When we talk about Vermont’s nearly $6 billion unfunded liability, most of us think about the teachers’ and state employees’ pensions. But these two giant liabilities only account for half of the state’s total unfunded liabilities. Where’s the other half?
Well, it’s in retirees’ health care benefits, otherwise known as “other post-employment benefits” or “OPEB” for short. OPEB provides retired state employees and teachers with subsidies for health insurance based on how many years they served the state. These subsidies can be used towards Medicare coverage if the retiree is over 65, or through regular private insurance if the retiree is not yet eligible for Medicare.
Unlike with our pensions, we pay for OPEB liabilities on a “paygo” basis. That is, the costs for the current year are paid for in the current year. There’s no money set aside for future costs. In other words, we don’t prefund OPEB, meaning there’s no set aside pool of assets to offset these unfunded liabilities.
If Vermont were to start prefunding its OPEB liabilities, it would cost us more up front, but ultimately reduce our unfunded liabilities by roughly $1.7 billion by allowing us to use different interest rates. We could also use investment returns to reduce unfunded liabilities even further.
The challenge? Well, prefunding costs money. The State of Vermont is already doling out hundreds of millions every single year to deal with its unfunded liabilities. Coming up with a funding source to pre-fund our liabilities might be worthwhile long-term, but it would cost a lot in the near term.
But along with prefunding, there are other options to reduce our OPEB liability. One is quite simple: use Vermont Health Connect.
Every year, tens of thousands of Vermonters buy health insurance from Blue Cross or MVP through Connect. And yet, we still create and administer separate programs for our retired state employees’ and teachers’ health care. Vermont Health Connect is clearly the better choice for both state and retiree, and Vermont taxpayers.
This decision is especially puzzling with the addition of recent federal premium subsidies. Because of these subsidies, many Vermonters pay a fraction of the unsubsidized premiums. For example, a 60-year old Vermonter with a $35,000 retirement annual income could get an individual MVP Gold 1 plan, for which the federal government would subsidize $651 of the $751 monthly premium. Therefore, Vermont and/or the retiree would be responsible for just $100 every month.
Contrast this to the standard plan offered to 60-year old retirees, which costs Vermont $888 each month and the retiree $222. Every time a low-income, pre-Medicare retiree switches from a Vermont pension healthcare plan to such an insurance plan, the retiree would save $122 each month. And the state would save over $9400 a year, even if Vermont paid 100% of the retiree’s monthly premiums! Under Vermont Health Connect, retirees would have more plans to choose from, all of which cover pre-existing conditions, use community ratings and guarantee renewal.
If Vermont took its current OPEB system and changed it so that retirees went to Vermont Health Connect instead of separately administered plans, retirees could use these federally-financed premium subsidies to their advantage. Vermont’s OPEB benefits could transform from separate plans into lower-cost allowances for retirees, with the state banking the remainder of the savings. A win for retirees and taxpayers alike.
The same concept could work for those who are eligible for Medicare. Instead of signing up for a separate plan, retired state employees and teachers could buy Medigap insurance like anyone else, and the state could provide an allowance to offset the expense. The savings would be fiscally significant, since we’d be using federal dollars to replace state costs.
A 2009 Vermont unfunded liability report called for the state to get its act together on OPEB. A dozen years later, and it has done very little. It is long past time for policymakers to think outside the box with innovative solutions instead of repeating the same failed policies of the past that got us into this mess.