Commission Discusses Employee and Retiree Health and Pension Funding

The Public Employees’ and Retirees’ Benefit Sustainability Commission held its second meeting on October 19 to discuss employee and retiree health benefits, funding of Maryland’s pension system, and the implications of GASB 45.  In its comparison of health insurance plans, the Department of Legislative Services (DLS) found that Maryland’s premium subsidy levels are slightly above average and that out-of-pocket maximums for prescriptions and the number of days for which a prescription is supplied are uncommon benefits.  Maryland’s out-of-pocket maximum for prescriptions is $700, meaning that once a family hits this amount in prescription co-pays in a single year, the state assumes all subsequent co-pays for the year.  This increases plan costs by $8 million annually when compared to having no maximum at all.  In addition, Maryland’s prescriptions are filled with a 45-day supply for a single co-pay, instead of the standard of 30-34 days.  This increases plan costs by $7 million annually.

A representative from the Department of Budget and Management (DBM), Employee Benefits Division, provided an overview of State employee benefits and the impact of healthcare reform on the State’s health plans.  Maryland’s plans have been grandfathered, meaning that Maryland is not required to implement $0 co-pay for preventive services, nor expand preventive services covered.  Maryland is also not required to implement ERISA-like internal/external claim appeal procedures.    Grandfathering status is jeopardized if changes (such as raising out-of-pocket costs, decreasing employer contributions, cutting or eliminating benefits) are made to the plan.  Treasurer Nancy Kopp and former Senator Barbara Hoffman, both members of the Commission, questioned the benefits of grandfathering and asked whether DBM has quantified the administrative costs should Maryland’s plans no longer be grandfathered.  DBM’s actuary provided numerous examples of state’s that decided not to grandfather their plans, or initially grandfathered and anticipate reviewing this decision in the very near future due to increasing benefit costs.

The pension funding overview provided by DLS was of particular interest.  The financial summary shows that while employer contributions increased to $1.1 billion in FY 2009, total revenues are in the whole $5.7 billion due to declining investment income of $7.4 billion.  The presentation also identified multiple reasons for growth in accrued liabilities: 1) salary increases of 4% in 17 school systems in fiscal 2007 and 21 school systems in 2008; 2) the 2006 pension benefit enhancement – the retroactive benefit added $1.9 billion to the actuarial liabilities; and 3) increases in life expectancy.  The corridor funding method, which holds the employer contribution rates lower than the actuarial rates, and annualized investment returns of 2.1% over the past 10 years have added to the unfunded liabilities.  The targeted annual return is 7.75%.  DLS concluded that we cannot expect to invest our way out of this and that the problem is getting worse.

In his closing comments, Commission Chairman Cas Taylor said they still have a lot to learn and consider in a short time frame and he gave an open invitation for interested groups to come and meet with him regarding their issues.  He also stated that a third meeting to be held on November 10 at 12:30 would continue the Commission’s educational sessions, but he hopes to move into the decision process before the end of the year to produce some form of an interim report.

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