September 14, 2004

SUBJECT:  Employee Eligibility for Post Retirement Medical Benefits

REPORT IN BRIEF

This report examines both current and alternative City of Sunnyvale payment practices for post retirement employee medical benefits under the Public Employees Medical Health Care Act (PEMHCA). 

The City of Sunnyvale currently provides health benefits to active and retired employees through the California Public Employee Retirement System (PERS) under PEMHCA.  City employees who are vested in PERS and who retire from Sunnyvale are eligible to receive post retirement medical benefits paid for by the employer.  Currently there is no minimum service requirement with the City of Sunnyvale to be eligible for this benefit.  The City is required to contribute the same amount to retiree medical benefits as is contributed to active employees within the same employee group under the current PERS contract.  This is called the “equal” contribution election that the City made when it first became subject to PEMHCA in the early 1970’s.  The City cannot change from the making an equal contribution even with a contract amendment.

Government Code Section 22825.5 allows the City of Sunnyvale to make a contract amendment with PERS that would require a minimum of 5 years of service with the City (vesting period) and a minimum of 10 years of PERS service in order to qualify for payment of a portion of a retired employee’s health insurance premium.  The exact premium contribution is between 50% and 100% of the required State contribution depending on total years of PERS service.  The vesting requirement would only apply to employees hired after the contract amendment is made.  All employees hired prior to the contract amendment would continue under the current plan unless the City allows existing employees to opt for inclusion under the vesting plan.  Existing retirees would not be affected by the contract amendment.

The City may be able to reduce retiree medical insurance costs through the contract amendment with PERS.  Based upon the analysis of our current retiree population, the contract amendment would have saved the City approximately $266,000 per year if the amendment had been in place at the time of retirement of our current retirees.  This is net savings and varies by employee group.  It is based on current required PERS retiree health contributions under the vesting contract amendment, the City’s current contribution to active employee medical premiums, and the retiree population as of April 2004.  Future savings are not certain because of uncertainty surrounding future changes in required PERS retiree health contributions and changes in the City’s contribution to active employee health premiums.  If the City is successful at capping contributions to active employee health insurance and takes other steps to slow the increase in those contributions to a rate lower than the PERS retiree premium rates increase, the savings attributable to the PERS contract amendment will be less and it may also end up costing more than under our present system.  If, however, the City’s contribution to active employee medical increases at a higher rate than future increases in PERS retiree premiums, future savings may actually be greater. 

Although preliminary analysis indicates that the City may reduce future post retirement medical costs under the PERS contract amendment, there are a number of elements that are not controllable by the City that create the risk that costs may actually increase in the long-run.  It is for this reason that staff recommends that no changes be made to the post retirement medical benefit plan at this time and that the post retirement medical plan vesting analysis be included in the broader study of the City’s continued participation in PEHMCA.

BACKGROUND

The Human Resources Department was asked to look at City of Sunnyvale payment practices for post retirement employee medical benefits under PEMHCA and to identify any alternatives that were available which might impose a minimum service requirement with the City of Sunnyvale in order to qualify for the benefit.  

EXISTING POLICY

The City of Sunnyvale provides employees who are vested in PERS and who retire from Sunnyvale with post retirement medical benefits either partially or fully paid for by the employer.  The City provides employee health insurance through PERS and is subject to the requirements of PEMHCA.  Under the existing contract with PERS, the City is required to contribute the same amount to retiree medical benefits as is contributed to active employees within the same employee group.   There is no minimum service requirement with the City of Sunnyvale in order to qualify for this benefit.

Contributions for active employees are specified in the salary resolution and are negotiated with the associations representing our employees.  The City is required to contribute the same amount to retiree medical benefits as is contributed to active employees within the same employee group under the current PERS contract.  This is called the “equal” contribution election that the City made when it first became subject to PEMHCA in the early 1970’s.  The City cannot change from the making an equal contribution even with a contract amendment.

DISCUSSION

Government Code Section 22825.5 allows local contracting agencies to adopt a resolution requiring that a vesting period be satisfied before an employee would become eligible for payment of post retirement medical premiums.  The process that must be followed before a PERS contract amendment can be implemented is different for employees represented by an employee association from those not represented by an employee association.  For groups represented by an employee association, the City must first bargain over the change.  Once bargaining is concluded, the PERS contract for that group can be amended.  This bargaining requirement does not exist for non-represented employee groups (i.e., Management and Confidential). 

A summary of the key rules for this alternative follows:

·         Vesting for Health Benefits

o        Regulated by Government Code 22825.5

o        Applies to employees hired on or after the effective date of the resolution electing the vesting method

o        Applies to elected officials first elected on or after the effective date of the resolution electing the vesting method

·         Vesting Schedule

o        A minimum of ten years of PERS service is required to receive 50% of the employer contribution

o        Purchased “Air-Time” (additional PERS service credit that an employee may purchase for service with a non-PERS agency) does not qualify, as it is not earned service

o        Five of those ten years of service must be performed with the City of Sunnyvale

o        Each additional service credit year after ten years increases the employer contribution percentage by 5% until 20 years at which time the retiring employee is eligible for 100% of the employer contribution.  Currently, employees are eligible for 100% of the employer contribution with no minimum service requirement.

·         Employer Contribution for Active Employees

o        Is subject to a collective bargaining agreement or memorandum of understanding (MOU) and the Salary Resolution

·         Employees Hired Prior to Vesting

o        Continue under the current plan

o        Once each year the employer may allow any employees hired before the employer elected the vesting option the opportunity to individually elect to be subject to the provisions of Government Code 22825.5

·         Employer Contribution for Retirees (Annuitant)

o        Minimum must equal the State’s retired contribution, annually calculated by the 100/90 formula (100% of the weighted average of the health benefit plan premiums for State employees and annuitants enrolled for self alone plus 90% of the weighted average of the additional premiums required for enrollment of family members in the four health benefit plans that have the largest number of enrollments during the fiscal year to which the formula applied).

o        Maximum can be up to 100% of total premium

o        Retired Employee (Annuitant) and Survivor: Percentage of employer contribution is based on years of service credit for annuitants

·         Exceptions to the Vesting Requirements Who are Eligible for the Full Employer Contribution

o        An employee (all employees both safety and miscellaneous) who retires on disability retirement

o        An employee who performs 20 years of service credit solely with the City of Sunnyvale

The premium contribution under the contract amendment is proportional to the years of PERS service with a minimum of 5 years of service with the City of Sunnyvale needed to qualify.  The employer then is responsible for only a portion of the premium based upon the number of years of PERS service according to the following schedule: 

Credited Years of PERS Service	Percentage of Employer Contribution	Sunnyvale Retiree Population Eligible Under Vesting Amendment (April 2004)
10	50%	16
11	55%	14
12	60%	13
13	65%	15
14	70%	15
15	75%	17
16	80%	18
17	85%	19
18	90%	11
19	95%	15
20 or more	100%	287

 

The third column included in the table lists the number of current retirees who would be eligible for an employer contribution to the cost of retiree health coverage under the provisions of the vesting contract amendment.  There are a total of 440 retirees and survivors that would be eligible.  This should be compared to 505 retirees and survivors who are eligible for post retirement employer medical contributions under the City’s current plan.  The change in the number of retirees end survivors eligible for employer contribution to the cost of retiree health coverage is detailed in the following table:

Group	Currently Eligible	Sunnyvale Retiree Population Eligible Under Vesting Amendment (April 2004)	Change
PSOA	162	151	-11
SEA/CONFIDENTIAL	231	195	-36
COA	6	6	0
MANAGEMENT/COUNCIL	96	84	-12
SEIU	10	4	-6
Total	505	440	-65

 

The contribution rates to retiree medical are set by PERS on an annual basis.  As described above, the rates are a weighted average of the health benefits plan premiums for State employees and annuitants enrolled in the four most popular plans.  The contribution rates set by PERS typically increase each year based on the inflationary increases for the health plans.  The increases for calendar years 2002, 2003, 2004 and 2005 were approximately 8%, 30%, 16%, and 10% respectively.  These increases are similar to the average increases that have been experienced with all of the health plans offered through PERS. 

For 2004, the monthly contribution rates established by PERS that are applicable to employers under the vesting contract amendment are as follows:

·         $331 for employee only coverage

·         $621 for employee plus one dependent

·         $780 for the employee plus more than one dependent

These contribution rates should be compared to the current monthly contribution rates being paid by the City:

SEA/Confidential	$452.59
PSOA	$467.46
SEIU	$206.29
COA	$472.98
Management (including City Council)	to full premium

Analysis of Potential Savings Under PERS Vesting Amendment

It is impossible to tell exactly what the cost elements will be under the vesting formula because there are so many variables.  However, it is possible to generalize based on our current retiree population.  For this analysis staff used the April 2004 retiree health insurance billing statement.  The group included 505 retirees and survivors.  The current costs and the costs under the contract amendment are summarized in the following table:

This analysis indicates there would be a net savings of approximately $266,000 under the vesting amendment schedule.  It is important to point out that these net savings are based on our current health premium contributions for each employee group, the current retiree premiums established by PERS, and the current length of service of our current retirees with the City and under PERS.

These factors will change overtime.  For example, using the same retiree population and using 2005 PERS retiree vesting rates and health insurance premiums, the net savings attributable to the contract amendment drops to approximately $180,000.  This assumes no increase in health contributions for active employees where there currently is a cap in the amount the City contributes.  Where there is no cap, it is assumed that the City continues to pay the full cost of the health plan selected by an active employee.  The projected experience for each employee group varies significantly.  Costs for PSOA would increase by approximately $220,000, where costs for Management/Council would decrease by over $327,000.  Costs increase for PSOA because the vesting rates are significantly more than the current rates being paid for both active and retired employees.  The projected savings for management employees increases because the PERS retiree vesting rates are less than the full premium payment for any plan selected by the Management/Council retiree. 

It is possible that a situation may exist in the future where it may be more costly under the PERS vesting formula than if the City continues under the present approach of paying the same amount for retired employees that is contributed to active employees.  This situation is illustrated in the table above where costs would actually increase for PSOA and COA under the vesting plan.  Costs would increase for these two groups because the contributions the City would be required to make under the vesting amendment are greater than the current contributions.  For example, the current maximum retiree contribution the City is required to make for PSOA is $467.46 per month.  The average actual monthly contribution is approximately $420.00.  However, under the vesting program the average monthly required contribution increases to $528 for the 151 retirees and survivors who are eligible under the vesting amendment (or $492 per month using 162 retirees and survivors).  In either case, costs are higher under the vesting program than current costs. 

Another way to reduce retiree medical costs without moving to the PERS vesting program would be to reduce the monthly health insurance contribution for active employees.  However, this would not impose a minimum service requirement with the City of Sunnyvale in order to qualify for an employer contribution to the cost of post retirement medical benefits.

City Risk Under the Contract Amendment

A key point to consider is that the City no longer controls the process if a PERS vesting contract amendment is adopted.  The City would be subject to PERS requirements and future changes in PERS vesting requirements.

The premium contribution rates are calculated by PERS each calendar year.  The individual employer is bound by contract to accept these annually calculated rates.  These contribution rates multiplied by the percentage of employer contribution forms the minimum post retirement medical premium contribution that employers are required to make under the contract amendment for a given year.

As mentioned earlier, the premium contribution rates are set by PERS based on actual premiums.  These premiums have experienced double digit increases over the last several years and this increase is expected to continue in the future.  This continued increase in vesting premium rates will decrease any possible future savings and may eventually increase the City’s post retirement medical costs. 

Under the contract amendment, the City does not control the monthly contribution rates that are established for retirees.  These are set by PERS following a formula. 

In contrast, the City ultimately controls the contribution rates that are now used for active employees through the negotiation process with the employee associations and under the Salary Resolution for non-represented employees.  The contribution rates for active employees are the same contribution rates for retired employees.

The risk that the City runs is that costs under the vesting plan could be higher than costs based on the current requirement that contributions to retired employee medical premiums be the same as those for active employees.  The City would not have any way to reduce future retiree medical costs under the PERS vesting amendment.

General Conclusions

While this subject is very complicated, there are a number of general conclusions that can be reached regarding the PERS vesting amendment.  The conclusions follow:

1. Strategies that tend to hold down employer contributions to active employee medical costs tend to favor maintaining our current system because inflation will continue to increase the required contributions under the PERS vesting period amendment making it relatively more expensive.

2. Strategies that tend to increase active employee health insurance contributions at a rate greater than the increase of required premium contributions under the PERS vesting amendment tend to favor the amendment because the amendment will become relatively less expensive over time.

3. The vesting amendment will tend to reduce the number of retirees who qualify for payment of a portion of a retired employee’s health insurance premium which will decrease costs as long as there is not an offsetting increase in premiums required by the contract amendment.

4. Disparities between retiree health insurance contributions will be eliminated under the contract amendment in the long-run.

5. Any potential savings (and potential costs for that matter) will occur long into the future as employee who are hired after the amendment begin to retire.

6. The costs for the Management/Council group will always be less than the costs under the current PERS vesting rules than under the current plan as long as the City pays 100% of the cost of any plan selected by and active or retired employee. 

FISCAL IMPACT

There is no immediate fiscal impact associated with just initiating the process of adopting a contract amendment with PERS to impose a vesting period to qualify for City paid post retirement medical benefits pursuant to Government Code Section 22825.5.  Long-term savings are possible provided that the PERS retiree premiums continue to be less than the City’s contribution rate for active employees.

PUBLIC CONTACT

Public contact was made through posting of the Council agenda on the City’s office notice bulletin board, posting of the agenda and report on the City’s web page, and the availability of the report in the Library and the City Clerk’s Office.

ALTERNATIVES

1)     Adopt the PERS vesting program under Government Code Section 22825.5 for all employee groups.

2)     Adopt the PERS vesting only for those groups where the analysis indicates that reductions in the cost of retiree medical benefits could occur (SEA/Confidential, Management/Council, and SEIU).

3)     Do not make any changes to the current post retirement medical benefit plan at this time, but include the post retirement medical plan vesting analysis in the broader study of the City’s continued participation in PEHMCA.

4)     Do not make any changes to the current post retirement medical benefit plan.

RECOMMENDATION

Staff recommends Alternative 3 which is not to make any changes to the current post retirement medical benefit plan at this time, but to include the post retirement medical plan vesting analysis in the broader study of the City’s continued participation in PEHMCA.

The reasons for this recommendation follow:

1. Adopting the PERS vesting amendment and remaining under PEMHCA is risky and post retirement medical benefit costs may actually increase, rather than decrease.

2. The post retirement medical contribution is an integral part of the current study the City is engaged in to determine whether to continue under PEMHCA.  It makes sense to address the retiree vesting issue with the bargaining units at the same time that we address the subject of our continued participation in PEMHCA. 

3. There would be no loss in savings to the City if the vesting amendment was adopted now or addressed in the near future when the City addresses participation in PEMHCA. 

Prepared by:

Mark Gregersen
Director of Human Resources

Reviewed by:

Mary Bradley
Director, Finance

Approved by:

Amy Chan
City Manager