New School District Retiree Medical Benefit Numbers
The Piedmont Unified School District (PUSD) has obtained a new report on its unfunded liability for retiree medical benefits. The report estimates the total required annual cost to fund this benefit will be $500,000 per year for the PUSD, which covers 280 employees.
This $500,000 school figure compares to a $1.6 million required annual contribution by the City of Piedmont to fund its medical retiree benefit for slightly fewer than 100 employees.
Despite having almost 3 times as many employees, PUSD’s unfunded liability is substantially less than the City’s because the City of Piedmont provides a lifetime medical retiree benefit, while the PUSD provides this benefit until age 65, when Medicare benefits are available to the retiree. Also, a PUSD retiree is not eligible for this benefit if covered by a spouse’s insurance.
The PUSD made the change limiting its Medical Retiree Benefit to age 65 two decades ago – in 1989. In addition, PUSD employees obtain the medical retiree benefit after 10 or 15 years of employment, rather than after only 5 years of employment, which is the City’s vesting period.
The total PUSD unfunded actuarial accrued liability is $5 million as of 9/1/11. This figure has increased by $1 million since the PUSD’s April 2009 report, prepared only 17 months ago, due to benefit accruals and new CalPERS and CalSTRS assumptions. However, the Superintendent noted that the new estimate could be reduced by caps on medical costs negotiated in 2011-14 PUSD employee contracts. The report’s figures are calculated as of September, 2011 and therefore based on 2009-11 contracts.
Future PUSD contribution costs will vary based on the number of employees, the number of retirees, and their demographics. The report noted in its executive summary that PUSD costs and liabilities “could vary as much as 10-20% from estimates . . . .” It further noted that costs can be reduced if the PUSD implements contribution caps.
Looking at the Assumptions Behind the Numbers
The cost estimates for the PUSD were based on the following assumptions:
- $6,500 first year cost of retiree medical cost
- (subsequent years based off this figure; source not specified)
- 4% annual increase* in medical insurance rates
- 5% discount rate
- 30 year amortization rate (maximum allowed by law)
- 3% inflation rate
- 3% annual payroll increase
- no increase in the number of staff
- no “merit” increases
- 80% married
- 280 eligible active employees
- 92 eligible retirees
The importance of each of these assumptions (e.g. the magnitude of change in the bottom line if the assumption changes +/-1%) is not indicated by the report. (But this information can be calculated by the PUSD consultant for an additional fee.)
*The report explained its medical cost assumption (4% annual increase) as follows: “We do not believe it is reasonable to project historical trends vs. inflation rates several decades into the future” because the nation is “at a tipping point which will inevitably result in changes in health care finances and/or delivery that will bring health care costs more closely into line with general inflation.”
PUSD’s 280 employees include:
- 20% who are less than 40 years old
- 80% who are 40 years or older
- 27% who are 55 or older (minimum retirement age is 55)
Retirees hired prior to 1989 receive lifetime benefits for themselves and their dependents.
Link: See full report at p. 9 of PUSD 5/9/12 agenda background materials
It is important to note that this unfunded actuarial liability will be less when it is recalculated based on the collective bargaining agreements with PUSD employees for 2011-14. During the term of these agreements, PUSD’s health insurance contribution for retirees is capped at $6500 per year (the same cap that applies to a single current employee). Beginning July 1, 2014, retiring teachers will be limited to a maximum of 5 years of such coverage (rather than a maximum of 10 years if a teacher retired at age 55 and was covered until Medicare eligibility at age 65). These are additional sacrifices made by PUSD employees to help the District have a sustainable budget.
Editor’s Note: The reduction due to current contracts was noted in the article. Thank you for providing specifics not included in background materials.