An Explanation of “Blending” and GASB Statements 45 & 75

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Background

The City of Glendale has a long history of providing quality medical insurance programs to its employees and dependents, and for many years, has allowed employees to remain on the plan following retirement.  In addition to allowing retired employees to remain on the City’s health insurance plan, the City has traditionally “blended” the active and retiree rates together, applying the same increase to both groups for each year’s medical insurance renewal.  This practice creates what’s known as an “implied subsidy,” whereby active employee premiums subsidize retired employee premiums, and which has greatly reduced the insurance premium charged to retired employees who remain on the City’s health insurance plan.

 

Blending and GASB 45

This practice of “blending” the active and retiree medical insurance rates has historically had minimal financial implications for the City.  The implied subsidy was simply absorbed by the City on a pay-as-you-go basis.   Recently, however, the Governmental Accounting Standards Board (GASB) established Statement No. 45, which requires the City to calculate and disclose the unfunded liability in its annual financial reports.  More problematic is that another GASB Statement (GASB No. 75) requires that, beginning fiscal year 2017/2018, the City must actually book this liability on its balance sheet.  These non-pension related costs are often referred to as Other Post-Employment Benefits or OPEB, and are significant as discussed below.

As observed in GASB 45, the pooling of employees and retirees for the purposes of setting insurance rates has two significant financial impacts on the City: 1) because the City pays a portion of the health insurance premiums for active employees, the City contributes a larger dollar amount than if retired and active employee rates are assigned separately; and 2) the City has an ever-increasing unfunded liability for retiree health insurance based on the implied subsidy.

The implied subsidy for OPEB is reflected in the City’s Retiree Healthcare Valuation prepared biennially by John Bartel of Bartel & Associates, who is the City’s actuary.  As the number of retirees increases and the blending practice continues, the implied subsidy has grown from roughly $100 million in 2009 to $229 million today.  This figure represents an unfunded liability which must be reflected in the City’s Comprehensive Annual Financial Report (CAFR), and beginning in Fiscal Year 2017/2018, must be booked as an actual liability on the City’s balance sheet, as per the requirements of GASB No. 75.  This will have a significant impact on most of the City’s funds, as the liability is distributed according to the fund that generates the cost. 

The implications of this new GASB requirement will have a devastating effect on the City’s overall balance sheet and ultimately, our operating budgets.  If the City were to attempt to fully fund the OPEB liability, it would require an investment of approximately 20.2% of the City’s payroll, which is roughly $25.5 million each year, the majority of which would affect the General Fund, severely impacting Police, Fire, Parks, Library and other related services.  This level of expenditure would amount to an unrealistic and unsustainable cost to the City.

Proposal to Un-Blend: June 1, 2016

After a significant amount of review and analysis stretching back several years, the City has determined that the only realistic means of eliminating the $229 million OPEB liability would be to eliminate the practice of “blending” active and retired employees’ medical insurance rates in subsequent insurance renewals.  This course of action will be recommended to the City Council, with a scheduled effective date June 1, 2016

The unfortunate consequence of “unblending” is that retiree medical insurance rates for the City’s plans will generally increase, in some cases dramatically.  Preliminary analysis (See Appendix A - attachment) shows that Early Retirees (meaning retirees younger than 65) on the City’s PPO plan would experience a 74% increase in the premium; Medicare Retirees on the City’s PPO plan could see a 48% jump in premiums.  For the Anthem HMO, Early Retirees would see a 31% increase; while Medicare Retirees would see a slight reduction of approximately 7%.  On the Kaiser Plan, Early Retirees would face a 97% increase; whereas Medicare Retirees would see a minor reduction.

While these increases are indeed significant, the fortunate news is that there are alternatives that exist today for quality health coverage at very reasonable costs.  The Affordable Care Act (ACA) and other changes in the insurance industry have ushered in a very robust and competitive insurance marketplace for individuals of retirement age.  Additionally, it is important to note that the City is not proposing to remove coverage from retirees or somehow preclude them from obtaining coverage through the City of Glendale.

 

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