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PA Budget Secretary Says Future Retiree Health Care Costs Estimated at $8.5 Billion

Says Pennsylvania Has Taken Major Steps to Control Costs, Preserve Promised Benefits

HARRISBURG, Pa., May 9 /PRNewswire-USNewswire/ -- Budget Secretary Michael J. Masch today released a final estimate of future state retiree health care costs, saying the $8.5 billion figure represents a commitment by the commonwealth to preserve the benefits that have been promised to retirees in future years through the prudent management of the state's costs for its retiree health program.

"Keeping employee health care costs under control is one of the biggest challenges facing employers today -- in the public and the private sectors," Masch said. "For employers who provide health care benefits to retirees, this is a challenge that extends far into the future.

"Governor Rendell is committed to keeping the promises that his administration and previous administrations have made to state employees to provide them with health care coverage in retirement," he said. "At the same time, Pennsylvania must control retiree health care costs so that the commonwealth has sufficient resources to meet our many other crucial responsibilities -- including providing adequate funding to support public safety, public education, social services and transportation infrastructure."

The commonwealth's initial estimate of its accumulated retiree health benefit obligation was $13.8 billion, Masch said. The final estimate of $8.5 billion is nearly 40 percent lower than the preliminary estimate, and Masch said the reduction results from several proactive steps the Rendell administration has taken to get state retiree health benefit obligations to a more manageable level. These steps include:

-- Requiring retirees to pay a portion of their premium costs. Eligible

employees who retired after June 30, 2005 but before July 1, 2007 must

contribute 1 percent of their final annual gross salary toward their

health care coverage each year. Eligible employees retiring after June

30, 2007 must contribute at the same percentage rate as active

employees, beginning at 1 percent of their final annual gross salary and

rising to 3 percent by October 2010.

-- Redesigning the Retired Employees Health Program. Changes announced in

September, which included adjustments to retiree medical and

prescription plans that are projected to reduce annual cost increases by

approximately $90 million.

-- Establishing a special account for payment of retiree health benefits.

Under an agreement with the state treasurer, the commonwealth will

establish a dedicated account to invest funds to pay for future retiree

health care costs. The earnings generated by these investments will help

reduce the commonwealth's current payments toward future retiree

health care costs.

The commonwealth also periodically rebids its health care and pharmacy contracts to receive better prices, and -- beginning July 1 -- it will extend from 15 years to 20 years the minimum length of time employees need to work for the state in order to qualify for state-paid retirement health benefits.

Even with these changes, the cost for state-paid retiree health care benefits is projected to increase to more than $970 million over the next five years, Masch said.

"We are taking every step we can to reduce health care costs while still preserving benefits for the workers who served the commonwealth for many years," he said.

Masch noted that state and local governments have long been required to develop and publicly release annual estimates of their accumulated pension liabilities. Now, under new public accounting rules, beginning this year state and local governments are also required to develop and make public an annual estimate of any non-pension benefits they have committed to provide to their present and future retirees. These benefits are known as "OPEB" -- other post-employment benefits. For Pennsylvania, the primary OPEB benefit is retiree health care. The commonwealth must include a final estimate of its future retiree health benefit liabilities for the first time in its 2007-08 year-end financial statements, which will be published late in calendar year 2008.

Masch explained that both the initial and final estimates of the state's accumulated liability for commonwealth retiree health care costs were developed by the Hay Group, a consulting firm based in Arlington, Va. Masch released the Hay Group's final report today.

The commonwealth provides health benefits to approximately 60,000 retired workers through its Retired Employees Health Program (REHP). Annual costs for REHP have increased 63 percent -- from $336 million to $550 million -- in just the past four years. Out of this year's $550 million benefit cost, retirees contribute less than 0.2 percent toward the cost of their health care. Last year, the commonwealth spent an average of $9,250 in taxpayer money per retiree on health care benefits, Masch said.

Wall Street credit rating agencies are keeping a close eye on states' future retiree health care costs as they review their state ratings. The agencies have said they expect governments to take positive and proactive steps to address these liabilities.

"The commonwealth's prudent fiscal policies have earned it high marks from Wall Street," Masch said, noting that currently the commonwealth has a double-A rating with all three major Wall Street rating agencies. This is the second-highest level of credit, and it directly correlates to the level of interest a state must pay to borrow money. The higher the credit rating, the lower the interest charged.

"We want to maintain this favorable rating, which is another incentive for us to pay close attention to retiree health care costs," Masch said.

Retiree health care costs are a growing concern nationally. Other states and many private companies have made drastic adjustments in their retiree health care plans in response to these escalating costs. In Illinois, retirees with less than 20 years of service who are enrolled in the largest plan saw the cost of their health insurance premiums rise more than 60 percent between 2005 and 2007. Ohio created three tiers of retirement coverage, phasing in increased retiree contributions and reducing coverage for retirees with fewer years of service. In West Virginia, retirees now contribute approximately 30 percent of the cost of premiums.

In the private-sector labor market, many employers dropped retiree medical coverage altogether after private-sector accounting rules required firms to calculate future retiree health care costs. According to a Kaiser/Hewitt survey of firms with more than 1,000 workers, 66 percent offered retiree health benefits in 1988. By 2006, that number had dropped to 35 percent.

"The commonwealth will continue to provide promised health care coverage to retirees," Masch said. "The steps we have taken, and will continue to take, to lower future retiree health care costs will ensure that we will be able to keep that promise."

The Rendell administration is committed to creating a first-rate public education system, protecting our most vulnerable citizens and continuing economic investment to support our communities and businesses. To find out more about Governor Rendell's initiatives and to sign up for his weekly newsletter, visit:

EDITOR'S NOTE: A copy of the Hay Group report on the commonwealth's post-retirement medical plan costs is available on the budget office Web site:


Susan Hooper


SOURCE Pennsylvania Office of the Governor
Copyright©2008 PR Newswire.
All rights reserved

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