Vanguard Analysis: City Modifies Retiree Medical Vesting Plan

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retiree-healthWhen the city approved the 2009-2010 MOUs, all of them included a revision to the Retiree Health Benefit, that created a vesting of the benefits.  The city at the time believed it could receive “potentially significant savings from implementation of the vesting period for retiree medical benefits.”

Under the previous MOU, the city implemented the “standard  CalPERS vesting” for current and future employees for retiree medical benefits.

According to a January 2010 staff report, “Once an employee has ten years of service with a PERS agency or agencies, a minimum of five of which must be with the city of Davis, then the employee receives 50% of the benefit level.”

The report continues, “The percentage paid by the City increases 5% with each year of service after that, until the full benefit is attained at 20 years of service with a CalPERS agency/agencies, at least 5 of which must be with the city of Davis. This benefit is in line with the standard state CalPERS benefit.”

The staff added, “In addition, benefit levels will be determined based on the employee and their dependents, rather than defaulting to the highest cap amount.”

Prior to that point, all employees hired before 1996 received 100% retiree health coverage for themselves and their dependents.  Those hired post-1996 received a 50% contribution towards coverage until age 60 and 100% thereafter.

The plan that the city agreed to is very common in cities in northern California.  To be eligible for any post-retirement health benefits, an employee must complete at least five years of PERS-credited service with the City of Davis.  Employees who retire from the City with at least a total of ten years of total PERS-credited service (including other agencies they work for) would receive a CITY contribution towards their post-retirement health benefits in accordance with the then-current PERS vesting schedule.

The contribution was based on their total PERS service, not just their Davis-service.  Those with 10 years would get a 50% contribution towards their health care costs, and the contribution would be increased by 5% for every year of service greater than 10 years.  Those with 20 or more years would get 100% coverage.

However, the Vanguard has learned that while the city contemplated adopting the plan, the plan was never implemented by the city.  Even before Steve Pinkerton was hired, the city realized that there were some fatal flaws in the plan.

The City had its Actuary compare the Medical Vesting Plan to the City’s current retiree medical plan.  The actuary after analyzing the medical vesting plan recommended against adopting it.

The reason for this was based on the demographics of the city of Davis employees.  Many of them were long term employees of the city of Davis.  Even those who were relatively new arrivals, had the majority of their work in state and local agencies that fell under the PERS-coverage.

Based on this analysis, it was determined that the medical vesting plan would be far more expensive in both the long and short run.  In other parts of the state, there would be fewer employees who would be retiring with max-PERS service time, and therefore a vesting plan makes more sense.

In the Sacramento region however, the vast majority of the public agencies are in PERS — including the State and Yolo County.

In Davis, many employees have less than ten years of service with Davis, but most of them have 20 or more years in PERS.  Based on the vesting plan, the city would end up with most retirees getting 100% coverage from the day retired whether they were 50, 55 or 60.  Whereas, under the City’s current plan, post-1996 employees who retire before age 60 did not get full benefits until they reached age 60.

The city was able to convince the bargaining units in the current round of MOUS to not implement the vesting plan as the city warned it would have required the units to take additional cuts on retiree benefits.

Under the new contracts, the existing (pre vesting plan) stays in place until the end of 2015.  After that, the City’s contribution diminishes over time.  By agreeing to this change, the City’s retiree health obligation was reduced and the overall contribution to retiree health dropped by about a million dollars per year.

MEDICAL BENEFIT PREMIUMS FOR RETIREES

(This is for DPOA sworn and civilian, PASEA, Management, Executive Management)

Retirees are not eligible for any cash in lieu of health benefits.

1. EMPLOYEES who retire from the City on or before December 31, 2015, will receive the following retiree medical benefit. “Retire” includes both service and disability retirement.

A. EMPLOYEES hired before July 1, 1996- City shall continue to contribute to eligible retirees an amount equal to 100% of the premium for the group health insurance plan available from Kaiser-Bay Area for retired EMPLOYEES and two or more dependents sponsored by the CITY through CalPERS.

B. EMPLOYEES hired on or after July 1, 1996- City shall continue to contribute to eligible retirees an amount equal to 50% of the premium for the group health insurance plan available from Kaiser-Bay Area for retired EMPLOYEES and two or more dependents sponsored by the CITY through CalPERS until age 60. After age 60, EMPLOYEE will receive a retiree medical benefit based on 100% of the CalPERS Kaiser Bay Area rate for employee plus two or more dependents.

2. EMPLOYEES hired before July 1, 1996, who retire after December 31, 2015, but on or before December 31, 2025, will receive the following retiree medical benefit.

A. EMPLOYEES who retire with at least 25 years of City service or as a result of disability- City shall contribute to eligible retirees an amount equal to 100% of the premium for the group health insurance plan available from Kaiser-Bay Area for retired EMPLOYEES and two or more dependents sponsored by the CITY through CalPERS. Once the employee has transferred to a Medicare plan, the City will pay the Medicare Supplemented/Managed Medicare monthly rate based on the CalPERS Kaiser Bay Area rate for employee plus two or more dependents.

B. EMPLOYEES who retire with less than 25 years of City service- City shall contribute to eligible retirees an amount equal to 75% of the premium for the group health insurance plan available from Kaiser-Bay Area for retired EMPLOYEES and two or more dependents sponsored by the CITY through CalPERS. Once the employee has transferred to a Medicare plan, the City will pay the Medicare Supplemented/Managed Medicare monthly rate based on the CalPERS Kaiser Bay Area rate for employee plus two or more dependents.

3. EMPLOYEES hired on or after July 1, 1996, but before December 31, 2012, who retire after December 31, 2015, but on or before December 31, 2025, will receive the following retiree medical benefit.

A. EMPLOYEES who retire with at least 25 years of City service or as a result of disability- City shall contribute to eligible retirees an amount equal to 50% of the premium for the group health insurance plan available from Kaiser-Bay Area for retired EMPLOYEES and two or more dependents sponsored by the CITY through CalPERS until age 60. After age 60, EMPLOYEE will receive a retiree medical benefit based on 100% of the CalPERS Kaiser Bay Area rate for employee plus two or more dependents. Once the employee has transferred to a Medicare plan, the City will pay the Medicare Supplemented/Managed Medicare monthly rate based on the CalPERS Kaiser Bay Area rate for employee plus two or more dependents.

B. EMPLOYEES who retire with less than 25 years of City service- City shall contribute to eligible retirees an amount equal to 50% of the premium for the group health insurance plan available from Kaiser-Bay Area for retired EMPLOYEES and two or more dependents sponsored by the CITY through CalPERS until age 60. After age 60, EMPLOYEE will receive a retiree medical benefit based on 75% of the CalPERS Kaiser Bay Area rate for employee plus two or more dependents. Once the employee has transferred to a Medicare plan, the City will pay the Medicare Supplemented/Managed Medicare monthly rate based on the CalPERS Kaiser Bay Area rate for employee plus two or more dependents.

4. EMPLOYEES hired before July 1, 1996, who retire after December 31, 2025, will receive the following retiree medical benefit.

A. City shall contribute to eligible retirees an amount equal to 75% of the premium for the group health insurance plan available from Kaiser-Bay Area for retired EMPLOYEES and two or more dependents sponsored by the CITY through CalPERS. Once the employee has transferred to a Medicare plan, the City will pay the Medicare Supplemented/Managed Medicare monthly rate based on the CalPERS Kaiser Bay Area rate for employee plus two or more dependents.

5. EMPLOYEES hired on or after July 1, 1996, but before December 31, 2012, who retire after December 31, 2025, will receive the following retiree medical benefit. A. City shall contribute to eligible retirees an amount equal to 50% of the premium for the group health insurance plan available from Kaiser-Bay Area for retired EMPLOYEES and two or more dependents sponsored by the CITY through CalPERS until age 60. After age 60, EMPLOYEE will receive a retiree medical benefit based on 75% of the CalPERS Kaiser Bay Area rate for employee plus two or more dependents. Once the employee has transferred to a Medicare plan, the City will pay the Medicare Supplemented/Managed Medicare Monthly rate based on the CalPERS Kaiser Bay Area rate for employee plus two or more dependents.

6. EMPLOYEES hired on or after January 1, 2013- City shall contribute to eligible retirees an amount equal to the Medicare Supplemented/Managed Medicare monthly rate based on the CalPERS Kaiser Bay Area rate for employee plus one dependent based on status.

—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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22 thoughts on “Vanguard Analysis: City Modifies Retiree Medical Vesting Plan”

    1. hpierce

      How would you like to see it changed?

      In direct answer to you question, the City would be obligated to try to change the terms thru the negotiation process, but failing that, I believe the City could unilaterally change the provisions but will leave to others what that/those process(es) might be. I just don’t know.

  1. hpierce

    Thank you for actually quoting from the MOU language. For those who many wonder, 1996 was the year after which new employees (and employer) started paying in to Medicare. For those hired prior to 1996, they never contributed to Medicare, and therefore would not be eligible for benefits based on their City service (but might be, based on previous employment, spouse, etc.).

  2. Doby Fleeman

    David,

    Thanks for getting those clarifications on the projected impacts of the new programs. Sounds like 60 becomes the new 55 – at which point Kaiser’s Medicare Supplement premium will save the city a boatload. Hopefully, that transition won’t prove too onerous for existing current or retiring staff.

    Looking to future hiring and staffing strategies, and with a growing number of California cities moving to defined contribution or dropping post employment medical altogether, it is still a question where that leaves the city in terms of prospective new hires in the 50-60 age range who might seek out their final years in Davis specifically to qualify for this lifetime benefit. Two to ten years of service in exchange for 25-30 years of future premium expenses – or is the city proposing to fund those 20+out-year premiums during the 2-10 year term of service?

    Couldn’t such a strategy just add to our existing problems with unfunded liabilities? While it will become a clear recruiting advantage, our arcane government accounting standards – in those circumstances – would seemingly continue to push those costs onto future budgets and future generations of taxpayers.

    Looking forward, for future generations of Davis taxpayers, just wondering if there has been any discussion from this longer-term point of view? How, if at all, will it influence our future recruiting strategy?

    1. hpierce

      Re-reading your post, Dobie, you have a good point about “shopping” for benefits in late career. Used to be a 50+ year old, never in public service, could qualify for 100% with a year of service with the City. Those days (appropriately) are over. My concern is for rule-changing for those who have previously chosen to work for Davis, served 10-15-30 years with the intent to SERVE the community, and are told “April fools”, we really didn’t mean what we told you when you applied, left your previous job, with whatever security that offered, and accepted the City position for a significant part of your career.

      I do know of a number of City employees, who made the conscious choice to take significant losses to salary, for the stability and value of benefits. From a strict business perspective, we could say, “too bad, so sad, get over it”. Moving forward, for new hires, we should be clear what is offered. If it’s less than what was in the past, so be it.

      As we do so, if that is the direction, don’t be surprised f the applicant pool deteriorates. We’ll still get some who genuinely want to serve the community, but less who not only are highly competent, want to serve, but are also realists who need to take care of their families.

      1. Frankly

        “I do know of a number of City employees, who made the conscious choice to take significant losses to salary, for the stability and value of benefits.”

        Maybe when they took the job, but not now. You would be very hard pressed to prove that now. In fact, I think it is more likely that the city employee is making a higher wage than are private sector workers with comparable job roles.

        It it really hard to keep on the blanket of victim-hood when the winds of facts keep blowing it off.

        1. hpierce

          So, I am incorrect about someone who accepted a job with the City 25 years ago? You would pull some or all the retiree medical from them if it was legal to do so? I already conceded that new employees should have “eyes open” if there are less benefits moving forward. Seems like you would prefer, legal issues aside, that we end (including retroactively) all City retiree medical benefits. Otherwise, it seems you would have acknowledged what might be appropriate for new hires, moving forward.

          1. Frankly

            Without getting to any significant math detail or legal discussions… just from a “what is fair and reasonable” perspective, here is what I would do.

            1. Not change any pension or healthcare payments for existing retirees. These people cannot reasonably be expected to go back into the workforce and make up the shortfall. We screwed up, and they won the lottery and are the lucky new millionaires.

            2. For all remaining employee, change the minimal full-vesting retirement age to 65 (60 for safety).

            3. For all remaining employees, implement a progressive vesting schedule based on existing years of service and age. For example, for employees with 30+ years of service and age 64, provide 95% vesting. For 63, 90% vesting, for 62, 85% vesting, etc..

            For employees below 50-40 years old, the vesting schedule needs to be augmented with a greater share of employee contributions to their pension and healthcare. These folks have time to alter their lifestyle and save.

            For employees below 40, they need to be offered a cashout rollover to a defined contribution plan to replace the defined benefit pension plan. The DC plan should include the funding for their retiree healthcare (no more government provided healthcare at retirement). The retirement benefits would then match what the private sector does.

            Lastly, the entire workforce should be evaluated in a mark-to-market wage study every four years, and adjustments be made to the wage quartiles to keep pay in line with the private sector.

          2. hpierce

            Assume you mean both ways, as far as ‘wage quartiles’… up or stagnant/down. How would the public sector deal with “bonuses” that are common with private firms where professionals are involved?

            Although I may disagree with specifics/details, your concepts appear ‘sound’, but I’d hate to see changes be ‘instantaneous’… would prefer they were phased to minimize traumatic change. You seem to recognize that a measured approach is preferred to a ‘slamming on of the brakes’. Think that would be a better ‘track’.

            Your comment about “no more government provided healthcare”… are you talking about the City benefits, or are you also talking about Medicare? Medicare is not fully funded by employer/employee contributions, as I understand it, at least in the long term. I appreciate the fact that the post I’m replying to is reasoned, even if I have a different take… overall, don’t think we’re that far apart (tho’ I acknowledge you would’nt care one way or the other on that).

          3. hpierce

            Another thought re: younger employees moving to a DC plan… would you endorse a City matching contribution?

        2. hpierce

          I may have to apologize… did you not see that I was talking about folks who joined the City 5-10-15-20-25-30 years ago? If you missed that, I apologize for my rebuttal. Particularly in professional classes, I can document (but will need to be careful to not breach privacy considerations) where the private sector (prior to 2008) was offering 10-15% more in salary, for identical/comparable positions (weighing education, experience, certifications, etc.). Did you get the rug pulled out from you, and just want everyone else to “share the pain”?

          1. Frankly

            I think you might find isolated cases where because of the supply and demand for certain skills the private sector might pay a premium. Engineering is an example depending on the discipline. For example, I think geotechnical engineers tend to make less in the private sector, but civil engineers and mechanical engineers would tend to make more.

            But a recent BLS study demonstrates that, in general, public sector employees are making a lot more in wages, and if comparing total compensation, they are making an order of magnitude more.

          2. hpierce

            OK, I’ll partially “out” myself. I am a Civil Engineer (at least I try to be civil), and I made several choices to forgo higher salary (amounting to 15-20 %) for the benefits and stability of the public sector. Know many other Civil Engineers who did the same. Plus, I liked the idea of working for the community that I lived in. But psychic benefit does not put food on the table, nor ensure retirement security.

          3. hpierce

            BTW, except possibly for CalTrans, can’t think of any agency that has geo-tech engineer position… maybe LA or SF.

  3. Davis Progressive

    i’ll be curious about rich rifkin’s take on this as he made it a point to argue that the vesting period was a mistake. but he seemed to miscalculate that pinkerton made the vesting period due to his previous service time with calpers and therefore gets the full benefit regardsless.

    1. hpierce

      The City Manager has a separate contract. I’m somewhat sure, under the PASEA and other contracts in place when he was hired, only ‘passed’ the total service test, but would have failed the 5 years with the City test.

      All animals are equal, but some are more equal than others.

  4. David Greenwald Post author

    The Kaiser monthly supplement rate is $294.97 for an employee, $589.94 for employee and a dependent, and $884.91 for two or more dependents.

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