Facing deficit, state may look at retiree health benefits

As Connecticut struggles to control the cost of retirement benefits, one item under consideration may be a health insurance program generous by state government standards and rare in the private sector: discounted lifetime coverage of retirees and the spouses of retirees who log 10 years of service at any time in their careers.

A panel created by Gov. M. Jodi Rell to study the fiscal health of Connecticut’s retirement benefit programs is expected to debate recommending an end this practice, along with new health care costs for future retirees, before it completes its first draft on Aug. 1.

The chairman of the Post Employment Benefit Commission, Michael Cicchetti, said huge costs looming over the retiree health care system, coupled with a lack of savings to offset them, are forcing a discussion that many in state government have long wanted to avoid.

Unlike the pension system, which calculates the cash payment based on several factors, including length of service and salary earned, the right to free health insurance – both for the worker and a spouse – is guaranteed after 10 years of full-time service. An employee can leave state service after 10 years, move on to a career in private industry, and come back to claim state health benefits when he or she retires.

“The way our system is set up right now, it’s all or nothing,” said Cicchetti, who is Rell’s deputy budget director. “Someone who works 10 years gets the same benefit as someone who worked 35.”

But with a nearly $22 billion price-tag on future health benefit obligations, Cicchetti said state officials can’t afford to avoid tough discussions about the topic any longer. “We can’t limit our discussion to items that are not controversial,” he said. “When you look at the 30-year horizon, those costs are just astronomical. We can’t afford to make those payments and that is going to require some changes.”

But a state union spokesman noted that none of the recommendations the commission ultimately offers are likely to be raised in negotiations with unions or for legislative consideration before Rell’s term ends in early January. State Employee Bargaining Agent Coalition spokesman Matt O’Connor said the administration is trying to deflect attention from the real problem – poor fiscal planning by the governor and her predecessors.

According to a 2009 report from a Washington, D.C.-based research group on public-sector wage and benefit issues, Connecticut’s plan is among the more generous offered by the 50 states.

The Center for State & Local Government Excellence reported that 11 states restrict health care to eligible workers who retire directly from state service, having participated in state employee health plans within the final year prior to retirement. It also indentified 18 other states that provide other rules that effectively restrict eligibility for benefits, such as service requirements of 20 years or more to obtain fully-funded health coverage.

For example, Delaware employees must pay half of their health insurance premiums if they have just 10 years of state service, but none if they have 20. In Rhode Island, full funding is available to workers who have 28 years of service.

The report also found cost-sharing of premiums is employed in 32 states.

Though all 50 states provide some level of retiree health care coverage, that benefit is far less common in the private sector.

According to a 2009 summary of employer health benefits prepared by The Kaiser Family Foundation and the Health Research and Educational Trust, 29 percent of employers with 200 or more workers-including state and local governments–offered retirement health care that year. Among employers with fewer than 200 workers, just 5 percent offered that benefit.

All three of the Republican gubernatorial candidates – Tom Foley, Michael Fedele and Oz Griebel – have called for a tightening of state employee retirement benefits as one of several measures to be taken in the face of a projected $3.37 billion state budget deficit for 2011-12.

But that deficit is due in large part to more than $1.9 billion in revenues from one-time or otherwise limited sources: state budget reserve funds, emergency federal stimulus grants and borrowing – that Rell and the legislature are using to prop up ongoing spending programs in the current budget, according to the legislature’s nonpartisan Office of Fiscal Analysis.

Rell and the legislature agreed in 2007 to dedicate $10 million from that year’s surplus to open a savings account for state retiree health care costs, but otherwise Connecticut has reserved nothing toward a long-term obligation projected at $21.7 billion.

State government traditionally has followed a pay-as-you-go system, allocating money each year to fund retiree health care, a cost that continues to grow rapidly with no investment earnings to offset it.

State government is slated to spend $490.6 million in this fiscal year on health insurance for about 42,000 retired workers. That’s about 2.5 percent of the $19.01 billion total state budget.

If the Rell was so concerned, O’Connor said, she could have tried to close the budget gap that is creating a crisis for her predecessor, or insisted upon more saving for retiree health care.

“This is about a failure to pre-fund and a failure to plan in general,” he said, adding that the administration is more predisposed toward reducing workers’ benefits than toward improving fiscal responsibility on the state’s part. “From our perspective, it’s a real shame.”

The next meeting of the governor’s Post Employment Benefits Commission is scheduled for 1 p.m., Friday, in the Legislative Office Building. The seven-member panel also includes other representatives from the administration, the state comptroller and treasurer’s offices, and state employee unions.