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The Unintended Consequences of High-Cost Health Plans for Public Employees

One of the more alarming data points I have come across while compiling the necessary records for the TransparentCalifornia website has been the large sums of money spent on health insurance for public employees. As our site does not provide individual breakdowns of benefits in an effort to present the information in a uniform and comprehensible manner, the cost of individual health plans was not something we were particularly focusing on.

However, in the course of formatting and uploading the necessary records to TransparentCalifornia.com, several agencies jumped out at me as a result of their alarmingly expensive health insurance plans. First it was the $20k+ plans in Corte Madera, CA and the Contra Costa Community College District. Then I saw the $30k+ plans in Beverly Hills. Finally, I came across what remains the most expensive plan I have seen to date – a $37,815 health insurance plan for the Water Superintendent of Sierra Madre, CA.

I suspected this was not a problem isolated to the handful of agencies whose numbers happened to catch my attention but, rather, indicative of a systemic problem likely to be found in many other public agencies. Operating on this assumption, I wrote about the way in which taxpayers would effectively be taxed twice for these plans – initially, to fund the public employee’s compensation itself and, again, when they find themselves paying an artificially inflated premium for their own health insurance.

Unfortunately, Pew Research has confirmed my suspicions. In 2012, State and Local government spending on health care increased by 8%; double the amount total U.S. healthcare spending grew during that same time period. The larger trend is terrifying – state and local government spending on health insurance premiums has increased an inflation-adjusted 444% from 1987 to 2012. It would appear that the agencies above are merely symptoms of a much larger problem.

The farther the distance between consumer and provider, the less reason either has to economize, which results in the out of control prices we see nationwide in the health care sector. Where an insurance plan can cost $37,815, the costs being insured against must be staggering. While there are a plethora of factors responsible for the current health care crisis in this country, the third party payer system, especially when that third party is using other people’s money (government agencies), is one of the core issues that demand immediate attention.

Robert Fellner is a researcher at the Nevada Policy Research Institute (NPRI), currently working on the largest privately funded state and local government payroll and pensions records project in California history, TransparentCalifornia.com, a joint venture of the California Public Policy Center and NPRI.

Los Angeles Police Union Attacks CPPC Study

On May 17th the Los Angeles Police Protective Leagues “Board of Directors” authored a post on their LAPPL blog entitled “Inventing the headline number,” attacking the research and the motives of California Public Policy Center. Here’s how the post began:

“The playbook is familiar now—gin up a study on public pensions and government debt to be released to media outlets with a headline-grabbing number shrieking doom for public finances. The latest exhibit is a propaganda piece tossed out to the media by the anti-public employees group California Public Policy Center (CPPC) purposely inflates pension debt.”

Despite claiming the CPPC study was mere propaganda, the LAPPL failed to convincingly refute any of its findings, including the estimate that California’s state and local government debt totals between $648 billion and $1.1 trillion, depending primarily on what assumptions one uses to discount future pension obligations. The “discount rate” used to estimate a present value for future retirement payments – already earned – is equivalent to the interest rate the fund managers believe they will be able to earn each year on the assets that must be already set and invested. To the extent the market value of the invested assets at any point falls short of the estimated present value of the projected future retirement payments at that same point in time, a plan is underfunded. So the lower you set a discount rate, the lower you believe your rate of interest will be on your investments, i.e., the lower the discount rate, the greater the present value of the liability.

It is fair to hotly debate what this amount should be. A lot is at stake. For example, if the estimated interest rate on pension funds goes down by 1.0 percent, the amount of total state and local government pension underfunding goes up by at least $100 billion. Put another way, for every 1.0% the estimated interest rate on pension funds goes down, the required annual contribution by cities and counties to their pension funds goes up by at least 10% of pension eligible payroll.

As shown in the CPPC study “Calculating California’s Total State and Local Government Debt,” here’s what happens to California’s total pension liability based on various interest rate earnings assumptions for the pension funds:

At 7.5% = $128 billion (official number as of June 30, 2011 – most recent financial data available)

At 5.5% = $329 billion

At 4.5% = $450 billion

There are compelling reasons why 5.5%, or even 4.5%, are probably more realistic numbers than 7.5%, which is skewed upwards by the stock market bubble of the 1990’s combined with the real estate bubble of the 2000’s. And throughout this period, since around 1980, a debt bubble has been growing worldwide – government, commercial and consumer – that is reaching its practical limit. When debt, overall, is being paid down instead of growing, it is harder to sustain the same rates of economic growth. On top of all that, the global population is aging, meaning a larger percentage of people are selling their assets to finance their retirements, pushing down returns. For these reasons, it is unlikely that public employee pension funds can earn 7.5% per year.

This is the issue. Even reducing the earnings rate projection to 6.5% would be catastrophic to the solvency of California’s pension funds. But instead of confronting this issue in good faith, in their recent post the LAPPL made a grossly misleading statement in reference to Moody’s original intention to evaluate the credit of cities and counties based on a discount rate of 5.5%. According to the LAPPL:

“Their justification [the CPPC’s use of the a 5.5% rate for their what-if analysis]: a July 2012 Moody’s statement that considered using 5.5 percent to calculate pension debt. Of course, they simply ignored Moody’s statement of April 17, 2013, that they wouldn’t be using a fixed 5.5 percent rate.”

What the LAPPL doesn’t acknowledge here is that in Moody’s statement, they did indeed say they would not simply use a 5.5% rate. Apparently the LAPPL expects their readers to assume this means Moody’s will use a higher rate than 5.5%. But if you actually read an explanation of Moody’s final adopted method, it says this:

Moody’s Revised New Approach to Adjusting Reported State and Local Government Pension Data – Excerpt:

“Actuarial accrued liability (AAL) will be discounted using a high-grade, long-term taxable bond index rate. For adjustments to pension data, Moody’s will use the Citibank Pension Liability Index (Index) posted on the date of the valuation instead of its original proposal to apply a single rate for all plans each year.”

Here are those rates, courtesy of the Society of Actuaries:  Pension Discount Curve and Liability Index. And if you take a look at these rates, you will see that they are currently lower than 5.5%. Which is consistent with our position that macroeconomic headwinds make it unlikely that 7.5% can be achieved, and that even hitting 5.5% is going to be very tough.

Did the LAPPL do their homework before making this claim? Was it an honest oversight, or a deliberate misrepresentation to their members of financial reality? In either case, LAPPL isn’t just misrepresenting financial reality, they also completely misrepresent the CPPC:

“Driven by hatred of public employees and public employee unions, and a belief that public employees and unions are the main cause of the “downfall” of California (and perhaps, the nation and mankind as we know it), this group endeavors to influence the media through ‘research” and “studies.'”

Really?

“Hatred of public employees”? Not a chance. “Belief that public employees and unions are the main cause of the “downfall” of California”? Not a chance. Here’s a revision however that might be somewhat accurate:

“Belief that public employee unions are the main cause of the ‘downfall’ of California.”

That would be closer to the mark. A serious bipartisan debate over just how Californians can wrest control of their state, cities and counties from the grip of public employee unions is long overdue.

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UnionWatch is edited by Ed Ring, who can be reached at editor@unionwatch.org