Saturday, September 30, 2006
Comments on Dennis Leone's STRS Report in the ORTA Quarterly
Duane Tron: A wake-up call
From John Curry, September 30, 2006
Subject: Re: PA Education Association official says their pensions not in fiscal trouble -- despite warnings to the contrary!
PA Education Association official says their pensions not in fiscal trouble -- despite warnings to the contrary!
Retiree health care may overwhelm governments
This staggering burden is coming to light because of new accounting rules issued by the Government Accounting Standards Board. They require public agencies to disclose the future cost of health care and other benefits — such as dental, vision and life insurance — promised alongside traditional pensions to the nation's estimated 24.5 million active and retired state and local public employees.
AGING AMERICA: Should U.S. move toward universal health care? | Innovators win $250KRetiree health care costs have been quietly mounting for decades while public agencies have passed out generous retirement benefits during labor negotiations — often in lieu of salary increases. But government negotiators rarely considered the long-term financial consequences of awarding such perks, according to Brian Whitworth, a retirement benefits specialist with JP Morgan Chase and Co.
"A surprising number of public entities didn't even make informal estimates of long-term costs prior to the new accounting rules," Whitworth said.
Many cities and state agencies already are struggling to fully fund their pension obligations, but experts say those liabilities pale in comparison to the debt accumulated for other retirement benefits.
Last month, JP Morgan released what it considers the most comprehensive preliminary estimate. It projects the present value of unfunded health care and other non-pension benefits at between $600 billion and $1.3 trillion.
By comparison, the debt rating agency Standard and Poors estimates the country's total unfunded public pension debt at around $285 billion.
"There's a good chance some government entities are going to go bankrupt," said California Assemblyman Keith Richman, a Republican from Chatsworth. "But the issue isn't just bankruptcy, it's governments dying of a thousand cuts in services. The costs of promises that have been made are going to be astronomical."
Union officials say it's not their fault municipalities put themselves in a hole by promising more than they can deliver.
"This is a monumental problem and government is going to have to deal with it," said Steve Regenstrief, head of the retirement division at the American Federation of State, County and Municipal Employees.
When the new accounting rules take effect in 2008, taxpayers will be able to see for the first time just how much they're paying to provide benefits to active and retired state and local public employees.
"When the numbers are produced, they're going to be shocking," said Ronald Snell, director of state services for the National Conference of State Legislatures. "They'll be in the hundreds of billions, and it's definitely something that policymakers are going to have to take notice of and act upon. ... There are consequences of decisions made in the past."
The Government Accounting Standards Board is an independent non-profit organization that establishes accounting standards for public agencies. Seeing a need to bring public sector disclosure rules in line with those of the private sector, the board unveiled the rules change in 2004 and gave governments several years to implement them.
The new rules don't require governments to come up with the money right away, just to disclose the present value of these future costs and estimate how much more money is needed to pay for them. To prepare for these disclosures, public officials across the country already are beginning to calculate how much they might owe.
So far, California, New York, and Maryland appear to have the biggest burdens, but that could change when estimates begin trickling in from Florida, Texas, Illinois and Pennsylvania. Of the country's 10 most populous states, none has completed a formal estimate of their liabilities, but those that have completed preliminary assessments are reporting astounding numbers.
•The California Legislative Analyst's Office estimates $40 billion to $70 billion in retiree health care and related liabilities for the state. With cities and counties included, JP Morgan pegs California's debt at $70 billion to $200 billion. The state controller is just now beginning a detailed study.
•New York's preliminary analysis puts state liabilities between $47 billion and $54 billion. In a recent budget report, the state acknowledged "these costs are substantial and would significantly reduce or even potentially eliminate" New York's current $49.1 billion in positive net assets.
•Maryland has initially estimated its liability at $20 billion.
•Other states also have reported significant amounts: Alabama estimates $19.8 billion, Massachusetts $13.2 billion, Alaska at least $7.9 billion, and Nevada between $1.62 billion and $4.1 billion.
Many local governments also are beginning to acknowledge huge liabilities. The City of San Francisco reported its burden at $4.9 billion, and the Los Angeles Unified School District said its liability is $10 billion. New York City has yet to complete its analysis, but is expecting a large shortfall and already has set aside $2 billion to help cover it.
How this will impact citizens depends upon the size of their government's obligation and how it's handled.
At the least, experts say, the public can expect increased taxes and fees or reduced public safety and public works services as governments adjust their budgets to amortize the debt.
They probably can't expect much in the way of concessions from public employee unions, said Suzi Rader, director of district and financial services for the California School Boards Association. Any attempt to limit benefits already granted in future negotiations will be a contentious issue, she said, so employers must instead hold the line on granting additional perks to future retirees.
John Abraham of the American Federation of Teachers said union negotiators have long been aware that future retirement benefits must be paid from shrinking resources.
"If they haven't been looking at the numbers, shame on them," he said. "Do we recognize there is a cost problem? Absolutely. As costs have gone up we've made accommodations."
Lori Moore, spokeswoman for the International Association of Fire Fighters, said nothing is really changing except the need for cities to reveal how much they'll owe in non-pension retirement benefits.
"The liability has always been there," she said. "They had to know in the back of their minds that it was there."
Most governments now fund retiree health care on a pay-as-you-go basis, with annual appropriations from their general funds, focusing most of their attention on current expenses.
Under the new accounting rules, the liability can be paid over 30 years, just like a home mortgage, but it forces public officials to recognize the debt and calculate an annual payment.
If officials choose not to set aside additional money each year to cover the payment, it counts against net assets, potentially putting a city or agency deeper into the red. Because assets are a critical component in the credit ratings that allow governments to borrow money at lower interest rates, governments that don't handle their liability properly could end up insolvent.
Parry Young, director of public finance at Standard and Poors, said few governments are prepared for the annual contributions they'll be expected to make.
"It's been a growing liability that wasn't being addressed. But now the chickens are coming to roost," he said. "For some it's going to be a big credit issue depending upon what resources they have."
Young says one way governments can get a jump on their liabilities is by putting more money into retiree health care plans, something "easier said that done."
Public officials "might also choose to issue bonds, or review benefit costs and maybe make changes in the benefits themselves," he said.
Some states have taken a proactive stance. Ohio sought to address its future liabilities by establishing a Post Employment Health Care Fund containing more than $12 billion, an amount the fund's trustees say will not be enough. In order to cut health care costs, the state has reduced the amount it will pay for employees who retire with less than 30 years of service.
Utah, with a relatively small liability estimated at between $536 and $828 million, has taken a unique approach, earmarking unused sick leave for retiree health care expenses. Under a law passed last year and upheld by the Utah Supreme Court, retirees can no longer cash out unused sick leave earned after January 2006. Instead, 25% must be placed in an employee's 401K and the remainder in a Health Reimbursement Account.
"The law really stopped the out-of-control-escalation of health care costs," said John Reidhead, director of Utah's Division of Finance. "From a financial perspective it's a good deal. From the employee perspective, maybe not."
Wall Street Journal on Columbus Public Schools: Health-care consultants reap fees from evaluees
It wasn't. After the district switched its health insurance to UnitedHealth Group Inc. on what it says was Mr. Grady's recommendation, he started getting payments and other compensation from the big Minnetonka, Minn., insurer. "Thank you and United for the steaks," Mr. Grady wrote in a Dec. 20, 2001, email to a UnitedHealth employee. "We'll have those on Christmas eve."
All told, UnitedHealth paid Mr. Grady $517,138 for helping it get the district's business. The district says it learned about the payments two years ago after a new human-resources chief came on the job. It canceled Mr. Grady's contract. Last month, the Ohio Department of Insurance suspended Mr. Grady's license for three years, accusing him of "deception." He was ordered to pay $137,000 in restitution to the Columbus district and a $25,000 civil penalty. Earlier this year, UnitedHealth agreed to pay a $125,000 penalty to settle the matter without admitting wrongdoing.
The episode spotlights a widespread and largely invisible practice that critics say boosts the cost of health care. Many consultants and brokers who are hired to help employers get the best deal on health insurance or prescription-drug coverage have significant financial ties with the health vendors they are supposed to be scrutinizing. The ties may take the form of bonuses for bringing in business, commissions or consulting fees. Often they are disclosed only partly or not at all.
Mr. Grady's son, Joe, who is president of the family consulting business, says his father is appealing the suspension and did nothing wrong because the payments he received are standard in the industry. "All (insurance) companies offer bonuses," says Joe Grady. "It's a way to sell the product and saves them from hiring 20,000 agents." He denies that his father pushed the district to choose UnitedHealth and contends the district knew all along about the payments. The insurer declined to discuss the specifics of the Columbus case.
Consultants and other middlemen are prospering even as employers struggle with spiraling health-care costs. Some employers are dropping health coverage or raising workers' payments. That has contributed to an increase in the number of Americans without health insurance to 46.6 million last year from 45.3 million in 2004, according to the Census Bureau.
Tamar Frankel, a professor at Boston University Law School, says employers who hire middlemen need to ask: "Are you recommending me someone who is now paying you?" If the answer is yes, she says, it is best to hire someone else.
Consultants play down the importance of their financial ties to vendors and say they are part of the solution to rising health-care costs. "Health-care finance and delivery are ... not the core mission of most employers," says Robert O'Brien, the head of health and benefits consulting at Mercer, a unit of Marsh & McLennan Cos. "We help employers manage the expense and complexity of their health and benefits programs in a way that maximizes their value for employees."
A handful of consulting giants such as Mercer, Hewitt Associates, Lincolnshire, Ill., and Towers Perrin, Stamford, Conn., dominate the benefits-consulting business, but smaller ones also thrive working with local employers. Mercer says it expects its health-benefits consulting business to bring in revenue of $526 million this year.
Payments to a consultant are at issue in an Ohio case involving the South-Western City School District, which encompasses suburbs southwest of Columbus in the central part of the state. In 1996 the district hired Joseph James & Associates of Dublin, Ohio, to help it choose a health insurer.
The district had fired its previous consultant after learning he had financial ties to health insurers. Superintendent Kirk Hamilton says the district made clear that it expected Joseph James not to take money from district health-care vendors. "We wanted to make sure the people representing us were solely working in our best interest," he says.
Each time the health-insurance contract came up for bidding in subsequent years, Joseph James managed the process. Each time, UnitedHealth won the business. Over 10 years, the district paid the consulting firm about $380,000 for its services.
Earlier this year, Dr. Hamilton discovered that Joseph James also was getting paid by UnitedHealth. The district quickly sued both the consultant and the insurer in Franklin County Common Pleas Court. Documents filed in the suit showed that Joseph James was receiving 1 percent of premium dollars paid by the district. The consultant received more than $645,000 from UnitedHealth from 1999 to 2004 for bringing in the district's business, according to the documents. Joseph James, in court filings, says it became eligible for the bonus as part of a "recognition program" by UnitedHealth rewarding its "overall contributions."
In its lawsuit, the school district contends the deal gave Joseph James a financial incentive to continue choosing UnitedHealth and to ensure that the district's premiums kept rising. The premiums increased to more than $21 million this year from $5.2 million in 1996, according to Dr. Hamilton. He says it is possible "we could have negotiated lower premiums" if not for the behind-the-scenes deal.
In court documents, Joseph James argues that bonuses from insurers are an accepted and legal practice in the insurance business and it didn't need to disclose them to the school district. The consulting firm's lawyer, Kort Gatterdam, says: "There's no evidence of steering. They provided an excellent service to South-Western schools and saved them millions of dollars." He says Joseph James helped the district move in the late 1990s to a managed-care plan that saved $6 million and after that the consultant worked hard to squeeze the best rates out of UnitedHealth.
UnitedHealth declined to comment on the South-Western case. A spokesman said that in general, bonuses and other rewards for consultants who bring in a large amount of business "are not built into premiums or fees that customers pay" and don't raise the cost of health care.
The practices of brokers and middlemen in other forms of insurance were the target of a widely publicized investigation two years ago by New York state Attorney General Eliot Spitzer. He was particularly concerned about payments brokers received from insurers for bringing in a certain volume of business from corporations buying property, casualty or life insurance. Mr. Spitzer said the corporations were entitled to an unbiased opinion from their brokers rather than one potentially influenced by so-called contingent commissions.
Mr. Spitzer reached several high-profile settlements with insurance brokers and consultants. Marsh & McLennan, New York, agreed to pay $850 million and stop accepting contingent commissions. Only a handful of brokers agreed to settlements, and the probe didn't delve into health-benefits consulting. Major health insurers including UnitedHealth, Aetna Inc., Hartford, Conn., and WellPoint Inc. of Indianapolis say they continue to offer contingent commissions.
Aetna gives brokers a "retention bonus" for staying loyal. If a broker keeps 90 percent of his Aetna clients with the insurer for another year, he gets a bonus equal to 0.75 percent of the clients' total premiums. If 100 percent stay, the bonus rises to 1.25 percent of total premiums. Though employers typically put their health-insurance contracts up for bid every few years, such bonuses are one factor encouraging brokers to keep their clients on the same plan.
A spokeswoman for Aetna said the insurer requires consultants and brokers to disclose such fees to customers. She said Aetna also makes its broker fees public via its Web site and in annual disclosures to clients. Many other insurers don't detail their contingent commissions on public Web sites.
Consultants also may have financial ties with pharmacy-benefit managers, or PBMs, which administer prescription-drug benefits for employers. Mercer, the big benefits consultant, has done consulting work for a leading PBM, Medco Health Solutions Inc., even as it was advising employers choosing among PBMs including Medco, of Franklin Lakes, N.J. In a proposal for a 1998 job handled by Mercer Management Consulting, Mercer said it could help Medco "refine its pricing to increase its profitability." Mercer also said it would help Medco "improve relationship with key benefit consultants to better position (Medco) for winning target accounts."
In 2000, the top Mercer pharmacy-benefits consultant, Nicholas K. Vasilopoulos, gave a written declaration in a lawsuit by Medco clients who accused the PBM of overcharging them for drugs. In it he defended Medco as "forthright" in its business dealings. Mr. Vasilopoulos said he advised employers seeking advice on PBMs -- and advised Medco in assessing its competitiveness against other PBMs.
In an email, Mr. Vasilopoulos said "there were no conflicts of interest" when he was a Mercer consultant. He said Mercer had no reason to favor any particular PBM because it provided advice to all the major ones over the years. This advisory role gave Mercer a "more thorough understanding" of each PBM's offerings, which benefited Mercer's employer clients, he said.
Lisa Zeitel, a senior consultant at Mercer's pharmacy-benefits consulting practice, said much of the work for Medco was done by the management-consulting side of Mercer, which is "totally separate" from her unit. She said her own unit occasionally undertakes small assignments for PBMs, but this "in no way interferes with the work that we do for individual clients."
Joseph Sawicki Jr., the comptroller of Suffolk County on Long Island, N.Y., discovered the ties between consultants and PBMs after the county sought a routine audit of its PBM, Express Scripts Inc., in 2003. The county hired Mercer for the job. Mr. Sawicki says officials didn't realize at first that Mercer also serves as Express Scripts's employee-benefits consultant and had other consulting arrangements with the PBM. Mercer says it did disclose the ties.
Mr. Sawicki wasn't happy with the audit's results, which initially found that Express Scripts had overbilled the county by more than $1.1 million but later suggested that the overbilling amounted to only $14,000. Mercer charged the county $93,000. Mr. Sawicki withheld half the payment and asked Mercer to return the half it already had received, saying he doesn't pay for "shoddy" work. A spokeswoman for Mercer, Stephanie Poe, says Mercer made clear its initial estimate was likely to be reduced and it did a good job on the audit although it wasn't allowed to complete its work. The dispute over the $93,000 is unresolved.
The county didn't pursue any refunds from Express Scripts in connection with the billing Mercer had audited. It then hired another auditor to review Express Scripts's billing in subsequent years. That review led to a settlement in which Express Scripts paid the county $865,000. A spokesman for Express Scripts said the company has saved "millions of dollars" for Suffolk County. He declined to comment on the settlement.
Back in Columbus, school-district human-resources chief Craig Bickley wants consultants who aren't getting money from the same people they are supposed to be evaluating. He was annoyed to discover that under the previous consultant, Kevin Grady, the district switched to UnitedHealth from Anthem (now part of WellPoint) even though UnitedHealth's administrative fees were $776,000 a year higher. Mr. Grady's son, Joe, says UnitedHealth offered more coverage for the money.Mr. Bickley says his first question to consultants nowadays is: "Who are you working in the best interest of, yourself or the client?" The district insisted that the consultant replacing Mr. Grady forgo commissions and bonuses it might otherwise receive from health insurers for bringing in the district's business. Mercer won the contract and agreed to do so.
RH Jones speaks out: Hearsay or a good idea for STRS?
Friday, September 29, 2006
Jim Kimmel and George Doyle to John Curry re: Preparing us for the kill
Thursday, September 28, 2006
Why Hutras didn't want to respond: now we know WHY -- thanks to Sen. Dann's office!
Today I spoke with Aristotle Hutras, Director of the Ohio Retirement Study Council about your concern on the status of the studies of the Ohio Police and Fire Retirement System and the State Teachers Retirement System of Ohio, which was commissioned by the Independent Fiduciary Services of Washington D.C.
As of today, September 28, the ORSC is still waiting on the reports to be finished. One of the main reasons is that during the process of the study, the ORSC went to the IFS and asked to have another provision added to the study, particularly whether or not the current system of dealing with custodial assets is the best way to do so. Currently the state Treasury has the power to pick which banks hold the assets. The ORSC wanted included in the study the possibility of the ORSC having some kind of say where the assets are held. This addition to the study is one of the reasons the report has yet to be finished.
Mr Hutras had no way of knowing when the report would be finished but informed me that when it is presented they are planning to have all members present.
I hope this clears up any questions to the status of the report.
If our office can be of any further assistance in the future please do not hesitate to contact us.
Duane Tron gets an answer -- but not from the ORSC office
RH Jones: An April '07 Massive STRS Retiree Gathering in Columbus?
RH Jones to Ann Hanning: Why no objection from you?
Wednesday, September 27, 2006
Molly Janczyk to Sandra Knoesel: What else CAN we do?
2. Become your own PBM
3. Join with Ohio educators - active and retired for HC and any other public employees who will have us.
It is clear, STRS is considering and waiting to see legislative outcome regarding age rating and restricting retirees from enrolling in STRS HC if they previously declined because they went to work unable to pay for STRS HC. This is beyond harmful to retirees who did nothing more than work to serve their communities and their children.
From Sandra Knoesel, September 27, 2006
Mary Ellen Angeletti on Dispatch editorial: They should have gone after Taft, too
Kathie Bracy's response to Columbus Dispatch editorial: The mindset is still there; they are STILL squandering our money
Retired educator and STRS beneficiary
John and Damon: On the same page at last
Damon, I think we now are on the same page. John
From John Curry, September 27, 2006
Duane Tron's vision of Tent City for Elderly Educators
Sen. Dann's office to investigate John Curry's request to ORSC for study status