Retiree Retiree Medical Insurance Medical Insurance

UpdateUpdate

March 10, 2003

Sue Autry, Human Resources Manager

Steve Hilfers, Director of Finance

Marisa Walker, Principal Analyst

Current Issues …The Retiree Perspective

•Significant upsurge in medical healthcare costs in recent years of 15%-30% per year

•Impact on employees/retirees through cost shifting:

•Higher deductibles

•Higher co-pays, co-insurance

•Higher out-of-pocket maximums

•Higher premiums

•Increase in share of premiums

•Future uncontrolled escalation of healthcare costs

Current Issues …The Employer Perspective

•Significant increase in medical healthcare costs

•Growing retiree population

•Failure of Medicare to offer prescription drug coverage

•Decreasing Medicare reimbursements

•GASB consideration of employer accounting for retiree health coverage liability

Employer Trends in Offering Retiree Benefits

Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits: 1999-2000 and KPMG Survey of Employer-Sponsored Health Benefits: 1988, 1991, 1993, 1995 for Large Employers (1,000-4,999 workers)

Percentage of Large Employers Offering Retiree Health Benefits

67%

56%

48%55%

44%37%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Year1988

Year1991

Year1993

Year1995

Year2000

Year2001

Industry Trends in Offering Retiree Benefits

Percentage of Employers Offering Retiree Health Benefits By Industry - 2001

49%

27%

58%

10%

33%

40%

21%

80%

0% 20% 40% 60% 80% 100%

Mining

Manufacturing

Transportation/Utility

Retail

Finance

Service

State/Local Government

Healthcare

Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits 2001 (Large Firms 200 or more workers)

Comparison City Retiree Benefit Trends - 2002 Survey

•94% have a medical coverage program for retirees

•28% subsidize retiree medical coverage

City of Colorado Springs Retiree Profile

360

463

0

100

200

300

400

500

1

Retiree Count as of January 31, 2003

Sworn Retirees

Civilian Retirees

City of Colorado Springs Sworn Retirees On City Medical

PlanPercentage of Sworn Retirees

PreMedicare vs. Medicare Eligible

55%45%

PreMedicare Retirees(147)

Medicare Eligible (120 retirees)

PreMedicare City Retirees:

Health Insurance Continuation Options

SWORN RETIREES

•Remain on City health insurance plan

•Obtain health insurance coverage elsewhere

CIVILIAN RETIREES

•Join PERA health insurance plan

•Obtain health insurance coverage elsewhere

City Health Insurance Subsidy Levels

1. Fully paid

(Eligible to retire before 1/1/1979)

2. Partially paid - $91.40 per month

(Eligible to retire on or after 1/1/1979 and hired before 8/1/1988)

3. No subsidy

(Employees hired on or after 8/1/1988)

Sworn Retiree Subsidy Level Summary

Sworn Retiree Subsidy Level Data (Shown as a percentage of total sworn retiree population)

79%

20%

1%Fully Paid Subsidy (72 retirees)

Partially Paid Subsidy (285 retirees)

No Subsidy (3 retirees)

Civilian Retiree Subsidy Level Summary

PERA Civilian Retiree Subsidy Level Data(Shown as Percentage of Total Civlian Retiree Population)

87%

6% 7%Fully Paid Subsidy (31 retirees)

Partially Paid Subsidy(403 retirees)

No Subsidy - ineligible(29 retirees)

PreMedicare Sworn/Civilian Retiree

2003Health Insurance Cost Comparison

CITY PreMedicare EPO Retiree Rates2003

Monthly RateRetiree Only $390.34Retiree + Spouse $780.68Retiree + Child $741.65Retiree + Family $1,131.99

PERA Pre-Medicare retiree rates - CIGNA HMO2003

HMO #1Monthly Rates

Retiree Only $672.00Retiree + Spouse $1,378.00Retiree + Child $1,210.00Retiree + Family $1,882.00

2003 PreMedicare Monthly Rate Comparison

Sworn/Civilian Retirees

$390

$672$781

$1,378

$742

$1,210$1,132

$1,882

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

Retiree Only Retiree + Spouse Retiree + Child(ren) Retiree + Family

City EPO Plan (sworn)

PERA HMO # 1 Plan (civilian)

2003 PreMedicare Monthly Rate Comparison

With PERA Subsidy*

Sworn/Civilian Retirees

* Presumes employee has earned full 20 year credit subsidy amount of $230 per month

$390$442

$781

$1,148

$742

$980$1,132

$1,652

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

Retiree Only Retiree + Spouse Retiree + Child(ren) Retiree + Family

City EPO Plan (sworn)

PERA HMO # 1 Plan (civilian)

Medicare Sworn/Civilian Retiree

2003Health Insurance Cost Comparison

CITY Medicare EPO Retiree Rates 2003Monthly

RateRetiree or Surviving Spouse with AB $246.24

Retiree & Spouse with AB $492.46

PERA Medicare Retiree RatesMutual of Omaha

2003Monthly

RateBenefit Recipient - All Medicare Coverage $227

Benefit Recipient + Spouse – All Medicare Coverage $439

2003 Medicare Monthly Rate Comparison

Sworn/Civilian Retirees

$246$227

$492$439

$0

$100

$200

$300

$400

$500

Retiree or Surviving Spouse with AB Retiree & Spouse with AB

CITY EPO (sworn)

PERA Mutual of Omaha (civilian)

2003 Medicare Monthly Rate Comparison

With PERA Subsidy*

Sworn/Civilian Retirees

* Presumes employee has earned full 20 year credit subsidy amount of $115 per month

$246

$112

$492

$324

$0

$100

$200

$300

$400

$500

Retiree or Surviving Spouse with AB Retiree & Spouse with AB

CITY EPO (sworn)

PERA Mutual of Omaha (civilian)

Retiree Subsidy Program Funding

2002 Annual Funding

•Sworn Retirees

•Partial Subsidy : $312,588

•Full Subsidy : $309,512

•“PERA” Subsidy * : $525,000

Sworn Retiree Total $1,147,100

•Civilian Retirees

•Partial Subsidy : $442,010

•Full Subsidy : $ 62,750

Civilian Retiree Total $504,760

Total Annual City Cost : $1,651,860 * Technically, the “PERA” subsidy goes to sworn actives, but works to the benefit of sworn retirees

Current and Future Retiree

Partial Subsidy Level Summary

262

379403 431

0

50

100

150

200

250

300

350

400

450

Partial Subsidy Sworn Partial Subsidy Civilian

Retirees ReceivingPartial Subsidy(current)

Eligible Actives (future)

Funding the Future Partial Subsidy Program

$312,588

$442,010

$728,275

$914,731

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

Partial Subsidy to Current Retirees Partial Subsidy to Current + Future

Retirees

Annual Cost to City: Partial Retiree Subsidy Current and Potential Future Population

Sworn

Civilian

Current Retirees Current Retirees +Future Retirees

Future Funding Requirements for

Partial Subsidy Program

Annual Cost to City - $91.40

(includes current and future partial subsidy eligible retirees)

•Sworn Retirees - $728,275 annual cost to City

•Civilian Retirees - $914,731 annual cost to City

Total $1,643,006

Increase of $ 888,408

Sworn Retiree City Rate Setting Process

•In 1997 Council authorized staff to set sworn retiree rates using a 'blending' process.

•Blending process averages projected active and retired claims experience for setting rates.

City Rate Setting Process

Blending Strategy

Step 1: Average the projected higher claims experience of retirees with the projected lower claims experience of actives to arrive at a blended or average rate.

Step 2: Utilizes an additional subsidy from General Fund, “PERA subsidy” to buy the higher active sworn rates back down to or as near as possible, to civilian rates. Amount of PERA subsidy is number of PreMedicare and Medicare retirees times comparable PERA Health

Trust fund subsidy. (currently approximately $525,000 per year)

RESULT: Lower retiree rates and slightly higher active sworn rates.

Sworn Retiree Claims Experience

1999-2002

$0 $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000

2002

2001

2000

1999

Total Revenues

Total Expenses

$- 881,836 deficit

$- 1,149,505 deficit

$- 328,404 deficit

$ -225,724 deficit

Active Partial Subsidy

Eligibility Summary

Summary Eligibility Status as Percent of Current Employee Population:

Active Sworn

37% eligible

63% ineligible

Active Civilian

•29% eligible

•71% ineligible

379431

647

1046

0

200

400

600

800

1000

1200

ELIGIBLE INELIGIBLE

Number of Sworn and Civilian Active Employees Eligible vs. Ineligible for Partial Subsidy

Upon Retirement

Sworn

Civilian

Future Pre-Tax Funding Options

•PERA 'carved out' a separate Health Care Trust fund from existing pension fund. Bill in Legislature for FPPA to establish a health care trust fund similar to PERA

•Several vehicles available to save money for post retirement health care expenses..IRC section 457, 401(k), IRA's, Roth IRA's, VEBA's

•City is examining a custom plan offered by ICMA that allows employee to set aside dollars for future health care expenses

•Recent federal proposals to restructure defined contribution plans and individual retirement arrangements could alter all plans in future