SB 454 (Moorlach) Page 5 of 5

SB 454 (Moorlach) Page 5 of 5

SENATE COMMITTEE ON

PUBLIC EMPLOYMENT AND RETIREMENT

Dr. Richard Pan, Chair

2017 - 2018 Regular

Bill No: SB 454 Hearing Date: 4/24/17

Subject: Public employee’s health benefits

SOURCE: Author

DIGEST: This bill requires the employer contribution for retiree health benefits for state employees first hired on or after January 1, 2018, to be based on the 80/80 formula; provides that state employees who first become a CalPERS member on or after that date are subject to the 15/25 vesting requirement in order to receive retiree health benefits; makes the state responsible for 100 percent prefunding of the benefit; sets goals for the state to pay the unfunded liability already accrued for state employee retiree health benefits; and requires the Controller to make a report regarding the benefit’s cost, as specified.

ANALYSIS:

Existing law:

1)  Establishes the California Public Employees' Retirement System (CalPERS), which provides health care coverage through the Public Employees’ Medical and Hospital Care Act (PEMHCA) to state and California State University employees (CSU) and retirees (annuitants) who meet specific vesting requirements.

2)  Requires the state and each employee or annuitant to contribute to the employee or annuitant’s health plan premium cost such that the combined employer-employee/annuitant contribution shall equal the total cost per month for the premium.

3)  Establishes the 100/90 employer health contribution formula, which provides fully vested state retirees (e.g., with 20 or more years of state employment) and their dependents an employer contribution for retiree health care equal to 100 percent and 90 percent, respectively, of the weighted average premium of the four health plans most highly utilized by all members.

4)  Establishes the 10/20-year health vesting schedule, which provides that most current state employees (those hired after 1985 or 1989, depending on class) must work for 10 years to receive an employer retiree health benefit contribution, which starts at 50 percent of the 100/90 formula, with an additional 5 percent per additional year of service until, after 20 years, they are vested to receive 100 percent of the 100/90 formula.

5)  Provides, under recently approved MOUs between the state and most of its bargaining units, that future active employees covered in those state bargaining units will receive an employer retiree health contribution based on the 80/80 formula (i.e., for active employees and annuitants enrolled in Basic plans, 80 percent of the weighted average premium of the four health plans most highly utilized by active members; for annuitants enrolled in Medicare plans, 80 percent of the weighted average premium of the four Medicare health plans most utilized by annuitants).

6)  Provides that all employees in specified bargaining units first hired by the state on or after January 1, 2017, will be subject to an extended 15/25-year health vesting schedule providing 50 percent of the employer contribution upon completion of 15 years of state service, increasing 5 percent for each additional year of service, until the employee is 100 percent vested after 25 years of state serivce.

7)  Requires Medicare-eligible retirees to enroll in Medicare and choose a Medicare-coordinated health plan. Since these plans may be cheaper than Basic plans, thus resulting in some portion of the employer contribution going unused, current law requires that any unused portion of the 100/90 formula contributions may be applied to reimburse retirees for the costs of Medicare Part B premiums. These reimbursements are made in the form of an additional payment to the retiree on the retirement warrant up to the cost of the Part B premium. Whether or not a retiree receives the Medicare Part B reimbursement in full or in part depends upon the cost of that retiree's health plan.

8)  Provides that all employees in specified bargaining units first hired on or after January 1, 2017, will no longer be eligible to use the employer contribution for a retiree health benefit plan for Medicare Part B premiums.

9)  Determines the state employee contributions, by bargaining unit and as a percentage of pensionable compensation, required to prefund employees’ retiree health benefits with a goal of requiring the state and state employees to share equally in the cost of prefunding the benefits.

This bill:

1)  Sets, the employer contribution toward the Basic health premium effective January 1, 2018, at 80 percent of the premium weighted average for the four Basic health benefit plans that had the largest active state civil service enrollment, excluding family members, during the previous benefit year.

2)  Requires, the employer to contribute an additional 80 percent of the premium weighted average for dependent family members, for the four Basic health benefit plans that had the largest active state civil service enrollment, excluding family members, during the previous benefit year.

3)  Provides that rank and file, CSU, and Legislative state employees, employed by the state for the first time, and who becomes a state member of the system on or after January 1, 2018, shall not receive any portion of the employer contribution payable for annuitants unless the person is credited with 15 years of state service at the time of retirement.

4)  Provides that all rank and file, CSU, and Legislative employees employed by the state for the first time, and who become a state member of the system on or after January 1, 2018, shall be subject to the 15/25 health vesting schedule.

5)  Requires that on and after January 1, 2018, the prefunding of retiree health care for state employees, annuitants, and their beneficiaries shall be the responsibility of the state and the state shall do the following:

a)  Prefund state employee retiree health care costs with the goal of paying 100 percent of the benefit’s actuarial determined normal costs by July 1, 2019.

b)  Pay unfunded liabilities for accrued retiree health benefits, as specified, with the goal of pay 50 percent by January 1, 2022, and 100 percent by January 1, 2026.

6)  Requires the Controller to provide to the Assembly Committee on Budget and the Senate Committee on Budget and Fiscal Review a report on the unfunded liability of retiree health care, as specified, on or before January 10 each year.

Background

According to information from the author, the primary purpose of this bill is to prevent recently negotiated retiree health care cost-sharing provisions from creating future pressure to increase state employee compensation. Presumably, by requiring the state to pay the entire cost of prefunding the retiree health care benefit the state would avoid future salary augmentation concessions to employees.

This bill runs counter to the Governor’s stated goal of requiring state employees to share in retiree health care benefit costs so that those costs are transparent to the employees and to the public.

Moreover, by imposing conditions that are generally regarded as the subject of bargaining the bill conflicts with the state’s public policy of supporting collective bargaining with state employees to ensure an effective system of managing labor relations.

Finally, much of the bills requirements have already been implemented through MOUs negotiated between the Administration and the state employee bargaining units.

Related/Prior Legislation

SB 28 (Pan, Chapter 1, Statutes of 2017), ratified 6 MOUs covering approximately 126,000 state employees and included provisions to provide that all employees first hired by the state on or after January, 1, 2017, in Bargaining Units 8, 12, 13, 18, and 19 will receive an employer retiree health contribution based on the 80/80 formula.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

SUPPORT:

City of Costa Mesa

OPPOSITION:

American Federation of State, County and Municipal Employees, AFL-CIO

CAL FIRE Local 2881

California Association of Highway Patrolmen

California Association of Professional Scientists

California Nurses Association

California Professional Firefighters

California School Employees Association

Peace Officers Research Association of California

Professional Engineers in California Government

Retired Public Employees Association

Service Employees International Union, Local 1000

ARGUMENTS IN SUPPORT: According to the author, prefunding retiree health care is “currently funded through a 50/50 premium contribution split between the state (employer) and the participant (employee). The intentions for the cost sharing split were good in seeking to get employees responsible for these costs. Over time, it developed into a broken system because the split is not even. The state pays its 50 percent, and technically, so does the employee. Because of union negotiations, state employees often receive pay raises to cover the cost of their share. Being compensated for their share not only completely negates the point of the cost sharing program, but ends up costing the state more money.”

ARGUMENTS IN OPPOSITION: According to Service Employees International Union, Local 1000, this bill “circumvents the collective bargaining process and threatens the retirement security of millions of retired Californians that dedicated their career to helping the most vulnerable in the state.”

Several safety member employee associations, including the Peace Officers Research Association of California, state that “employee healthcare is a subject of collective bargaining and should be negotiated between the employer and employee organizations. What works for one may not work for the other. Also, recently, all state employee groups and many contracting agencies have negotiated the prefunding of retiree healthcare. Over time, this prefunding will reduce the overall cost of retiree healthcare.”

According to the California School Employees Association, “the bill’s stated goal of pre-funding retiree health in one year is unrealistic, incredibly expensive, and is just another attack on retiree health care.”