Warwick has experienced significant cost increases in supplying health and dental benefits to its active and retired employees since the city started uploading its budgetary information online, which goes back to Fiscal Year 2003 (July 1, 2002 to June 30, 2003).
This second part in our three-part series examining union benefits will dive deeper into the financial implications of those benefits, both in terms of healthcare and in pensions. It should be noted that this analysis is based upon current and historic city budgetary data and actuarial reports that cover FY18 (July 1, 2017 to June 30, 2018), as that is the most current data available.
This piece intends to objectively assess the costs associated with the benefit packages outlined in last week’s Beacon, which observed the specific health care plans, prescription benefits and supplemental Medicare benefits afforded to active and retired members of the unions – as well as the structures of defined benefit pension plans that they receive upon retirement after a certain length of service to the city.
This piece will then examine major cost differences as a result of the comparatively unique benefits given to the unions organized under the Warwick School Department – the Warwick Teachers’ Union (WTU) and Warwick Independent School Employees (WISE) Union. Differences in benefits granted, as seen in the data, directly correlate to a vast difference in costs associated with them.
During FY03, Warwick spent a total of $9,708,819 on healthcare and dental benefits for the active and retired members of its three collective bargaining units (fire department, police department and municipal employees). In FY2010, that number increased to $17,033,113.
As of the most recent budget, FY2020, the cost for supplying union employees with medical and dental insurance has jumped more than 150 percent from the FY03 number, to $24,601,662, and represents a 44 percent increase from 10 years ago.
Increasing costs associated with providing healthcare to active employees shouldn’t come as a surprise. According to a study from the Journal of the American Medical Association in March of 2019, healthcare spending in the United States as a whole rose about a trillion dollars between 1996 and 2015. In 2017 alone, the country spent about $3.5 trillion on healthcare, which is expected to rise, according to the study, to $6 trillion by 2027.
Rather, the noteworthy expense in Warwick is money spent on medical benefits for retirees. As last week’s article highlighted, all employees – and their spouses – hired prior to June 30, 2015 that accumulate 20 years of service (in the fire or police departments), or 10 years in municipal service, are entitled to a supplemental healthcare plan through Blue Cross that eliminates co-pays for most services associated with Medicare, which retirees become eligible for when they reach age 65.
Additionally, members of the three groups get an out-of-pocket prescription cap of $300 per individual and $600 for a family plan, which could potentially leave the city on the hook for large prescription bills for the remainder of a retiree’s life, especially if that person has any number of chronic conditions which often require the taking of multiple, expensive medications daily.
Employees hired after June 30, 2015 will still be eligible to receive both of these benefits in retirement, but for individual coverage only, after they attain 25 years of service*** (Editor's note, this has been corrected from an error stating such employees only needed 20 years of service) in the fire department or police department, or 10 years as a member of Council 94.
Specifically looking at healthcare benefits given to retirees, costs have increased from $3,557,456 in FY03, to $6,196,160 in FY2010 and currently contribute to a $10,435,972 cost within the FY2020 budget. This represents a 193 percent increase in the cost of supplying retiree health benefits since FY03 and a 68 percent increase from 10 years ago
These costs have been seen across the board in all three unions. The city spent $1.34 million on retiree healthcare in FY03 for IAFF (firefighter) members, versus $3.6 million in FY20 (169 percent increase). The city spent $1.14 million in FY03 for retired FOP (police) members, versus $3.4 million in FY20 (200 percent increase). And the city saw its largest retiree healthcare expense increase in its Council 94 (municipal employees) union members, which went from $1.07 million in FY03 to $3.4 million in FY20 (a 216 percent increase).
The City of Warwick spent $35,026,144 to continue funding its pension obligations to its three collective bargaining units in FY20. Overall, the city still faces a net pension liability of $453.5 million, according to the most recent pension report for FY18.
Still, this doesn’t necessarily mean the city is in financial peril regarding its pensions. Both the Fire 2 and Police 2 pension funds are funded well, at 85.3 percent and 83.4 percent respectively, according to the FY18 reports. The municipal pension is a little worse off, at 72.6 percent funded with a liability gap of about $50 million – however the city has made its annual recommended contribution (ARC) payments for all funds each year and, if it continues to do so, those liabilities will eventually plateau and decrease.
The largest area of concern regarding pensions continues to be the Fire and Police 1 pension, which has a total liability of over $300 million. Of that liability, there is only $72.8 million in assets within the pension plan, meaning it has a funding ratio of a little over 24 percent.
The vast majority of this liability comes from the Fire 1 portion, which covers 327 retired members of the department and has seven active employees remaining that qualify for this pension. It has a total liability of $260 million. The city’s most recent pension contribution for this fund is by far the largest in the city, at $16.3 million for FY20. The average benefit for a member retired in this plan is $57,606, the highest average among any plan in the city. Its seven active members make an average of over $100,000.
The Police 1 portion, comparatively, covers only 96 retired members of the department and has no active members. The city’s contribution to the Police portion of Police/Fire 1 was $2.57 million in FY20.
That Fire/Police 1 pension will continue to increase in costs by 2.75 percent as the years go forward, until the pension is at least at 60 percent funded. It is projected in the FY18 report to require an ARC of $21 million by 2023.
The pension contribution rates across the board for the unions vary, but for the most part the city contributes two-thirds of the percentage of total payroll covered that is determined by the actuary to be needed to adequately fund the accounts.
For example, in FY18 there was $14.59 million in projected covered payroll encompassed by the Police 2 pension plan. Of that money, the actuary has determined that the city must set aside 48.16 percent of that payroll in order to keep the pension on track to be adequately funded when members retire. Of that 48.16 percent, two-thirds is the responsibility of the city (32.1 percent), while the final third is taken from the employees’ pay (16.05 percent).
A factor to keep in mind that is also driving increasing pension costs is that employees who were hired prior to June 30, 2012 in both the fire department and police department get 3 percent, compounded cost-of-living adjustments (COLAs) to those pension payments in perpetuity, each year for the length of their retired lives. Those hired after that date get a COLA as well, but it is based on the Consumer Price Index, which on average amounts to far less than 3 percent each year.
OPEB and Comparisons to the School Department
Much has been made of the concept of OPEB (other post-employment benefits). To put it simply, OPEB refers to the large picture of costs associated with providing healthcare to all union employees in the city throughout the remainder of their lives following retirement. In a recent report to the city council, Marcum LLP reported the city faces OPEB liabilities of more than $352 million on the city side. Some have argued that number is actually higher, but for the sake of this piece we will use it as a benchmark.
Some have painted these projected OPEB costs as evidence the city is approaching bankruptcy, as Warwick isn’t putting any money aside as a means to cover these costs in the future. Others, however, have downplayed the OPEB number as a faulty representation of hypothetical costs extended throughout many decades – a formula that could make any expense look insurmountable. People in this camp claim that as long as the city can make its annual healthcare payments to active and retired employees, an extrapolated, long-term view of those expenses is relatively meaningless.
Regardless of where you land on that spectrum, the fact about OPEB projections is that they are a solid indicator of how costly medical insurance plans afforded to workers truly are. And whether or not they indicate looming financial ruin in Warwick, they certainly provide the most concrete comparative example of the differences between the school department and city collective bargaining units.
While the city has, as mentioned above, a projected OPEB liability of $352 million, the school department’s two collective bargaining groups – which include more active employees (about 1,175) than all three of the city’s unions (about 726 active employees as of the FY18 reports) – has an OPEB projected liability of just over $53 million.
While the school department spent about $19 million on health and dental benefits for its active WTU and WISE members in FY20, the department only spent a little over $525,000 on retired members of the same two groups. A stark contrast from the more than $10 million spent on retiree healthcare for the three city bargaining units in the same year.
This is due to a couple of reasons. One reason is quite simple – neither WISE nor WTU members are provided the Plan 65 Medicare supplement that is given to IAFF, FOP or Council 94 members following their retirement, nor do they get any benefits towards prescription medication.
The other reason is a bit more complicated, but it has to do with the pension reform initiated by Governor Gina Raimondo during her first term in office, which among many other things, increased the amount of time a teacher would need to work in order to receive their full pension benefits. As a result, teachers and WISE employees in Warwick will not generally be able to retire until age 62 at the youngest.
Contractually, WISE and WTU members are entitled to receive healthcare at the city’s expense until they reach age 65, but three years or fewer of city-covered insurance comes at a far lower cost than members of, for example, the Warwick Fire Department, whose covered members in the Fire 2 pension plan have retired at an average age of just over 51 years old, meaning they would get full health coverage at the city’s expense for 14 years, and then get the Medicare supplement afterwards.
The pension reforms also made an impact on how much the Warwick School Department has to set aside for pensions. The details are too complex to cover in full for the purposes of this piece, but essentially the pension reform made it so the city will now always contribute about 15 percent of the total payroll for certified staff (which includes teachers and administrators). That number was on track to climb over 20 percent prior to the reforms, according to school finance director Anthony Ferrucci.
These differences have stabilized retiree healthcare costs for the school department in a way that is not seen on the city side for its collective bargaining units. The school department also does not have to factor in regular COLAs to their pension contributions, as WISE gets no COLAs and WTU members only get COLAs if the state pension fund achieves high returns on its investments and attains a certain funding level.
The long-term costs associated with providing healthcare benefits to retirees – as bargained in contracts between the city and its fire department, police department and municipal employees – result in significantly higher costs than the city’s school department, which doesn’t provide similar retiree health benefits. Retiree healthcare costs associated with the city’s three collective bargaining units have increased by more than 190 percent since the fiscal year that ended on June 30, 2003.
The state overhaul of the teacher pension system that began in 2011 has also contributed to lesser retiree costs for the school department, as members are mostly unable to retire prior to age 62, and the city can more accurately predict its contribution requirements year to year.
Next week, this series will conclude by talking to members of the city’s unions and city government, to provide information for readers to decide for themselves whether benefits given to these members are insufficient, fair, or excessive.