Retiree Health Care: Ideas and Strategies

Costs of providing health care benefits for retirees are rising rapidly for cities and counties. Two panels at the 2008 ICMA conference looked at how local governments are handling these costs.Kenneth Sperling, senior vice president of CIGNA, pointed out that in 1940, the average age of Americans was just 22 years of age.  Today, the Baby Boomers are reaching retirement age and local governments are challenged to prepare for the largest wave of retirements in the nation’s history.

The growing number of retirees combined with rising health care costs means that cities and counties may have to rethink their tradition of providing generous benefits.

Until recently, Brentwood, TN, provided 100 percent city-paid benefits for retirees to age 65 and paid 50 percent of dependent costs.  The city also provided a lifetime Medicare supplemental benefit for retirees.

Kirk Bednar, Brentwood’s assistant city manager, recounted how an actuarial study in 2004 showed that the city had a substantial unfunded liability.

As a result, Brentwood grandfathered benefits for existing employees but made substantial changes for new hires, requiring them to cost share if they retire before age 65 and give up their dependent coverage. The city also began full funding of its annual required contribution (ARC) beginning in 2006 and adopted the ICMA-RC employer investment trust (EIP) in 2007.

Dr. Richard C. Kearney, author of the Center’s issue brief, After GASB 45: Solving the Unfunded Liability Problem in Retiree Health Care, gave an overview of new survey data from the 50 states and a large sample of local governments.  His survey found that:

  • Nearly all states have created a state-wide health care pool, providing uniform benefit levels for the active workforce and to all retirees residing in the state.
  • In the last five years, 10 percent of states have established a plan that limits the state subsidy for future retirees; 34 percent say they are likely to introduce such a plan in the next five years.
  • Most states have instituted a variety of cost containment programs:  84 percent have a disease management program and 80 percent require hospital inpatient precertification.
  • The most popular preventive medicine programs in states are: coverage for a retiree’s annual physical exam (72 percent); smoking cessation (70 percent); and wellness newsletters or websites (66 percent).