SD POA: Criticism from taxpayer advocacy groups over AB 2510 unjustified

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Following the organization’s endorsement of mayoral candidate Nathan Fletcher last week, San Diego Police Officers Association President Brian Marvel noted to us via Twitter that recent analyses of AB 2510 by columnist Steve Greenhut and radio host Chris Reed, some repeated on Rostra, were inaccurate, stating the references as “a perfect example on the right of trickle down laziness.” He indicated that none of these individuals had contacted the POA to ask questions about the bill.

In an effort to bring varying perspectives to Rostra, we asked if the POA would like to offer an editorial on the matter. The following is authored by Marvel and POA Vice President Jeff Jordon.

Guest Commentary — AB 2510 Explained: Criticism from taxpayer advocacy groups was not expected

by Jeff Jordon and Brian Marvel

When anyone hears the word CalPERS, their mind immediately associates the word with pensions and not health programs.  We almost never meet anyone that knows CalPERS Health is the largest employer purchaser of health benefits in California, and the second largest employer purchaser in the nation after the federal government.  CalPERS Health purchases health benefits for State of California employees and more than 1,100 local and government agency and school employers that contract with it.  It is estimated that CalPERS Health covers more than 1.3 million active and retired state, local government, and school employees, as well as their families.

Obviously, a system that is estimated to spend more than $7 billion on health insurance has some distinct benefits, especially for contracting agencies.  For example, In October, CalPERS reported reducing the cumulative health care costs for state and public agency employees by $1.2 billion over the last three years.  Additionally, CalPERS Health offers at least three HMOs and three PPOs to contract employers at very competitive rates.  CalPERS was able to negotiate premium rate increases of only 4.1 percent for 2012 compared to the national overall premium increase of 9 percent as cited by the Kaiser Family Foundation.  Many employers are unable to offer that many choices to their employees and if they do, the costs of the PPO plans are affordable to only the highest paid public executives and managers.  In fact CalPERS’s blended premium rates — rates that are the same whether you are an active or retired employee — are similar to the unblended premium rates that the City of San Diego offers to its active employees.  The fact that the City of San Diego’s rates are unblended simply means that active employees and retired employees pay different premiums for the same health plan.  The premium for a single, active city employee selecting Kaiser is $346 a month, while a retiree premium for the same Kaiser plan is $740.  The cost for the retiree is higher, because healthcare costs are typically higher the older we get and retired City employees are placed in different risk pools from active employees when there premiums are determined by insurance providers.  City of San Diego employees who retired before July 1, 2009 are eligible to receive up to $860.00 a month to purchase healthcare in retirement and the single best way to cut that cost is to offer retirees health insurance plans from CalPERS that give them greater choices and coverage options at substantially reduced rates.  CalPERS charges $512 a month for a single employee to enroll in Kaiser and $526 a month for a solid PPO plan.

Beyond a wider selection of health plans to choose from and competitive rates, public agencies also generally have lower procurement and administrative costs with CalPERS Health, since they do not have to pay insurance brokers to shop their claims histories and census data to health care providers annually to determine their premium costs.  CalPERS administrative costs are less than a half percent as compared with many cities purchasing health care on the open market is around three to eight percent.  CalPERS insures so many people it does not ask for census data or claims history from a contract employer; it takes them as they are since most contract agencies are not large enough to impact the premium rates it negotiates with healthcare providers.  Lastly, agencies that contract with CalPERS are able to take advantage of certain accounting rules established by the Government Accounting Standards Board (GASB) when determining their retiree health liabilities, which results in significant savings to the agencies.

However, the advantages listed above are potentially matched by some very serious disadvantages for employers who contract with CalPERS.  First, if a public agency contracts with CalPERS for health insurance, they are bound by laws which govern this health system found in the Public Employees Medical and Hospital Care Act (PEMHCA).  These laws essentially require non-school public agencies to provide a contribution to the retiree health insurance premiums for employees who vest with them, which typically occurs after five years.  Thus, every non-school public agency that contracts with CalPERS for health will most likely be making contributions for retiree healthcare premiums for employees that do not even work for them, unless the antiquated laws found in PEMCHA are modified.  If a contract city wants to leave CalPERS Health, they lose the advantages of the program and their retiree healthcare liabilities may spike sharply due to GASB accounting rules.

Next, if a city like San Diego wants to join the CalPERS Health Plan for its advantages, it is effectively barred from it, since San Diego would never consider providing mandatory retiree health contributions after it eliminated this benefit for new hires years ago.  The San Diego Police Officers Association (SDPOA) looked at the cost of the retiree health care benefits provided to its members, which are undeniably vested for those who retired before 2009, and recognized that the City of San Diego could reduce its annual retiree health premiums by millions of dollars if retirees used the monies provided to them by the City to choose insurance plans with blended rates found in the CalPERS Health Program.  Additionally, actuarial studies found that the retiree health care liability would drop by another $16 million if SDPOA retired members utilized CalPERS Health and our analysis of the potential savings for moving active employees into this program is ongoing.  The SDPOA knew that for the City, as wells as its members, to access these potential savings, it had to modify the government codes in PEMHCA and Assembly Bill 2510 was born.

After AB 2510 was passed by the Legislature and signed into law in 2010, it became Government Code 22894.  The new law allows the SDPOA to enter CalPERS Health under the same rules provided to schools that utilize the program.  In essence, the law requires healthcare promises made to employees who have already retired be kept, and it does not require the City of San Diego to make mandatory contributions to employees who do not qualify for the benefit.  The SDPOA is the only non-school public agency in the state to have this option under PEMHCA.

When the SDPOA initially inquired about creating a public agency option similar to the option that schools have that exempts them from making mandatory retiree health contributions to its employees, state officials and some local politicians were less than excited.  One state official asked, “if the SDPOA was dumb” and wanted to know why we would want to enter CalPERS without our employer being forced to contribute to retiree healthcare benefits.  We explained the days of employers promising to provide lifetime health benefits are coming to an end (all employers were required to contribute to Medicare for any employee hired after April 1986), and that now was the time for employers to fund the promises they made without opening up new liabilities from benefits without the revenues to pay for them. The first state assemblyman that we asked to sponsor this bill backed away from the SDPOA when the realization hit that other unions would vehemently oppose the bill.

Afterwards, Assemblyman Nathan Fletcher met with the SDPOA.  We outlined what we wanted to accomplish and demonstrated how taxpayer savings could be achieved by not having public agencies be compelled to contribute to retiree healthcare benefits simply as a result of contracting their healthcare needs with CalPERS.  The SDPOA’s business plan and actuarial analysis clearly showed how the City of San Diego could reduce the annual premiums spent on retiree healthcare, lower the City’s retiree healthcare liability, and enhance the benefits to retirees simultaneously.  AB 2510 was passed without a single no vote and signed into law.  Unfortunately, the bill allowing the public agency option was limited only to the SDPOA, as well as unclassified and unrepresented employees employed by the City, after other associations declined to be a part of it and favored their own association managed health plans.  If PEMHCA was further modified to allow the estimated 1,100 contracting agencies using CalPERS Health the same provisions afforded to the SDPOA, it would undoubtedly save taxpayers billions of dollars.

Many people are criticizing the SDPOA and Nathan Fletcher for sponsoring this type of bill.  We expected this from some unions and associations in the state, but we did not expect it from taxpayer advocacy groups.  Interestingly, the SDPOA has recently become flooded with phone calls from lawyers and public employee groups around the state, who find themselves facing the same question the SDPOA answered years ago when we helped craft this bill.  They are all wondering how they can cut annual operating budgets, decrease retiree health liabilities and provide competitive benefits.  The SDPOA will enter full contract negotiations for the first time since this bill has become law, and it plans on showing the City of San Diego and taxpayers the potential of working collaboratively with elected officials to reach mutually beneficial legislation.  We suggest that taxpayer advocates learn about the bill and how taxpayers may benefit from statewide legislation that mirrors Assembly Nathan Fletcher’s efforts in AB 2510.

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Comments 14

  1. Nice explanation Jeff. My editor would have broken up your block of text paragraphs a bit to make it more readable and easier to follow but a minor quibble.

  2. Many people are criticizing the SDPOA and Nathan Fletcher for sponsoring this type of bill. We expected this from some unions and associations in the state, but we did not expect it from taxpayer advocacy groups.

    Steven Greenhut wrote on June 7 about why he opposed Fletcher on AB 2510:

    “He said that his Assembly Bill 2510 will save the city of San Diego money, but it merely shifted the burden to other taxpayers. In fact, his bill epitomized the approach of the unions, which want to shift the investment portfolios from local, generally more conservative systems to the state system, which uses the most liberal assumptions to hide the burdens on taxpayers.”

  3. Bradley,

    First, thank you for posting some of Mr. Greenhut’s comments. The SDPOA still does not understand what he is talking about in his analysis. I would be speculating, but I believe Mr. Greenhut thought the SDPOA’s legislation would enable us to join the CalPERS pension system, much like in San Jose’s Police and Fire proposal a few weeks ago. San Jose wants to have its public safety workers opt into lower pension tiers offered by CalPERS to reduce the strain on its own pension system and its members. AB 2510 is about allowing retired and active San Diego police officers to use the monies they already receive from the City to purchase healthcare from the largest purchaser of healthcare in the state to take advantage of the benefits of the system, while eliminating the legal requirement to provide retiree healthcare contributions to members who were never eligible for the benefit. There is no shift of the tax burden, but there is less of burden as retirees choose less costly insurance plans. I would love to speak with Mr. Greenhut, he can call me anytime at 858-573-1199 to discuss the matter.

    Respectfully,
    Jeff Jordon

  4. Mr. Fikes,

    When I made the statement of “trickle down laziness,” this is what I was speaking about. Steven Greenhut is confusing CalPERS pension system and their unfunded liability with their health division which has no unfunded liability. There is no transfer of debt to anyone or anything. It is a pay go system. If you don’t pay, you don’t get health care. I am not sure why Mr. Greenhut didn’t reach out to CalPERS to figure that one out.

    Mr. Greenhut wrote that blog post back in June and now Richard Rider and Chris Reed are parroting everything he wrote. We have three respected conservative voices speaking on a topic they clearly demonstrated they don’t understand nor have they tried.

    Hopefully our article clears up the situation quite a bit. Our goal at the SDPOA is to work with the city to find solutions to the serious issues facing it. We believe that working together will create greater results than the continuance of divisiveness and demonization of issues.

    Brian

  5. Brian, you write:
    Steven Greenhut is confusing CalPERS pension system and their unfunded liability with their health division which has no unfunded liability.There is no transfer of debt to anyone or anything. It is a pay go system. If you don’t pay, you don’t get health care.

    Could you help me reconcile what you said with what Controller John Chiang said in March about CalPERS’ health liability?

    Chiang said CalPers had a $60 billion unfunded health care liability.

    From Chiang’s press release:

    “Unlike state pensions, which are pre-funded and allow investment returns to reduce liabilities, California retiree health benefits are covered on a “pay-as-you-go” basis, meaning as the costs come due each year. The latest actuarial report estimates California’s obligation for retiree health and dental benefits, also referred to as Other Postemployment Benefits (OPEB), based on two different funding scenarios:

    “The current pay-as-you-go policy results in an actuarial unfunded obligation of $59.9 billion, which represents the total present value of future retiree health benefits earned as of June 30, 2010, by current and future state retirees. Based on this unfunded obligation, California has an annual OPEB cost of $4.2 billion for 2010-11 – or the amount the State would need to pay to cover these benefits. In the 2010-11 Budget Act, the State only provided $1.4 billion for retirees’ health and dental benefits.”

    Not only did Chiang say there is a $60 billion unfunded health care liability, he also defined pay-as-you-go differently than you did.

    What am I missing here?

    Best,

    Bradley

  6. Nice job Brian and Jeff. It is impossible for some people to draw an honest conclusion on these issues when they go into it positive the taxpayer is getting screwed even if they clearly are not. It also doesn’t fit the profile that all government employees are ripping of taxpayers.

    As I understand it, all AB2510 did was allow City of San Diego retirees to by their insurance at the CalPERS group rate. The group rate is set by the group of people buying it. Libertarians are freaking out becuase it was CalPERS but Costco, Qualcomm and every other company buys insurance the same way. It is free market economics at work. AB2510 did not pass any cost or unfunded liability on to anyone.

    Hank Turner
    President – Deputy Sheriffs’ Association.

  7. No matter how you cut it, i don’t see how AB 2510 has any substantial impact on the pension crisis. Seems like deck chairs on the titanic being masqueraded as some sort of meaningful reform.

    I’m not saying it was a bad idea or Fletcher shouldn’t have sponsored it, but it sure looks like he’s a willing partner in the union’s charade. I guess he’s being rewarded now.

  8. Roger,

    AB 2510 has nothing to do with pensions or pension reform, its focus is on reforming the costs and funding of OPEBs (Other Post-Employment Benefits) like retiree healthcare. For some cities, OPEBs represent significant liabilities that rival pension liabilities. For instance, the City of San Diego had a retiree health liability in the neighborhood of 1.6 billion and has a pension liability in excess of 2 billion dollars. San Diego reduced its retiree health liability by 700 million during the meet and confer process with its unions last year, Implementing AB 2510 would reduce it further by millions of dollars.

    In regards to pensions changes, the SDPOA is not supportive of putting employees in a 401k and believes the pension initiative will be held up in litigation for years if it is approved. This just halts what needs to be done on reform

    However, this is not to say that the SDPOA is not in favor of pension reform. We simply believe it would far more logical and efficient with the federal government giving states and cities the tools to manage their pension liabilities. For instance, in 2009 the SDPOA proposed to the City that its existing members be allowed to voluntarily opt into lower pension tiers, which would reduce the annual required contribution (arc) payment of the City and the Employee. The SDPOA was told this is not permissible by the IRS and jeopardizes the tax exempt status of the pension plan. This is ridiculous, some of our members are paying 18% of their salaries into the pension system based on their age of hire and they are not allowed to opt into a different pension plans that would save them and the City money. By new tier I speccifically mean going from 3@50 to 2.5@50 or even 2@50 voluntarily for immediate savings.

    For years, the Orange County Employees Association has pushed to allow its existing members to opt into hybrid plans. They hired the Groom law firm in DC to lobby congress to allow the IRS to do it. Nothing has been accomplished, so now Rep. Loretta Sanchez has a bill that moves this issue forward. I have not seen the bill, so I can’t comment on it intelligently, but it sounds promising.

    Additionally, the SDPOA believes that pension benefits that exist with pension plans should be modified to create greater savings and is moving in the next month to examine the elimination of the COLA Annuity given to employees to reduce the pension liability.

    Hopefully, SD ROSTRA will invite us back to explain next month to explain it further.

    Respectfully,
    Jeff Jordon

  9. Bradley,

    I believe what Brian was trying to explain is that by joining the CalPERS Health System, the City of San Diego does not become part of the states unfunded retiree health liability, nor does the state become part of San Diego’s OPEB liability.

    SDPOA active and retired members would use the money provided to them by the City to purchase healthcare insurance plans through CalPERS and if you don’t pay the bill, you don’t get insurance.

    Mr. Chiang was stating that the State of California had essentially made 60 billion dollars of promises to its past and active employees. If the State of California made the required payments to pay for its annual insurance premiums to its active and retired employees and pay down its outstanding OPEB debt, the annual cost would be 4.2 billion. Well the State of CA, much like cities all over the nation, don’t have the money so what they do is called pay-go, which is essentially nothing more than paying your annual insurance bill and for the state this is 1.4 billion. This means if the 60 billion was on a credit card, the State is not even paying the minimum balance so the liability or debt is growing.

    San Diego was paying 32 million or so to provide health insurance to its active and retired members annually (pay-go). However, if it wanted to really pay off its retiree health liability (1.6 billion) it should have paid about 100 million plus a year. The City could only afford 25 million more, so lately the City has been paying 32 million annually for health premiums plus 25 million extra to the CalPERS OPEB Trust, which is like a big savings account, to pay down their retiree health debt.

    After negotiating with the unions to reduce retiree healthcare benefits, the City’s annual required contribution to pays its active and retiree health premiums is about 57 million. By paying this amount, the City of San Diego is now paying the full amount needed to pay off its retiree health liability, unlike the state.

    Hopefully I explained this adequately, I served some search warrants today and my brain has not fully switched back to labor dude yet.

    Respectfully,
    Jeff Jordon

  10. Hi Jeff,
    Thank you for the detailed reply. I understand that switching modes takes a bit of effort, having done it myself.

    Would you point me to provisions in the legislation or existing state law backing up your statements? That way, the issue can be settled once and for all.

    I’m especially interested in anything proving that the state or city incurs no potential liability.

    I’m trying to add the numbers up so they balance. CalPERS is running a deficit now with its health premiums. So wouldn’t adding more retirees from the SDPOA at the same rates only make the deficit worse? And who would be responsible for that incremental deficit?

    In other words, who is responsible if the premiums paid by the SDPOA members don’t cover the cost of their care?

    Best,
    Bradley

  11. http://www.pebc.ca.gov/

    Bradley,

    I believe that many of the answers that you seek can best be found by going to the above web page, which is for the State of CA Public Employee Benefits Commission. I particularly learned much from the testimony of John Bartel (an actuary with Bartel and Associates).

    Also, when public employees choose benefits above and beyond the reimbursment level in their employee contracts their employer deducts that extra amount from either their retirement check or their pay stub depending on their employment status.

    Respectfully,
    Jeff Jordon

  12. I didn’t read this brain dump of an “article” by Brian and let me tell you why:

    Brian and his organization hold no credibility to me. Whatever he’s pushing for, history tells me it is not to taxpayers’ benefit. Every financial pill his organization has put forth has turned out to be poison.

    For almost a decade this city has been turning a blind eye to a growing, unsustainable, pension expense that his group has unwaveringly advocated ignoring the consequences to taxpayers.

    As financial reality has begun to set in, Brian and has cronies jumped to the front to fight for raising taxes through Prop D. If we didn’t raise taxes, Brian warned us that fire stations were to close, and police officers would be let go. Lies.

    When Comprehensive Pension Reform was being circulated, what did labor unions do? They went out and tried to tell us that they risk their identity being stolen by signing this petition. This disingenuous campaign against the petitioning process (which unions have all been in favor for when it served their interests), is more reprehensible than the above and proves that Brian and Union reps’ interests don’t extend beyond themselves when it comes to financial matters for the city of San Diego.

    Whatever this bill is about, if Brian and unions are in favor of it, I don’t need do much research to know where I stand on it.

  13. Taxpayer,

    You know I was just telling Brian that I am still scared of going on a cruise. I still believe the world is flat and the sun revolves around the earth, because history/experts claimed it was so once.

    Silly right? Almost as silly as your comments listed above, things change as do the policies and decisions of organizations as they evolve.

    As for prop D and lies, we have 1800 SDPD cops now and that number may drop to 1700 plus soon enough. We used to have 2127. We did not fire anyone, we just are not replacing them very quickly so citizens are unaware that services are just slipping away quietly.

    Jeff

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