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Other Budget Issues

Last Updated: 5/14/2010
Budget Issue: Proposed $200 million of General Fund savings due to federal health care reform's temporary early retiree reinsurance program.
Program: Health and Dental Benefits for Annuitants
Finding or Recommendation: Because we expect the savings eventually will prove to be less than $200 million, recommend sending all state employee and retiree health costs to conference committee so that more refined estimates of these savings and overall costs can be reflected in the final budget act.
Further Detail

The Governor's May Revision reflects $200 million of General Fund savings due to the temporary "early retiree reinsurance program" in the recently passed federal health care legislation. The May Revision scores these savings in Item 9650-001-0001 of the budget, the General Fund item through which the state funds its statutorily-required health benefits to state government retirees and their eligible dependents.

Early Retiree Reinsurance Program Under Health Care Reform. The federal health care reform legislation includes a temporary early retiree reinsurance program that will provide $5 billion to assist employer-based health plans in providing specified high-cost coverage for retirees age 55 to 64 and their family members. (The National Conference of State Legislatures has prepared this fact sheet on the reinsurance program.) The $5 billion, it appears, may be entirely exhausted within one year or two years. If, however, the $5 billion is not exhausted on this time table, the temporary program may remain in effect until 2014, by which time the health care legislation's "exchanges" should begin operations.

Public employee health plans, such as those administered by the California Public Employees' Retirement System (CalPERS), are eligible for the temporary reinsurance program, and under public retirement programs in California, many public employees enter retirement between the ages of 55 and 64. Accordingly, at its April 20 meeting, staff informed the health benefits committee of the CalPERS board that the temporary reinsurance program would be one of the areas of health care reform with the most significant short-term effects for the system.

Savings Estimate Is Very Preliminary. We give the administration and CalPERS credit for trying to estimate state savings under this temporary program as soon as possible, despite the fact that detailed regulatory guidance on the program is just now emerging. We strongly expect that the executive branch's estimate of savings under this program will be refined in the coming days and weeks. Furthermore, we expect the one-time savings eventually will prove to be less than $200 million in 2010-11.

Recommend That Budget Item 9650 and 9800 Health Costs Be Sent to Conference Committee. The calendar-year 2011 health plan rates for CalPERS--expected to be finalized in June--drive expenses in Items 9650 and 9800 of the budget. Accordingly, each of these items should be sent to conference committee so that the Legislature can have the opportunity to incorporate the actual 2011 health plan rates into its budget calculations. (The CalPERS board's health benefits committees is expected to recommend 2011 rates on June 15; accordingly, if the Legislature passes the budget early, the 2011 CalPERS rates may not be available.) 

The savings from the reinsurance program will be one factor in the overall health expense numbers to be incorporated in Item 9650. Other factors, including benefit requirements established by federal health care reform, may increase CalPERS health plan costs in 2011. Such increases and decreases may or may not already be reflected in the administration's projected increases for these costs in the 2010-11 budget year. Accordingly, we advise the Legislature to wait and incorporate any estimated savings for the reinsurance program into these final numbers.

Recommend Legislative Scrutiny of Savings Estimates. This is a new and developing program. Yet, to ensure that any budget savings scored is reasonable, we recommend that the Legislature request that CalPERS provide documentation to justify any estimates of savings under the reinsurance program. Specifically, we recommend that the Legislature consider how CalPERS assumes these savings will be divided among the state employer, local employers in CalPERS, and CalPERS' retired members.

For state retirees in CalPERS, the state, as the former employer, pays the vast majority of premium costs. Accordingly, it is appropriate, in our view, for the vast majority of savings under the temporary reinsurance program to be directed to the state, as well as other public employers, enrolled in CalPERS' retiree health programs. This also appears consistent with the provisions of the health care reform law. The purpose of the reinsurance program, after all, is to help employers maintain retiree coverage affordably pending the start of other efforts under health care reform to make coverage more affordable.

Accordingly, if CalPERS does not volunteer to direct the vast majority of savings to the state and other public employers, we recommend that the Legislature adopt trailer bill language directing CalPERS to ensure that the maximum allowable portion of savings or subsidies from the reinsurance program flows to these employers. This legislative action could be modeled on a provision of the 2007 general government budget trailer bill, where the Legislature specified that CalPERS would direct Medicare retiree drug subsidy (RDS) payments to certain purposes, such as reducing the state's retiree health expenses. In a 2009 press statement, CalPERS officials described how these RDS payments provide "welcome relief for cities and counties that are struggling to maintain health care benefits for retirees and their beneficiaries." Similarly, funds from the temporary federal reinsurance program will be welcome relief for public employers enrolled in CalPERS.