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F I S C A L I M P A C T R E P O R T
SPONSOR Smith
ORIGINAL DATE
LAST UPDATED
1/21/08
1/26/08 HB
SHORT TITLE Retiree Health Care Fund & Members
SB 67
ANALYST Propst
Relates to HB 62, the Health Solutions New Mexico Act, which would fold RHCA and the
RHCA Board into a new, comprehensive health care authority. Companion to HB 183.
Additionally, HB 7 includes a .2% increase in the employer/employee contribution, expected to
provide $7.3 million to be used to prefund benefits for future retirees.
REVENUE
Estimated Revenue
Recurring
Fund
FY08 FY09
FY10
FY11
or Non-Rec
Affected
ER/EE Increase
$19 Million $19.6 Million $20.2 million
Recurring
RHCA Fund
Suspense Fund
$3 million
Recurring
RHCA Fund
Subsidy
Change
$38 Million $39.1 Million $40.3 million
Recurring
RHCA Fund
ER/EE Increase
($9.5 Million)
Recurring
General Fund
ER/EE Increase
($9.5 Million)
Recurring Other State Funds for
LPBs, Schools &
Universities
(Parenthesis ( ) Indicate Revenue Decreases)
SOURCES OF INFORMATION
LFC Files
Responses Received From
Retiree Health Care Authority (RHCA)
Department of Finance and Administration (DFA)
Corrections Department (NMCD)
Higher Education Department (HED)
SUMMARY
Synopsis of Bill
Senate Bill 67, Relating to Health Care; Changing Provisions Regarding the Membership and
Duties of the Retiree Health Care Board; Providing for Additional Distributions and
Contributions to the Retiree Health Care Fund; Amending Provisions Regarding Retiree and
Dependent Premium Amounts, is endorsed by the Pensions and Investment Oversight Committee
and would change the membership of the Retiree Health Care Authority Board of Directors to
include additional non-retiree members, increase the employer/employee contribution from the
pg_0002
Senate Bill 67 – Page 2
current 1.95% to 2.4%, make permanent the $3 million per year additional funding from the
Suspense Fund, and establish certain, maximum subsidy levels on a graduated, age-based scale.
FISCAL IMPLICATIONS
The Corrections Department notes that employer/employee increase proposed in SB 67 will cost
NMCD an additional $273,795 per year, beginning on July 1, 2008.
However, NMCD also
notes that to the extent the contribution increase does effectively prefund unfunded liabilities for
active employees, it could perhaps help prevent NMCD and other state agencies from having to
pay additional contribution increases in the future.
RHCA notes the following fiscal implications:
a.
Annual reporting cost for reporting to the Executive and Legislature on the
financial condition of RHCA.
b.
Funds reserved by SB 67 for prefunding of future liabilities means that RHCA
will be able to dip into its reserves that would be used to prefund future retiree
benefits under SB 67.
c.
Changes in the RHCA computer systems will have to be implemented to track pre
funded contributions from employers and potentially the two plans.
SIGNIFICANT ISSUES
The Retiree Health Care Authority will become insolvent as of June 30, 2014 unless major
changes are made to the system. However, the solvency measure is an important but not
sufficient measure to completely understand the dire financial condition of RHCA. In addition
to the declining solvency period, the New Mexico Retiree Health Care Authority has a $4.1
billion unfunded accrued actuarial liability (UAAL) and the fund would need an additional
$200.5 million to meet the annual required contribution (ARC) to fully fund the program. And
finally, despite having been established to fully fund current benefits and prefund future benefits,
the program is prefunding no benefits for future retirees putting the entire system at risk for both
current and future retirees.
SB 67 is the result of consensus recommendations made by the House Bill 728 work group that
included representation from the Department of Finance and Administration, Office of the
Governor, the LFC, RHCA staff and Board members, the Legislative Council Service and the
Human Services Department. Taken together, the recommendation would add approximately 13
years of solvency to current seven years, close the ARC by $64 million and begin to prefund
future benefits by:
1.
Raising the employer/employer contribution by 19%, from the current 1.95% to 2.4%
2.
Permanently extend the $3 million per year allocation from the Suspense Fund that was
contained in HB 728
3.
Establishing a graduated maximum subsidy level based on age of retirement as follows:
under 50 years of age, no subsidy; age 50 to 54, 25% subsidy; age 55 to 59, 40% subsidy;
and, age 60 and over, 50% subsidy
4.
Establishing a maximum subsidy level for retirees 60 and over of 50% for the retiree and
25% for spouses and dependents
5.
Rebalance the RHCA Board to include representation by the Secretary of the Department
pg_0003
Senate Bill 67 – Page 3
of Finance and Administration, as well as a chief financial officer of one of the state’s
universities
6.
Requiring the Board to report annually on the fund balance, the amount of the UAAL, the
amount of the ARC, the current premium structure and the level of contributions from
participating employees
RHCA analysis of the potential increase in premiums under SB 67 for RHCA’s Silver Plan for
retirees (with spouse) under age 65 and the Blue Cross Basic Plan for retirees over age 65 may
result in the following monthly premium cost changes for members with more than 20 years of
service:
Current cost SB67 Cost
Under age 50 366.36 894.11
50 – 54 366.36 670.59
55 - 59 366.36 613.61
60 - 64 366.36 575.63
65+ 244.83 372.95
However, as noted by both the RHCA Board and the HB 728 Work Group:
1.
Premium increases approved by the Board for retirees have not kept pace with increases
in medical costs (see graph below). In some years the premium increase approved by the
Board was as low as 3% despite double digit increasing in medical costs;
NMRHCA Historical Premiums (Blue) & Claims (Yellow)
$-
$50,000,000
$100,000,000
$150,000,000
$200,000,000
$250,000,000
$300,000,000
FY 00 FY 01 FY 02 FY 03 FY 03 FY 04 FY 05 FY 06 FY 07
2.
The plans offered by RHCA are not rationalized in terms of true costs and only recently
has RHCA begun to try to bring benefits in line with the actual cost.
pg_0004
Senate Bill 67 – Page 4
Current Projected 2008 Retiree Share - Base Plan
Plan
Total
Mo. Cost
RHCA
Subsidy
Retiree
Cost Retiree Share
Non-Medicare Retiree
$372.34 $255.59 $116.75
31.40%
Non-Medicare Spouse
$497.35 $238.11 $259.24
52.10%
Self-funded Medicare Retiree $282.51 $187.64 $94.87
33.60%
Self-funded Medicare Spouse $294.59 $135.88 $158.71
53.90%
Medicare Advantage Retiree $63.34 $26.73 $36.61
57.80%
Medicare Advantage Spouse $65.30 $13.84 $51.46
78.80%
The base plan for Non-Medicare retirees is the Silver Plan
The base plan for self-funded Medicare retirees is the Complementary
Plan
No base plan designated for Medicare Advantage, average reported
In addition to the base plans, RHCA offers premium plans that are more highly subsidized.
Recognizing this, RHCA in 2007 agreed to increase the monthly retiree cost for the premium
plans more rapidly than the base plans until the retirees had to pay the full actuarial value of the
difference between the two plans in addition to their base plan costs. The Board expected to
implement this adjustment over a period of two to three years. The retiree share for the premium
plans is shown in the following chart.
Current Projected 2008 Retiree Share - Premium Plans
Plan
Total
Mo.
Cost
RHCA
Subsidy
Retiree
Cost Retiree Share
Non-Medicare Gold Retiree
$734.31 $562.93 $171.38
23.30%
Non-Medicare Gold Spouse
$701.72 $385.67 $316.05
45.00%
Medicare Self-funded Plus Retiree $339.86 $177.95 $161.91
47.60%
Medicare Self-funded Plus Spouse $356.01 $127.59 $228.42
64.20%
3.
As the following chart demonstrates, the vast majority of retirees would continue to
receive a significant subsidy in the cost of health care coverage under SB 67;
pg_0005
Senate Bill 67 – Page 5
NMRHCA Member's Age at Retirement
0
500
1000
1500
2000
2500
38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 86
4.
Even with the increase in contributions to the State and current employees, and the
graduated subsidy proposal, New Mexico still falls $136.5 million short of fully meeting
its Annual Required Contribution to fund the system and begin to prefund benefits for
future retirees (see graph below).
$373.9
FY08 Revenue, $173.4
Savings, $64.0
GAP, $136.5
$-
$50.0
$100.0
$150.0
$200.0
$250.0
$300.0
$350.0
$400.0
Dollars (000,000)
ARC
FY08 Revenue
FY09 Gap Between ARC, FY08 Revenue & Recommended Savings
pg_0006
Senate Bill 67 – Page 6
As the New Mexico Corrections Department (NMCD) noted that, to the extent the contribution
increase does effectively prefund unfunded liabilities for active employees, it could perhaps help
prevent NMCD and other state agencies from having to pay additional contribution increases in
the future.
ADMINISTRATIVE IMPLICATIONS
RHCA notes the following possible administrative implications:
9
Additional cost to the NMRHCA administrative budget may require modification to track
prefunded employer reserves.
9
Additional cost to the administrative budget will result in the additional reporting of the
Legislative Finance Committee ($75,000 per year).
COMPANIONSHIP, RELATIONSHIP
SB 67 is the companion to HB 183. Additionally, HB 7 includes a .2% increase in the
employer/employee contribution, expected to provide $7.3 million to be used to prefund benefits
for future retirees.
ALTERNATIVES
As an alternative to the SB 67 approach that requires contributions from current and future
beneficiaries to restore the fund to solvency, RHCA proposes raising contributions from
employers by 35% and employees by 38%, thereby requiring significant increases in costs to the
State and current employees.
Other options reviewed by the HB 728 work group and recommended for further consideration
include:
•
Conversion to a defined contribution approach
•
Explore the possibility of issuing bonds to increase the actuarial discount rate and lower
the UAAL while providing cash into the system
•
Consolidation of RHCA with the General Services Department Risk Management and
Public Schools Insurance Authority.
WEP/bb:nt