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INDIANAPOLIS – More than $120 million has flowed into new health care retirement accounts for state employees in the last two years – a program that has cost more than expected and come at a time when employees have seen pay frozen.
Earlier this year, Gov. Mitch Daniels’ administration tried to eliminate the benefit by zeroing out the funding in the new state budget.
But legislators fought for the program, which was created in 2007 in exchange for eliminating a lifetime health care perk lawmakers had created for themselves.
“(The cost) is a little painful, but I think it’s the right thing to do,” said Sen. Luke Kenley, R-Noblesville, author of the bill that created the program. “The governor is committed to trying to bring health insurance to more people, and it seems to me that the first obligation is to try and start with your own employees.”
The purpose of the plan is to provide a bridge for those retiring before they reach Medicare eligibility age. Under the program, all state employees can use money in their accounts to pay for health insurance premiums when they retire, including buying into the state health care pool.
Employees may retire with normal, unreduced retirement benefits if they are at least 65 with 10 years of service; at least 60 with 15 years of service; or at least 55 and the combination of their age and years of service is 85 or higher.
Of the nearly 2,000 employees on the program, only a handful are legislators – including former lawmakers from northeast Indiana Robert Meeks and Mike Ripley. Most are longtime state employees taking advantage of the first health care plan for retirees the state has offered.
But it is a plan with limitations. While originally billed as a way to cover health care expenses generally, the money cannot be used for co-pays, prescription costs or doctor visits.
“I thought it was really a good deal because I had $50,000 in my account,” said 70-year-old Ronald Renkenberger of Noble County, who retired earlier this year after working 51 years with the Indiana Department of Transportation. “I thought it could go for whatever Medicare didn’t pay for. I soon found out it’s only good for insurance premiums.
“So I have money in an account and can’t really use it. It’s good but it ain’t as good as it could be.”
Renkenberger has submitted claims to cover premiums for a Medicare supplement plan.
The state employee retirement accounts are a defined contribution plan. It promises annual contributions from the state between $500 and $1,400 for active state employees depending on their age. The average so far has been $1,100 per employee. Employees do not contribute.
The state’s cost for the base contribution in the first and second year was between $30 million and $35 million each year.
On top of that, legislators created a supplemental bonus contribution – known as the catch-up provision – in which every person who retires gets an additional $1,000 for every year of service. The average supplemental contribution so far is $26,000.
The catch-up provision is only available until 2017 and is for employees with at least 15 years of service. Legislators or other elected and appointed officers with just 10 years of service also qualify for the bonus.
The total cost of the program the first year was $56 million, with an average number of retirees at 750. This was in line with costs estimated by the nonpartisan Legislative Services Agency.
Then the cost jumped to $67 million this year – $10 million more than expected. The increase is likely because word had spread that the administration was trying to end the program – causing 1,200 employees to retire.
State Budget Director Chris Ruhl said the legislature appropriated only $23 million each year from a 2007 cigarette tax increase to fund the program initially. The rest came from the general fund, specifically an account that is normally used to provide raises and bonuses to state employees as well as absorb some of the increases in health care premiums.
“Pay raises and retirement are not directly linked, but there is definitely a tradeoff,” Ruhl said. “Every dollar you spend one place you can’t spend somewhere else.”
State employees last saw a raise in the beginning of 2008.
In the new budget, about $28 million was tapped for the program from cigarette taxes, Ruhl said. The rest will be billed to each department or agency depending on its number of retirees.
Kenley said lawmakers are “kind of gritting our teeth as we get over the large hump,” but he said the cost would stabilize in 2017 when the additional contributions cease.
Ruhl said he objects to the program because state revenue has plummeted and he is concerned the program could grow in the future.
“In these challenging economic and fiscal times, we thought there were higher priorities,” he said. “In the history of employee benefits, I’d surmise very few have shrunk over time. We are always doing cost-of-living adjustments and gradually expanding the programs over time.”
He also noted that the plan was originally sold as a cost-saving measure to state government by encouraging retirements. The idea was that those positions could then be eliminated or the person could be replaced by a younger employee with a lower salary. But Ruhl said those savings haven’t materialized.
Ruhl appreciates that the program is not a defined benefit plan, which promises its recipients a set level of health care benefits for a period of time.
Other states with those programs are struggling under the unfunded liability of the plans. According to a report by the Pew Center on the States, the long-term price tag for retiree health care and other non-pension benefits for state employees is about $381 billion. Of that, 90 percent was unfunded at the end of 2006.
“We’re trying to do this in a way that’s responsible – it helps employees while not opening up the state to full coverage in the future,” said Senate President Pro Tem David Long, R-Fort Wayne. “Our goal was to set an example without blowing up the system.”
Ripley, 52, left the legislature in 2008, and the beginning balance of his account was $13,400. But he hasn’t used it yet because he has insurance through his new job with the Indiana Chamber of Commerce. In the meantime, his account can gain interest in preparation for when he retires.
If retired state employees die before using all the money in the account, it would transfer to dependents. If there are no dependents, it reverts back to the state.
Ripley said the existence of the plan had no bearing in his decision to leave the legislature, and he said it costs more than he thought it would. He voted against the plan in 2007.
“But in some respects for legislators, it’s cheaper than the alternative we did have,” he said. Depending on the outcome of the federal health care reform debate, he said, “the state might be able to get out of the business.”
