State worker benefit fund near insolvency - Legislative mismanagement blamed
Posted by Scott "The Piper" St. Clair - March 12, 2010Washington state provides generous medical and other benefits to 336,000 state employees, retirees and dependents through the Health Care Authority. 63 percent of them are self-insured by the state, meaning that the state acts as their insurance carrier. The balance of them are covered by HMOs and Preferred Provider plans such as Group Health and Kaiser Permanente.
Overseeing the HCA is the Public Employees Benefits Board, a nine-member board appointed by the governor. PEBB sets benefit eligibility requirements, approves premium contributions for eligible employees and approves health-insurance plan benefits.
The state spends $1.7 billion per fiscal year on benefits. PEBB is tasked by the Legislature to take the funding given it and craft benefit plans accordingly. The difficulty is that the Legislature doesn’t always play fair leaving PEBB holding a now empty bag.
The state pays 88 percent of the cost of benefit plans leaving all employees – union and non-union – to pick up 12 percent. For union employees, the state pays 100 percent of the cost of dental, basic life and long-term disability insurance.
The HCA plan is prospectively funded, which means that premiums paid today will be used to pay bills that have not yet been incurred. PEBB is always making its best educated guess when it tells the governor and the Legislature what it will take to remain in the black.
PEBB tries to maintain a level of cash reserve equal to between seven and eight percent of projected claims. That’s where the problem arose.
Fiscal year 2008 saw PEBB generate a reserve of $200 million based upon state premiums of $707 per employee per month. This put it $120 million over its standard cash-reserve level. Rather than commending it for good stewardship, the Legislature saw the reserve as a source of quick cash to pay pressing bills. It forced the board to spend the reserve down by dropping per-employee funding to $561 per month for FY 2009.
According to Tim Smolen, a PEBB budget manager, the $561 figure represented deliberate underfunding of the program by the Legislature. The board had recommended an increase to $723 in order to stabilize what it saw were increased costs down the road.
“We knew we would be in a significant hole because the legislature didn’t adequately fund what they knew the cash needs would be,” said Smolen.
FY 2010 saw funding jump back up to $745 per employee per month, and then to the current rate of $768 for FY 2011.
According to PEBB, each dollar of premium payment represents $1.4 million in eventual revenue to the HCA.
In December of last year, Insurance Commissioner Mike Kreidler wrote to Gov. Christine Gregoire to advise her that the HCA’s condition would be considered “financially hazardous” if it were a private insurer.
Kreidler wrote that “if it were a domestic insurer, the HCA would be subject to receivership proceedings, potentially mandatory.”
Kreidler’s analysis noted that the downward change in HCA’s net income and cash on hand from June 30, 2008 to June 30, 2009 was a quarter of a billion dollars in each case. Net income went from a positive of $77 million to a negative $251 million, while cash went from a positive of $58 million to a negative $248 million.
Now that PEBB projects the HCA to be $197 million in the hole, the governor and the Legislature are scrambling to make ends meet. When the reserve account was flush, lawmakers cleaned it out to pay general fund bills. Now the House wants to sweep other designated funds to pay HCA bills.
PEBB’s $197 million projection is down from a $220-million projection at the start of the legislative session in January. PEBB will make another projection in mid-May.
At PEBB’s suggestion, Gov. Gregoire’s December budget proposal increased premium payments to $830 per month, an amount PEBB said would generate adequate cash to meet its obligations. The Senate wanted an increase to $795 per month. The House went all the way and more.
In an amendment to Senate Bill 6444, Rep. Mark Ericks, D-Bothell, proposed upping HCA funding from the current level of $768 to $863 per month. Ericks proposed raiding a data processing fund and a public works fund to the tune of $43 million to pay for part of the increase.
According to PEBB’s Smolen, $863 per month should be sufficient to maintain current HCA benefit levels. The other numbers would require PEBB to adjust HCA plans to shift more of the cost burden to subscribers by way of higher co-pays, deductibles and the like.
Ericks’ amendment passed the House by a voice vote last week.
A call to Ericks’ office requesting comment was not returned by 2:00 p.m. Friday.
But questions have arisen as to whether any of this is legal - can the governor and Legislature legally alter plan funding? Or have they run afoul of state law governing how union contracts are negotiated?
About half of the employees covered by the HCA are also covered by union contracts. The state law governing how those contracts are negotiated is specific in requiring a multi-step process before the Legislature can consider approving negotiated wages and fringe benefits. The law specifically denies authority to the Legislature to come up with numbers of its own, which some suggest was done here
These critics also question whether the governor has complied with state law.
The law sets out a process for the governor to request funding for negotiated wage and benefit adjustments. It includes certification by the director of the office of financial management that they’re feasible financially for the state.
The Legislature must approve or reject them as a whole on an up-or-down vote.
This interpretation is disputed by Victor Moore, director of the office of financial management. He said that the bargaining law does not apply to the Legislature’s PEBB and HCA funding decisions, only to changes in the percentage of premiums paid by the state and workers covered by union contacts.
Because the state does not bargain the amount it pays per employee, the bargaining law is not applicable. If the state wanted to change the percentage of the total premium, then the law would apply, he said.
Of course, this begs the question of why hasn’t the governor sought to negotiate a lower percentage payment for the state? The same law that Moore says is inapplicable also provides a way for the governor to open contracts for just such a negotiation, a move many Republicans in the Legislature and a number of newspaper editorial boards have advocated as part of an overall solution to the state’s budget-deficit problems.
An editorial in Thursday’s Seattle Times said:
Many voices, including this page, told legislators to declare a fiscal emergency and reopen state employee contracts. Raising the employee share of health-care premiums from 12 percent to 20 percent — a share that is still below the average in the private sector — would have saved about $50 million in this biennium. The Legislature didn't do it.
Neither the governor nor either house of the Legislature have indicated any willingness to follow this suggestion.
Another wrinkle to any hope of stabilizing the HCA is the federal government. Federal law regulates employee benefit plans. The law allows adjustments in benefit levels only on an annual basis. In the HCA’s case, that occurs each January. Yet the state’s fiscal year starts on July 1.
So whatever funding eventually is agreed to by the governor and the Legislature, there will be six-month lag time before benefits can be adjusted, if necessary. Whatever holes exist now will become six-month’s deeper.
State worker unions are adamant in demanding funding at the House level. The Washington Federation of State Employees says that the Senate level of $795 per month is an effort to balance the budget on the backs of state employees.
Next week’s special session of the Legislature will determine what the final funding number will be.
Thoughts? Add Comment -
John Carlson, Issaquah said on Mar 12 2010 at 7:25pm
It's a shame that government employees, already paid at a higher rate than those doing the same job in the private sector, believe they are entitled to better benefit plans at lower personal cost. Perhaps government unions should be eliminated altogether as they endorse and elect those who ultimately benefit them. This disrupts the 'balance of power' and is especially egregious in the state's school districts.
Perhaps the Legislature should eliminate non-standard election dates to encourage more participation by the voters. The first Tuesday after the first Monday in November in regular election years would help 'get out the vote' and reduce the impact of 'special interests' in self-benefitting elections. It is wrong for any group or organization to hold both sides of the bargaining table. Union endorsed and subsequently elected candidates dance to their fiddler's tune.
Bev. B. said on Mar 13 2010 at 12:44am
I personally feel unions should not be in the public sector because there is no bottom line like there is in the private sector. In the private sector, if a business shuts down the union can't survive...bottom line. In the public sector, just tax the people more...no bottom line. The unions gain clout and power through political donations. With this clout and power the unions call the shots, the political figure dances to their tune and puts the burden of more and new taxes on the taxpayers to meet their demands rather than cut, freeze or renegotiate. If people start moving away....where will your tax base be then? Show some good stewardship with the taxpayer's money and budget by priority and outcome base. Don't spend what you don't have. Downsize. No new spending. If there are cuts being made....why is the spending more?
Anita S. said on Mar 14 2010 at 9:19am
I agree with Bev. I don't think that the public sector should have unions period. There was a time for unions and that time has come and gone. With all the other state programs protecting the worker unions are just a political machine. If you do not agree with their politics you still have to pay dues and your money goes to everything you are fighting against. Is there anyway we could make it illegal for unions to contribute to political campaigns? If so that would be the first step to eliminating them.
I really think we should privatize our Universities, Colleges and even K-12 also.
Since I'm on a roll.... Why should people who don't own property get to vote when it comes to property taxes? This does not make sense to me. For instance, renters think that it will help the schools to raise property taxes so they vote for higher taxes because they think they are just sticking it to the rich landlord. We all know that is not true because the landlord will have to raise the rent!
O.K all done!
CC said on Mar 14 2010 at 10:48pm
I will email the governor - tonight - to ask if she's aware that the most highly unionized states are the ones that are the most broke. I fully expect her official email "answer-ers" to sidestep the question, though, since she has to be super careful to not lose Union support.
Kevin Kelly said on Mar 15 2010 at 10:58am
While politically astute citizens have long understood the true purpose of unions in modern America ... more and more are coming to understand their multi-decade, corrupt ties to elected officials and the cyclical give-and-take of: power, money, muscle and votes. The collapse of the American auto industry and the bankruptcy of heavily unionized states, as mentioned in the comments below, are the clear signs that the dirty deals have come due. Unfunded pensions and benefit programs are the single most compelling reason that the federal government, led by a President with more unethical ties to unions than any in recent history, needs to pass a health care bill. Those benefits are intended to back-stop failed union promises and perpetuate the exchange of votes for benefits for Democrats. Failure to pass it means that millions of union members will soon realize the promises made to them by politicians and their corrupt union leaders will be revealed to be false and undeliverable. That will crush their power over the workers who may have to wake up to the false promises and start looking out for themselves. This may be the natural “cleansing” that our unjust system has needed for a very long time.
Gail B. said on Mar 16 2010 at 7:10pm
Right On Anita S. preach it sister, also what is with property taxes any way? A straight flat tax and a consumption tax should take care of federal and state budgets. I am sick of paying for property and never owning it. If the state can't pay the bill with that cut your expenses! Also government workers should not be able to vote either - conflict of interest.