roll the balance to a private IRA. They have to work at least 30 years to earn a pension. After 45 years of service, they stop accruing increases.

    – The employer-paid retirement would shift to a 401k-style plan. The contribution would be a percentage of salary with incremental vesting until 20 years of service; after which the employee would be fully vested.

    – Employees could also take advantage of tax code allowing up to $17,000 per year in employee-paid pre-tax 401k contributions (plus another $6000 in catch-up for people over 50 years of age not having maxed their previous contributions)

    – The health insurance would be changed to a high deductable HSA. The employer would deposit the amount of the annual deductible or maybe even the amount of the out of pocket maximum in an HSA account. The employee would receive a credit card attached to the account to use for qualified medical expenses. The cash balance of the account would incrementally vest to the employee over 20 years of service and would be used by the employee to self-fund retiree health care costs after retirement.

    – Employees could also take advantage of pre-tax medical savings account (MSA) withholdings to supplement their employer-paid HSA accounts.

    – Since this type of health plan rewards employees with lower health insurance utilization (retaining more of their HSA and MSA accounts for retirement), the employer should also pay a wellness benefit (i.e., $250-$300 per month) that employees can use for to pay for a defined list of expenses for things proven to contribute to employee wellness. This would be a “use it or lose it” benefit and it would require HR to manage the program. Employees contracting chronic health issues requiring ongoing treatment could request to use their wellness benefit to pay insurance deductible co-pays to help them retain more of their HSA/MSA money for retirement. HR would need to set and administer the rules for this, and require a vetting process similar to short-term or long-term disability claims.

    Now, as folks respond to this benefit scheme as being unfair and hard on the public sector employee, note that this would be a Cadillac plan to almost anyone working in the private sector.

    What about implementation? We are over-committed right now with our existing retirees and employees. I think we have to honor what we have committed to existing retirees. Most cannot go out and get a new job to supplement the surprise added expense. New employees and employees with 5 or less years of service would be put into this new plan. Employees with 20 or more years of service would have the pension committments honored, but see the contribution ratios changed to force them to work a few more years until they could retire. This group would also face incremental employee-contributions for their health insurance premiums. Employees in the middle (6-19 years of service) would require some type of buy-out option… either stay with the existing plan with a reduced pension and greater employee-paid insurance premiums, or accept a buy-out to convert. The buy-out would be used to fund their HSA and 401k accounts to levels similar to what they might have if they had started with that plan. Since there are tax implications for a lump sum payment, contributions to the buy-out would need be paid over several years on some schedule.

  32. hpierce

    Jeff… your concepts are interesting… does your ‘formula’:
    – include employer/employee participation in SS &/or Medicare? [currently, SS law will displace, dollar for dollar, any retirement benefit from a public pension, so an employee who earns a pension from the public sector, leaves and works in the private sector, would have to pay SS taxes and probably would not see 1 cent in SS benefits, even after the required “quarters”]
    – would your formulas apply to someone who worked for multiple public agencies?

    What I’m trying to figure out is what could an employee expect if their career included 15 years in the private sector, 10 years for agency A (public) and 15 years for agency B (public sector).

  33. Robin W

    Rich — I still view the fully-paid supplemental health insurance post-age 65 (Medicare supplement policy) as an over-the-top and very expensive benefit which is a great place for the City to save some money. This benefit is unheard of in the private sector where employees are not receiving public-sector-like pensions — or any pensions at all. The public sector retirees are in a [i]better[/i] position than private sector retirees to pay for their own Medicare supplement policies in light of their pensions.

    I understand that a change like this may need to be phased in gradually (e.g., current retirees over the age of 65 contribute some smaller amount to their Medicare supplement policies), but I can’t see the City leaving this source of savings untouched unless the unions make other very significant contract concessions.

  34. Rifkin

    FWIW, after being locked out of the system for about 18 hours or so, I just managed to get back in. Unfortunately, I have nothing to say, other than, “Thanks, Don, for posting my reply to Ryan.”

  35. Neutral

    RobinW: [i] This benefit is unheard of. . . where employees are not receiving public-sector-like pensions — or any pensions at all.[/i]

    According to the BLS: “[i]In private industry, retirement benefits were available to 50 percent of workers in small establishments, 79 percent of workers in medium size establishments (those employing between 100 and 499 workers), and 86 percent of workers in large establishments.[/i]” [ [url]EBS News Release, 7/11/2012[/url] ]

    [ Search terms: “[i]bls retiree medical benefits[/i]” got “[i]About 401,000 results (0.19 seconds)[/i]”]

    Private sector employees do get pensions, and in medium-to-large organizations, retiree medical benefits as well. Care to revise your statement?

  36. Frankly

    Neutral:

    Robin W is absolutely correct. The retirement benefit given to private sector employees are almost all employer defined contributions to 401k plans. These are not pensions. The risks for funding retirement are 100% carried by the employee. Conversely, pensions are defined benefit plans that has the risks of coverage completely carried by the employer. That is a huge difference in value to the employee, and cost to the employer.

    I cannot find any examples of private-sector pensions except for some unionized employees. Only 6.9 percent of private sector employees are unionized.

    This from StateBudgetSolutions.org:
    [quote]Public employees are receiving pension and retirement benefits that are 337 percent greater than private sector employees. The cost of employee compensation, specifically retirement and savings, averages $0.97 per hour in the private sector. This is compared to the $3.27 per hour that public sector employees accrue.[/quote]
    I think you are working hard to deny the facts here.

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