What Happened
The city of Sioux Falls, South Dakota, is considering changes to its employee pension plans that could save $100 million over the next 30 years. Several options are being considered, but the most significant one would eliminate retiree health benefits for new city employees, replacing it with a flat monthly stipend in lieu of benefits.
Who Cares?
A major component of municipal retiree benefits is health insurance. And rising health costs are typically one of the two largest contributors to increases in pension contributions by municipalities. Controlling those costs is key to any potential savings, so the Sioux Falls approach is worthy of review.
Several Options
According to an actuarial report, the city is reviewing several options, including:
- Option One: New city employees do not join the retirement system, and instead join “a different retirement plan.” The retirement system would be closed to new hires, and member contributions would be increased.
- Option Two: New city employees do not join the retirement system, and instead join the state’s retirement system. The city would make pension contributions for existing employees, and would also contribute to the state’s system for new employees. According to local coverage of the issue, Sioux Falls mayor Mike Huether advocates this approach or the one above; he is urging the city council to get out of the pension business and turn it over to the state.
- Option Three: The retiree health plan would be closed to new hires, and new employees would receive no retiree health benefits from the city. Instead, eligible retirees would receive a monthly benefit or “stipend” of $500; that monthly benefit could be increased periodically “for inflation at the discretion of the City/Board.”
Comparables
Under some of the proposals being considered in Sioux Falls, future hires would not receive health care insurance from the city; rather, they would be expected to plan to cover their own costs. The actuarial report outlines potential changes to the retirement system, and the savings are significant.
Other communities have made or proposed similar changes, but not as drastically. In Conway, South Carolina, for example, employees had been able to retire prior to age 62 and have 75 percent of their premiums covered while in retirement. A new plan won’t cover any health premiums until the age of 62 is met; employees retiring prior to 62 can stay on the county health plan, but are responsible for their own premiums.
Just last month, the state of Illinois began eliminating free health insurance for more than 80,000 employees. Retirees had only been paying co-payments and deductibles.
Research
A detailed study of retirement healthcare costs by Massachusetts towns released by Wicked Local shows 116 municipalities facing $12.9 billion current liabilities for retiree health benefits.
The Mass. Department of Revenue believes the actual amount may be closer to $30 billion for all state municipalities; a commission studying this issue is due to report its findings in November.
One affluent town, Lexington, MA, recently reported that its liability was $306.3 million, with just $2.06 million saved towards that cost. Almost half of the towns surveyed in the report had not set aside any funds towards the overall liability.
While healthcare retiree benefits vary, most of the Massachusetts towns offered coverage for between 50 percent to 90 percent of health plan costs.
Gov1 recently wrote about GASB’s new pension accounting standard. Similarly, back in 2008, GASB began requesting that all public employers provide reporting on the long-term cost of retiree benefits. This reporting would detail the 30-year costs of health-care liabilities.