A new study from the Manhattan Institute, a free-market think tank based in New York City, reported improvements for one of Connecticut’s underfunded long-term debts – namely its medical benefits for state retirees and teachers.
Connecticut saw a decrease in the state’s actual liabilities for its other post-employment benefits (OPEB) and decreased yearly costs, while the state increased OPEB funding.
Between 2013 and 2017, Connecticut’s OPEB liability decreased by $1.7 billion and yearly payments decreased by $282 million, according to the study based on Connecticut’s 2017 valuation numbers.
“The decline is especially impressive, given that the discount rate was also reduced by almost 2%, a prudent move that increases the liability estimate,” wrote study author Thurston Powers.
The study attributes the savings to the 2017 SEBAC agreement negotiated between Gov. Dannel Malloy and the state employee bargaining agent coalition.
Part of the SEBAC agreement allowed Connecticut Comptroller Kevin Lembo to make administrative changes to the state’s OPEB plan for retirees over the age of 65, switching them to the Medicare Advantage plan.
The move was expected to save the state $130 million per year. House Republicans originally included the provision in their 2017 budget, but the change was factored into the SEBAC agreement.
But, the study cautioned the savings may just be short-term and will likely require more reforms in the future.
“However, health-care cost projections return to likely greater-than-economic-growth rates in the early 2020s,” Powers wrote. “This suggests the 2017 reforms have not made the state’s OPEB plans more sustainable but rather improved their affordability in the short run.”
The Manhattan Institute study mirrors an analysis of the 2017 SEBAC agreement done by Pew Charitable Trusts for the Connecticut Business and Industry Association.
Pew noted that “current projections beyond the second year of the agreement do indicate a return to the higher rates of health care cost growth.”
Connecticut’s required contribution in 2017 was $1.03 billion toward its $17.9 billion OPEB liability, according to the Manhattan Institute study. However, the state only contributed $667 million toward the payment, underfunding OPEB by $367 million.
Connecticut’s required contribution in 2017 was $1.03 billion toward its $17.9 billion OPEB liability, according to the Manhattan Institute study. However, the state only contributed $667 million toward the payment, underfunding OPEB by $367 million.
Lawmakers budgeted $776 million toward retired state employees’ health service in 2020 and $847 million in 2021.
Health care costs are determined by health care prices and usage. Prices are subject to fluctuation but have overall been trending upward, out-pacing economic growth.
Usage for Connecticut may swing upwards as the state faces a possible spike in retirements, as state workers look to retire before 2022 when cost of living adjustments for state employee pensions are expected to change.
Until 2011, Connecticut saved nothing for retiree medical benefits. The 2011 SEBAC agreement required state employees to contribute 3 percent of their earnings toward their retirement medical benefits for the first ten years of employment.
Connecticut matches this 3 percent contribution, leading to the state having $542 million in assets for its OPEB liabilities.
But the changes enacted by the 2017 SEBAC agreement may not be enough in the long run, according the Manhattan Institute study.
“Connecticut’s improvement is only impressive relative to itself, as it is one of a handful of states with significant OPEB liabilities,” the study says. “Future reforms, and potential disruptions for state employees and retirees, will likely be required.”
The Manhattan Institute study notes that health care cost projections are highly variable and subject to change with a large range of possible outcomes.
Connecticut’s retirement medical benefits are considered generous. From retirement to age 65, the former employee receives much the same health coverage as they received during their state service.
At the age of 65, the retiree is enrolled in the Medicare Advantage plan through the state of Connecticut and UnitedHealthcare.
