Don’t Use Inaccuracies to Sell A Bad State Retiree Drug Plan

by Peta Richkus.

Note from editors: What if you retired from your job with the State of Maryland with all your retirement ducks in a row, only to learn later that your drug prescription benefits were being taken away? Benefits that were negotiated in good faith? This menacing scenario is not a “what if” after all, but a saga playing out over the last eight years, during which the state has made efforts to take away prescription drug coverage from its Medicare-eligible retired employees. Peta Richkus has already written in Maryland Matters on this issue, and she now submits the following open letter to the Maryland General Assembly. The open letter is meant in particular for the members of the House Appropriations Committee who will consider SB946 (State Prescription Drug Benefits – Retiree Benefits – Revisions) in its most recent form on Tuesday, March 19, 2019.

I respectfully recommend you vote – Favorable, with Amendment.

Senate Bill 946 should receive a favorable report, but only with the following amendments as also recommended by Bill Kahn, former chief of the Contract Litigation division in the Office of the Attorney General:

1. A task force or study group, with adequate funding, should be formed immediately to study all of the issues relating to this bill to include those put forward by the proponents as well as those put forward by the retirees.  Retiree representatives should be included so that the task force is balanced.  A report should be required by the time the General Assembly meets in 2020.

2. In the meantime and given the expected duration of the Federal court injunction, uncodified Section 2 of the bill should be amended to provide that the elimination of the State retirees’ prescription drug plan for Medicare eligible retirees and spouses or dependents may not begin until the first day of the second health benefits plan year following the task force report.

Since it is likely that the injunction in the Fitch litigation still will be in effect during the 2020 session, there will be no harm done to the State by amending the bill in this way.

Senate Bill 946 has been on the fastest of fast tracks and retirees have been made to feel that, while our elected representatives have listened to our testimony, we have not been heard.  Under the circumstances, I hope you will agree that retirees are at least owed the consideration that is inherent in these offered amendments.

SB946 is being sold on the basis of an “unsustainable” unfunded liability of the Other Post-employment Benefits (OPEB) Trust resulting from the high cost of prescription drugs and medical care, which, it has been argued, may affect the State’s triple-A bond rating.

This is not true.

The issues of unfunded OPEB liability and Maryland’s triple-A bond rating should not be conflated.

The principal and substantial cause of the unfunded OPEB liability is the State’s consistent failure to make the necessary contributions to the OPEB Trust fund.

Documentation of this is in the analysis by the Department of Legislative Services (DLS) of the Department of Budget and Management (F10A02) Personnel budget (at page 16):

The State has not met the commission’s recommendation regarding payments to prefund the OPEB liability. The State provided payments from fiscal 2007 to 2009 but eliminated payments in fiscal 2010 for budgetary reasons. The State has not provided OPEB liability payments since fiscal 2010. In fiscal 2018, the State’s net OPEB liability was $10.6 billion, representing a funded ratio of 3% ($329.3 million in assets). If, today, the State started prefunding the OPEB liability on an annual basis, then the liability would decrease to $6.5 billion. However, this would require the State to pay approximately $127 million in addition to annual benefit costs.  (Emphasis supplied.)

In 2004, under then-new the Government Accounting Standards Board (GASB) standards, the State was required to set up an OPEB trust, but it never contributed the annual required contribution specified under GASB.  Indeed, the few contributions that were made were woefully insufficient.  The unfunded OPEB liability reflects this significant deficiency in the amount contributed to the Trust, computed actuarially.  If the State had made the required contributions, the unfunded liability would be much less, in the tolerable range, and the funded liability level – now only 3 % – would be much greater, more sustainable, and more in line with bond rating agencies’ thresholds.

The inescapable conclusion is that it is the lack of State funding of the OPEB Trust that has led to the large unfunded liability. And now the State turns around and uses the unfunded liability that it created as the excuse for removing retirees from their prescription drug plan, the plan that they were promised and that they have contribute to for 20, 30, 40 years and more. Of course retirees are more than concerned: they are outraged.

The ‘carefully edited’ GASB information provided by DLS has conveniently neglected to include significant relevant information that should be – and should have been – considered by governors and General Assembly members all along, namely:

“In a cost-sharing pension or OPEB, the participating employers pool their benefit obligations and assets,” said Project Manager Karl Johnson. “In addition to providing administrative services, the plan assumes from the individual employers the responsibility to fund promised benefits. In exchange, the individual cost-sharing employers incur liabilities to the plan for the contractually required contributions assessed to them by the plan as their share of the aggregate funding requirements for specified periods.”

GASB Staff Technical Bulletin, “Recognition of Pension and Other Postemployment Benefit [OPEB] Expenditures/Expense and Liabilities by Cost-Sharing Employers”-  December 2004 (https://www.gasb.org/jsp/GASB/GASBContent_C/GASBNewsPage&cid=1176156739075, retrieved 3/17/18)

And please remember – although the analyst’s Note still neglects to point out – the oft-referenced GASB has made its position on funding OPEB liabilities exceedingly clear:

“… the GASB believes that a government has an obligation to pay OPEB based on the level of retirement benefits promised to an employee in exchange for his or her services.”

(https://www.gasb.org/jsp/GASB/Page/GASBBridgePage&cid=1176164129754#section_3, retrieved 2/17/19)

Please also remember that whatever the actual costs of the program are, 40% of the cost is paid for by the retirees and federal funds.

The solution is not Senate Bill 946 in its present form.  Rather the solution is, as the Department of Legislative Services stated, annual State contributions to the OPEB Trust of $127 million, which would immediately reduce the unfunded OPEB liability by $4.1 billion dollars – a whopping 39 %.  That would be a huge return on the State’s investment in the OPEB Trust and would result in a very substantial positive improvement in the State’s balance sheet.

Moreover, failing to move in this direction will only make matters worse for the State and all its retirees.  It will be inevitable that the unfunded OPEB liability will continue to grow and you will be urged to take even more drastic measures to reduce State involvement in the benefits that it promised to its retirees.  This is hardly in the State’s best interests and certainly it is not in the interests of its employees and retirees.

Finally, the alleged fear about losing the State’s triple-A bond rating is a red herring, and it is unfounded.  Retirees are well-aware of, and Hearing testimony demonstrated, two relevant facts:

1. We have found no evidence that rating agencies have ever downgraded a state’s bonds based solely on an unfunded OPEB liability; and

2. States with greater OPEB liabilities than Maryland have continued to maintain their triple-A bond ratings – namely, Georgia ($18 billion unfunded liability), North Carolina ($33 billion unfunded liability), and Texas ($88 billion unfunded liability).

(As of July 1, 2018, the State’s net OPEB liability is $10.7 billion; the total OPEB liability is $11.1 billion. DLS Fiscal and Policy Note on the First Reader of SB946, http://mgaleg.maryland.gov/2019RS/fnotes/bil_0006/sb0946.pdf, retrieved 3/17/2019)

I have been involved with contracts and contract disputes most of my professional life, in both the public and private sectors. My own record of successfully concluding contract disputes and delicate personnel matters as Secretary of the Maryland Department of General Services was quite good. I understand that, in the hectic environment of the three-month General Assembly session, it is not easy to dig into the long history and complex details of where we find ourselves today. Especially with so many representatives newly elected to Annapolis. It is my hope that the testimony of and correspondence from affected State retirees will be given full consideration.

In compliance with GASB principles and in fairness to 45,000+ state retirees, Senate Bill 946 should be amended to keep retirees in the present retiree prescription drug program. Amending the bill as suggested will allow time for a task force to look at all sides, including the inaccuracies and half-truths that are being used to ‘sell’ this bill, before the 2020 session.  We believe that, if you do this, you will be persuaded that there is a better answer than the current version (Third Reader) of Senate Bill 946.

Please vote to amend Senate Bill 946 as recommended above and, only then, give it a favorable report.

Sincerely.

Peta N. Richkus

former MD Secretary of General Services (Jan 1999 – Jan 2003)

former Commissioner, Port of Baltimore, MD Port Administration (Jul 2008 – Jan 2014)

Featured image by Thisisbossi used here under Creative Commons Attribution-ShareAlike 2.5 Generic License.

4 thoughts on “Don’t Use Inaccuracies to Sell A Bad State Retiree Drug Plan

  1. One of my retired friends makes these heartfelt observations in reply to the standard State position recently espoused by Sen. Griffith of Prince George’s County.

    “I just sent this to Senator Griffith with a copy to the Maryland Reporter:

    Dear Senator Griffith,

    I read with much dismay, the article in Maryland Reporter in which you defended SB 946. Unfortunately, the article was extremely one-sided.

    The bill does provide for three new programs. The costs of these programs are unknown at this point because they have yet to be created. What is the fiscal note for these programs?

    Do you even understand the nightmare elderly retirees will face having to pay out-of-pocket for medications, submit proof of meeting the out-of-pocket minimums, then submit proof of payment for additional medications, and then wait until the State decides if it will reimburse?

    Oh, and then there is serious omission concerning out-of-pocket caps. You state that there is a cap on what retirees will pay. That is untrue to a certain extent. SB 946 states that there may be a cap on what the State will pay.

    Additionally, there is a provision in SB 946 that only some medications will be covered by the programs.

    You have justified the need to take away the prescription benefit that retirees earned based on an accounting number that includes program costs aggregated over umpteen years. The true costs of the prescription benefit program we were promised is $146m in 2020, as estimated in Analysis of the FY 2020 Maryland Executive Budget 2019.

    You wrote that “Going back [to the original plan] would add what is now an additional $11 billion to the state’s unfunded liabilities for Maryland taxpayers to grapple with in the future”. Well, this is perhaps true, but begs the question,”How far in the future?” It also begs the question, “Why was’t any funding to the heath care fund made in the past 10 years?” If the General Assembly and several Governors were/are concerned about retirees, then annual appropriations would have been made to the health care fund.

    A colleague of mine, William Kahn, an attorney who was with the State Attorney General’s Office wrote in recent testimony about SB 946 that, “If, today, the State started prefunding the OPEB liability on an annual basis, then the liability would decrease to $6.5 billion.However, this would require the State to pay approximately $127 million in addition to annual benefit costs.”

    Clearly there are things that the State can do to honor its long-standing commitment to its retirees that doesn’t involve putting them through a maze of bureaucratic red tape and unnecessary financial and emotional hardship.

    Senator Griffith, maybe the right and honorable thing to do is to withdraw SB 946, and begin a fact-finding group consisting of legislators and retirees to make reasoned suggestions for how to support the prescription benefit program retirees were promised and upon which we rely.

    Sincerely,
    Edward Kemery, PhD
    University of Baltimore, Retired”

    Liked by 1 person

  2. Thank you so very much for speaking the truth about the state employees prescription program. We need people like you that is not afraid to tell it like it is. Thank you for researching the issue and not being afraid to share the TRUTH.

    Like

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