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.