FREQUENTLY ASKED QUESTIONS

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How much is the implied subsidy?

The total implied subsidy paid by the City annualized is: 

  • 2010/11      $1,952,000
  • 2011/12      $2,405,000
  • 2012/13      $2,562,000
  • 2013/14      $2,762,000*
  • 2014/15      $3,086,000*
  • 2015/16      $3,426,000 (projected)*
  • 2016/17      $3,893,000 (projected)*
  • 2017/18      $4,326,000 (projected)*
  • 2018/19      $4,700,000 (projected)*
  • 2019/20      $5,161,000 (projected)*
  • 2020/21      $5,702,000 (projected)*
  • 2021/22      $6,227,000 (projected)*
  • 2022/23      $6,670,000 (projected)*

*Extracted from June 3, 2014 Actuarial Valuation, slide #38 by John E. Bartel, Bartel & Associates

 

Why is the unfunded liability so high when the retiree pays the full cost of their medical insurance?

In reality, the retiree does not pay the full cost.  Because the rates of active employees are blended with retired employees, the retirees are receiving the benefit of being subsidized by the City and the active employees.  The resulting difference between premiums paid and the cost realized is called an “implied subsidy”.  This implied subsidy forms the bulk of the City’s OPEB liability.

 

What about other cities that pay the full retiree medical?

Different cities offer different benefits.  We are Glendale.  Glendale has a longstanding practice to limit the liability of employee retirement costs going back a generation.  The world has continued to change – the Recession, accounting pronouncements and disclosures, and federal healthcare reform have all impacted the way we do business – as well as provide new opportunities for alternative insurance vehicles.  Glendale’s transformation over the last few years has been tremendous and financial sustainability is paramount.  As we continue to adapt to this “New Normal,” it is unlikely and unwise to simply return to the old way of operating.  Cost-sharing on pension obligations, health insurance, and refocusing on all other areas of compensation are integral to a long-term model of best practices.

 

If we unblend, I won't be able to afford medical insurance. What should I do?

Remember, of the 725 retirees on the City medical plan, only 664 are actual owners of the plan and the balance are beneficiaries/survivors. That’s 664 of the 2,135 total individuals receiving PERS pension after retiring from Glendale.  Further, 417 of the 725 retirees are already Medicare age.

What that means is that there is a relatively small number of retirees on the City’s plan (308) who are between 50 and 65 years old.  This group will potentially see the largest insurance rate increases and will have to make choices about their insurance plan (PPO versus HMO) and their plan provider (City’s plan versus the exchanges).

That said, for those individuals whose annual household income is less than $50,000, the City will provide a monthly subsidy of up to $200 in the form of a direct credit towards the cost of insurance for any retiree with a minimum of ten years of salaried service who chooses to remain on the City’s plan.  If you retired prior to the City’s enhancement of the PERS retirement pension (2001 for safety employees; 2005 for miscellaneous employees), then this subsidy will continue indefinitely.  If you retired after the pension enhancement, then the subsidy will continue until you reach Medicare age.

HMO members who are Medicare aged will actually see a decrease in their costs if they stay on the City’s plan.  If a Medicare aged person wants to stay on a PPO plan, then the health insurance exchanges established as part of the Affordable Care Act are a better avenue to mitigate costs and keep the same or similar plan.

 

I have a pre-existing medical condition. If I lose the City's plan, what if I can't get insurance?

Under the Affordable Care Act, insurance offered though the state exchange for pre-Medicare Early Retirees cannot be predicated on your current medical condition.  You cannot be prevented from accessing insurance for you and your family.  Many have found insurance programs that have been cheaper and which provide the necessary coverage a household desires. 

 

This is unfair! Why is the City of Glendale trying to hurt me and my family?

The City is not trying to hurt anyone.  The City’s first obligation, however, is to the residents of this community.  That means having the staffing and resources to provide the services and programs desired by our community.  Therefore, allocating scarce resources to our current employees who serve the community is our primary focus.  To be fair, these employees have endured unprecedented challenges – historic reductions in staff, decreases in compensation, and cost-sharing on PERS costs.  The City is appreciative for the careers and contributions of the retirees, and we believe the PERS pension that retirees enjoy is evidence of that appreciation.  Yet we cannot allow the costs of benefits paid to past employees – over and above the cost of the defined benefit pension – to crowd out our ability to serve the community going forward.

 

I was a good employee.  Why would the City want to do this to me at the twilight of my life, when I am most vulnerable?

The City Council has been adamant that we must protect low income retirees.  Thus, we are establishing a means-tested subsidy that will provide a monthly  credit of up to $200 to retirees who are affected by the unblending, whose household income is less than $50,000 per year and who had a minimum of ten years of salaried service with the City.

 

Is this move due to the City’s mismanagement of its financial resources?

Quite the contrary; this transition is based on the City ensuring that we are sustainable for the long-term.  This is an exercise in best practices in financial management, by understanding and addressing our comprehensive long-term costs.

 

Isn’t this OPEB issue just more government accounting mumbo-jumbo?

Certainly, there is a temptation to believe this.  But as stewards of the Public Trust and public resources, we must provide a full accounting of the costs and benefits afforded to our employees.  Failure to do so will saddle future leaders with these challenges.

Obviously, unblending the insurance rates goes beyond simply acknowledging the cost of OPEB.  In this way, I suppose it is a bit like owning a house and understanding what is the true cost of ownership – a new roof at some point, new paint, new plumbing, etc.  While you may choose to

ignore these expenses – maybe even for good practical reasons – eventually it catches up with you.  There are consequences – the house is ruined, or devalued, or the cost of repair ultimately skyrockets.  Indeed, while you can occasionally defer addressing needs, ignoring them doesn’t make the need go away.

Addressing OPEB through unblending rates, though difficult, is the best and most honest means of addressing this element of our long-term financial structural health.  We know the liability exists and it is incumbent on us to do something meaningful about it.

 

How is this even legal?  This blended rate is a vested right!  Weren’t we promised this benefit?

It is not a vested right and has never been negotiated as such.  The City has maintained the practice as long as it could afford it, but has never promised this benefit would continue for eligible retirees’ lifetimes.  The courts have held that a continuing practice of blending or pooling insurance rates does not create a right to blended or pooled rates for the life of retirees or employees.  Further, the memoranda of understanding (MOUs) with City employee organizations cannot be reasonably interpreted to include a lifetime benefit of blended medical rates.

Some retirees may refer to a letter from then-Assistant City Manager Robert McFall sent to retirees in August 2009 essentially stating that the overall blending practice would not change as a result of Anthem’s decision in 2009 to un-blend rates.  This letter was simply intended to assure retirees that unblending would not occur as a result of Anthem’s decision to unblend its rates at the time.  The letter was not a promise to provide this benefit for the lifetime of eligible retirees; rather, it was just a reiteration of an existing City practice that the City determined it could continue at the time.  The City must act prudently, however, to consider a change in circumstances, such as the change in GASB rules that affects the City’s balance sheet in such a dramatic fashion, and make appropriate changes to its benefit system when necessary to preserve the long-term fiscal health of the City.

 

Why now?  What has changed such that the City of Glendale needs to do this to me now?

Talks on this subject have been, ongoing for several years.  It’s not a matter of why now, but probably why not sooner; as we have seen the OPEB liability increase over each year. 

  • 2011 - $191 million
  • 2013 - $214 million
  • 2014 - $229 million

 

Based on past years’ growth, and the reality that we will soon have to book this liability on the City’s balance sheet, the time has come to address OPEB.

 

What is the estimated OPEB liability today?

The OPEB liability valuation is $229 million.  Unblending would reduce that liability to $4 million plus $16 million for Medicare Part A reimbursement for a total liability of $20 million. 

 

I understand that this liability needs to be managed, but it seems unfair to hoist this on the retirees.  Why not just stop blending for any new retirees?

If we are going to cease blending insurance rates for actives but not retirees, then the actives will be paying for a benefit that they will not be eligible for.  And while current retirees might be tempted to make that same argument (“We paid for it too, and now you’re taking it away”), the comparison is rather thin – current employees cost-share on employer PERS costs, current employees cost-share 50/50 on medical premium increases, current employees have been tasked with maintaining current service levels while staffing has dropped to 1995 levels.  Further, and from an external perspective, the GASB pronouncements and ACA have changed the situation immensely – now we have to account for OPEB; now there are alternatives to the City’s plan.

 

What if we don’t follow GASB’s pronouncements?

The GASB’s standards are not Federal laws or regulations and the GASB does not have the power to enforce their use. Nevertheless, compliance with these standards is required under many state laws, and bond raters consider whether GASB standards are followed. Moreover, auditors are required to note any departures from GASB standards when they express an opinion on financial reports that are presented in conformity with generally accepted accounting principles (GAAP).  Failure to follow the GASB pronouncement can put the City at risk of receiving a modified opinion from our auditors.  Further, it could jeopardize over $50 million in Federal grants the City receives annually and will place our credit rating in jeopardy, increasing the cost of Glendale’s long-term debt financing. 

 

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