10 Ways the New Healthcare Bill May Affect You
Friday, March 26, 2010
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The League of Cities is working with lawmakers in both the House and Senate to craft bills that would ease the burden on local governments.
In the city of Orlando, pension payments to police officers and firefighters account for about 30 percent of payroll.
In Orange County, pensions for "special risk employees" equal almost a fourth of salaries to the same group.
Cutting pensions and forcing employees to work longer before retiring are among the proposals aimed at trimming the liability.
"Some of the stuff is pretty radical," said Mike Hoening who runs the fire science program at Seminole State College and was a firefighter for 25 years.
"Towards the end of my career, the 24 hour shifts got longer, and longer, and longer," he said.
Heoning says deluxe pension plans and early retirement are the light at the end of the tunnel for many firemen who work long hours under grueling conditions.
"It's kind of a reward for what you gave," he said.
Heoning worries that for the next generation it's a luxury that may no longer exist.
"One of the main reasons why I got into this profession is because of the retirement," said Jacob Curtis, 25.
He's set to graduate from Seminole State's School for Public Safety this summer.
"Our pay is already low enough... what's left for us?" he asked.
Heoning says some students will have to "follow their heads instead of their hearts" if benefits are cut too drastically.
"What's going to be stripped from us next?" wondered 22-year-old Peter Walsh, another student set to graduate the school this summer.
He didn't choose the profession for the money or perks buy says it could be a reason to get out.
"When is it going to be better financially for us to just go out and pick oranges?" he wondered.
PERA's more than 400,000 members include teachers, state police, employees at public colleges and universities, state judges and most other state employees. Senate Bill-1, aimed at getting PERA back on its feet financially, recently was passed by the Colorado legislature and signed into law by the Governor.
The bad news is that under this bill, retirees will suffer a one year cost of living increase (COLA) holiday. After this holiday, current and future retirees will have their COLA reduced from an automatic 3.5 percent to a guaranteed 2 percent for the next 30 years regardless of actual inflation, as long as PERA's investment returns are positive.
Consequently, a person with the average monthly retirement benefit of $2,772 cumulatively will lose $170,964 over a 25 year period, ignoring the one year COLA holiday and possible negative returns on investments.
Further, there will be a phased-in 2 percent increase in current PERA employees" contributions, and a phased-in 2 percent increase in employer contributions that will be taken from future salary increases.
Retirement ages also are being raised. Despite the "2+2+2" marketing slogan that implied an equal sharing of the financial burden between employers, employees and retirees, retirees actually will shoulder about 90 percent of the burden of making the plan actuarially viable according to PERA officials.
This is because of the future value of compounding interest and the only significant near-term saving is from the COLA reduction. Colorado is the only state which is cutting benefits for those already retired in order to fund its retirement plan for current public employees.
The worse news for PERA members who are not retired is that a class action lawsuit challenging the COLA reductions has been filed. If it is successful and the 3.5 percent COLA is retained, employee contribution rates either must be raised to approximately 21 percent of salary (PERA's estimate) or the defined benefit plan will have to be changed to a defined contribution plan for those not currently retired.
Apparently current retirees would retain their defined benefit plan under the latter scenario. Changing from a defined benefit to a defined contribution plan transfers market risk from PERA to individuals. It would force workers to time their retirement according to favorable market conditions.
The situation is complicated.
A seemingly solid Attorney General's Opinion says that the legislature may change benefits for those not vested but may not change benefits for those already retired and who currently receive benefits. The legality of changing the plan for those vested but currently working is uncertain according to the Opinion.
In large part, the lawsuit will hinge on the legal definition of the words "retiree benefit." PERA claims that "retiree benefits" do not include legislated COLA raises and those bringing the lawsuit claim otherwise. The other issue will be whether the legislature can change the plan for those vested but not yet retired. The courts will decide.
How did PERA get in this mess? According to the impartial Pew Center on the States, "between the years 2003 and 2006, the amount of money (COLORADO) contributed to its pension systems fell far short of annual required contributions."
Several other factors also played a role. Around the turn of the century when PERA was funded at more than 100 percent, working members were allowed to purchase service credit at very low rates, PERA matched employee contributions to a Sec. 403(b) plan up to several thousand dollars, and the 3.5 percent COLA was enacted.
This made sense at the time: there was speculation that the legislature might try to take excess funds for general revenue purposes. More people than expected took advantage of these benefits and PERA soon began to be underfunded. Then the market crash of 2008 hit. PERA was heavily invested in Lehmann Brothers which went bankrupt. With Lehmann's bankruptcy, years of state underfunding, increases in benefits, and the overall market decline, PERA found itself in serious trouble financially.
What all of this means for PERA members and retirees is that they will work longer before retirement, pay more into the system, receive lower salary raises, receive lower pensions, and receive a benefit with reduced purchasing power if inflation goes above 2 percent. Most economists assume inflation will rise substantially above 2 percent in the next few years. If this happens, it will have a profoundly negative impact on PERA retirees.
Under present circumstances Senate Bill-1 probably was the best that could be achieved. There is one small window of hope for a slightly better plan, however. PERA has agreed to study a proposal for a progressive COLA where each retiree's benefit would be divided into several tiers. Benefits that fall into the lowest tier would receive a COLA to match inflation without any cap; benefits that fall into higher tiers would receive COLAs with progressively lower caps. Stay tuned.
Myron Hulen, Ph.D, Emeritus, was a professor at Colorado State University's College of Business. EDITOR'S NOTE: This is an online-only column and has not been edited.
The uninsured are clearly the biggest beneficiaries of the historic health-care legislation, which extends the health-care safety net for the lowest-income Americans. The legislation is also meant to provide coverage for as many as 32 million people who have been shut out of the market - whether because insurers deem them too sick or because they cannot afford ever-rising insurance premiums.
For people already covered by a large employer - most Americans, in other words - the effect will not be as significant. And yet, just about everyone might benefit from tighter insurance regulations.
"We think it's a big step forward," said Bill Vaughan, a policy analyst at Consumers Union. "It's going to provide a peace of mind that many Americans who really want or need health insurance will always be able to get a quality product at a reasonable price regardless of their health or financial situation."
There will be costs to consumers, too. Affluent families will be required to pay additional taxes. Most Americans would be required to have health insurance and face federal penalties if they do not buy it. And it is still unclear what effect, if any, the legislation would have on rising out-of-pocket medical costs and premiums.
But there is no question the legislation should benefit consumers in various ways. Beginning in 2014, for example, many employers - those with 50 or more workers - could face federal fines for not providing coverage.
Here is a look at some of the main ways the health-care overhaul might affect household budgets.
Although most Americans who do not obtain health insurance would face a federal penalty starting in 2014, many experts question how strict the enforcement of that penalty will actually be.
The first year, consumers who did not have insurance would owe $95, or 1 percent of income, whichever is greater. But the penalty would subsequently rise, reaching $695, or 2 percent of income.
Families who fall below the income-tax-filing thresholds would not owe anything. Nor would people who cannot find a policy that costs less than 8 percent of their income, said Sara R. Collins, a vice president at the Commonwealth Fund, an independent nonprofit research group.
• Expanded Medicaid : More lower-income individuals under the age of 65 would be covered by Medicaid. Under the new rules, households with income up to 133 percent of the federal poverty level, or about $29,327 for a family of four, would be eligible.
• Exchanges and subsidies : Most other uninsured people would be required to buy insurance through one of the new state-run insurance exchanges. People with incomes of more than 133 percent of the poverty level but less than 400 percent (that's $29,327 to $88,200 for a family of four) would be eligible for premium subsidies through the exchanges.
Premiums also would be capped at a percentage of income, ranging from
3 percent of income to as much as 9.5 percent.
• Employment flexibility : The exchanges also would help people who lose their jobs, quit or decide to start their own businesses.
"If you lose your employer-related insurance, you will be able to move seamlessly into the exchange," said Timothy Stoltzfus Jost, a professor at the Washington and Lee University School of Law.
Moreover, people of any age who cannot find a plan that costs less than 8 percent of their income would be allowed to buy a catastrophic policy that will be available for people under age 30.
• Employer coverage : People who receive coverage through large employers are unlikely to see any dramatic changes, nor should premiums or coverage be affected. But almost everyone would benefit from new regulations, like the ban on pre-existing conditions that would apply to all policies come 2014.
There may even be cases where people would be eligible to buy insurance through an exchange instead of through their employer, Jost said: those who must pay more than 9.5 percent of their income for premiums, or those whose plans do not cover more than 60 percent of the cost of their benefits.
• Changes in Medicare : One of the biggest changes involves the Medicare prescription-drug program. Its unpopular "doughnut hole" - a big, expensive gap in coverage that affects millions - would be eliminated by 2020. Starting immediately, consumers who hit the gap would receive a $250 rebate. In 2011, they would receive a 50 percent discount on brand-name drugs.
• High-cost insurance : Starting in 2018, employers that offer workers pricier plans - or those with total premiums of $10,200 or more for singles and $27,500 for families - would be subject to a 40 percent tax on the excess premium, said C. Clinton Stretch, managing principal of tax policy at Deloitte. Retirees and workers in high-risk professions like firefighting would have higher thresholds ($11,850 singles, or $30,950 for families), pegged to inflation.
Although the taxes would be levied on the insurer, experts expect the assessment to be passed on to the consumer in the form of higher premiums or reduced benefits.