State lawmakers think they have figured out how to pay state workers’ retirement checks. Now, comes the hard part: How do you pay for state retirees’ health insurance?
For a decade, South Carolina watched its retirement system spin out of control. Earlier this year, experts predicted the retirement fund would run out of money in 28 years, leaving taxpayers to make up the difference.
In June, however, Gov. Nikki Haley signed a law that will help reduce the retirement system’s costs. The solution was painful, but fairly easy to find: make state workers work longer before they can retire with full benefits.
But the new law has nothing to say about the health insurance costs of state retirees, quickly becoming one of the largest deficits in state government.
As of June 30, 2010, officials estimated the state’s future health care costs for its retirees at $9.6 billion. But the state only has set aside $487.5 million to pay those costs, about 5 percent of what is needed.
State officials still are finalizing the estimated cost as of June 30, 2011; those estimates always are a year behind. But Bill Blume, executive director of the Public Employee Benefit Authority, says the state’s liability grew to $10.1 billion.
That liability is the 18th highest in the country, according to State Budget Solutions.
“We can fix the retirement system. That doesn’t take magic,” said Art Bjontegard, chairman of the Public Employee Benefit Authority.
But, of the health care costs, he added, “We need a touch of magic to pull this together.”
‘Moving in the right direction’
South Carolina was one of the last states to make major changes to its retirement system for state workers. But it is in the same predicament as other states when it comes to paying state workers’ health insurance costs after they have retired.
On average, states have set aside 5 percent of the amount that they will need to pay those future costs. Seventeen states do not set aside any money, according to the Pew Center on the States.
For workers, employer-provided health insurance in retirement, once fairly common, is becoming a luxury. Only about one in three workers have health insurance from their employers after they retire and the number of employers offering that coverage is dropping.
Until 2008, states paid for the health insurance of their retired workers on a pay-as-you-go basis, as the workers retired. They did not worry about paying for the health insurance of workers who had not retired yet. But that changed when the Government Accounting Standards Board – known in government-speak as GASB – required states to acknowledge their future health insurance costs and to start paying for them now.
South Carolina set up a trust fund to pay for its costs. It puts money into that fund by charging public-sector employers – state and local governments, and school systems – 4.55 percent of their payrolls. In 2010, that amounted to $370 million in taxpayer money.
Also, if the state health plan has a surplus, that money goes into the trust fund. Those contributions have varied, from as low as $17 million one year to as high as $103 million in another year.
“We’re moving in the right direction on that one,” said state Rep. Brian White, R-Anderson, chairman of the House Ways and Means Committee and one of the five members of the State Budget and Control Board, which oversees the state health plan. “We’ve got the mechanism in place. When we have the extra funds, we have proven we’ll put it in there. History has shown will do it and we’ll continue to do it.”
But Richard Eckstrom, the state’s comptroller general and another member of the Budget and Control Board, disagrees.
“We are on a course to collapse the system,” he said. “The hope is that we put enough money in, but you can’t run one of these plans based on hope. You have to run one of these plans based on cost.”
‘We can’t afford ... that much debt’
State officials are just beginning to come up with a plan on how to deal with retirees’ health insurance costs.
In June, Gov. Nikki Haley appointed Bjontegard, a retired bank executive and soon-to-be former Palmetto Health board member, as chairman of the Public Employee Benefit Authority, an 11-member board that advises the State Budget and Control Board about the state health plan and retirement system.
“Every liability the state has is a priority for us – we can’t afford to be a state with that much debt,” Haley spokesman Rob Godfrey wrote in an email to The State newspaper. “We took care of pensions this year, and we’ll absolutely look at health-care costs going forward.”
The Public Employee Benefit Authority, commonly referred to as PEBA, had its first meeting last month. One of its first acts was to set up a Health Policy Study Committee. Cindy Hartley, a retired human resources director at Sonoco, the Hartsville-based packaging giant, is leading that committee. She declined to comment for this story.
Bjontegard said he expects the health policy committee to come up with a plan on how to get the state’s health insurance liability for retirees under control. While declining to discuss any specific ideas, he said one thing is obvious: “We are going to have to change behaviors.”
“How do you do that? My simplistic view is you go after the big-ticket items first,” Bjontegard said. “People that smoke, people that are overweight, people that have hypertension, people that have diabetes are all populations that we can probably do something about. But how to do it is the issue.”
Search for solutions
Columbia city officials had a similar problem a few years ago.
Part of their solution was to charge workers more for their health insurance. But the city also ramped up its prevention efforts in an attempt to lower its health care costs. That’s because, in the world of health insurance, a healthier employee is a cheaper employee and, in the future, a cheaper retiree.
The city identified its most at-risk employees and enrolled them in an optional 12-week fitness program with a nutritionist and personal trainer. City Manager Steve Gantt went through the program. He lost weight and stopped having to take some expensive prescription medications – saving the city $7,500 a year, he said.
“You write down everything you eat and the nutritionist beats your butt if you haven’t been eating like you are supposed to,” he said. “I went through it 21/2 years ago, and I have not had a soft drink in 21/2 years.”
The city also started a health clinic, designed for employees who do not have a primary-care physician. The goal is to reduce emergency-room visits, which cost the city about $1,800 a visit.
“We needed nine visits a day in order to break even on what it was costing ... and we’re averaging in excess of 20 patients a day,” Gantt said.
Columbia has about 2,000 employees. The state health plan has a bigger, more complex problem – covering 235,000 state workers, teachers and some city and county government workers.
“What we are going to come up with isn’t going to be something that comes off the shelf from someplace else,” Bjontegard said. “We’re going to do one that’s for South Carolinians.”