Increasing Health Care Expenditures Drive up Fringe Benefit Costs for District Government Employees

Government employees have traditionally enjoyed generous fringe benefits. The popular conception is that working for the government might mean a lower salary than one could get elsewhere, but job security and fringe benefits—primarily health care benefits and pensions or retirement contributions—make up for that salary difference. That is not always good news for taxpayers and can create tensions between current budget needs and future promises.  Some public employee pension plans around the country are less than 50 percent funded, and states and localities sometimes struggle to meet their benefit obligations, especially for pensions.  These governments in the past may have reduced contributions to their plans when their budgets got tight, leaving their plans underfunded.

The District does not face pension cost pressures, primarily because most of its employees are not in traditional pension plans.  Over two-thirds of District employees receive pensions in the form of defined contributions that are a share of their salaries, and in retirement their financial security will depend on these contributions and the returns on them (plus Social Security and any other savings they might have).  For the remaining one-third of District employees who are in defined benefit plans, the District’s pension plans are 100-percent funded—that is, the city has set aside sufficient funds each year to cover the full cost of future retirement costs.  (The District also benefited from a good starting point: with the Revitalization Act of 1997, the federal government assumed responsibility for the District’s unfunded pension liabilities to that point, and the District has been responsible for only pension liabilities accrued after 1998).

However, the District has been spending more on fringe benefits over time. Data on the District’s fringe benefit costs show the following trends:  First, fringe benefit costs, as a proportion of salaries, have grown over the past 15 years. Second, the driver of this growth has been increasing health insurance costs.  Finally, the cost of retiree health care is a newly recognized cost driver, but the District is funding this obligation and stands in a better fiscal position than many other state and local governments.

Benefits for Current Employees

Fringe benefits have cost the District an increasing amount, as a percentage of salaries paid, over the past 15 years. Not including the cost of its defined benefit pension plans, which will be discussed below, fringe benefits grew from 13 percent of salaries, in 1999, to 19 percent of salaries, in 2014. (In the figure below, a value of 16 percent means that for every dollar of salary the District pays, it pays an additional 16 cents in fringe benefits.)

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The primary components of fringe benefits are health insurance and retirement costs (defined contributions, which are five percent of base salaries, and employer contributions to Social Security and Medicare).  Health insurance costs increased from 47 percent of all fringe benefit costs in 1999 to 56 percent in 2014. We know that per-employee costs of health insurance have increased, but the overall expenditure increase could be because of a combination of the cost increases and more people choosing to join the health insurance plans, since health insurance is an optional benefit. A future post could explore this issue.

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How does this picture change when one includes defined benefit pension benefits?  Each year, the District sets aside contributions to the Police Officer and Firefighter Retirement System and the Teachers’ Retirement System.  When one includes these costs with fringe benefits, the trends are less clear, because contribution amounts to defined benefit plans vary from year to year depending (in part) on stock market performance over time. When adding these costs, retirement costs clearly become a larger share of the total. Nevertheless, health insurance is still increasing as a percentage of the total, from 35 percent in 1999 to 44 percent in 2013 before declining to 41 percent in 2014.image006

Retiree Health Insurance Costs

Like pensions, the promise of continued health insurance coverage for retirees represents a future liability for an employer. Unlike pensions, until recent years, this future liability had never been recognized on the books of state and local governments. A change made by the Governmental Accounting Standards Board in 2004, and phased in over following years, required state and local governments to recognize the liability for Other Post-Employment Benefits (OPEB), that is, benefits other than pensions. Retiree health insurance represents the bulk of these benefits.

In 2006, the District chose to apply $138 million of surplus revenues as a down-payment on the accrued liability to date, and beginning in 2008, the District has made substantial annual contributions – at least $80 million per year – to cover new liabilities and also pay down a portion of the accrued liability. The District’s plan is 85.7 percent funded, well ahead of most other jurisdictions in dealing with the OPEB issue. For example, at the state level, no state is more than 80 percent funded, and the majority are under 10 percent funded – see table 1 in this report on state OPEB funding .

OPEB payments are not included in the expenditure data reported here for fringe benefits. They are clearly related to benefits, but the change in accounting treatment and the subsequent change in expenditure pattern over the 15-year period would distort other trends we can see in the data.

What Exactly Is This Data?

Data come from expenditures recorded in the District’s financial system from Fiscal Year 1999 through Fiscal Year 2014.  Most fringe benefit costs are part of each agency’s budget for its employees, and the actual expenditures are charged to this budget. Three separate agencies exist to record separate District contributions to the Police Officer and Firefighter Retirement System, the Teachers’ Retirement System, and Other Post-Employment Benefits (primarily retiree health insurance).  Data from the two retirement systems are included in some of the analyses as noted. In addition, two other District costs for its employees are budgeted centrally – premiums for workers’ compensation and unemployment insurance. These costs are not part of the analysis.

Details – Who Gets What Fringe Benefits Among District Employees?

District employees are eligible to participate in employer-sponsored health insurance plans. The District pays 75 percent of the premium cost, and the employee pays 25 percent. Employees hired before 1987 choose from the same set of health insurance plans as federal employees; those hired after 1987 choose from a set of District-offered plans.

Retirement plans also vary by employee:

  • Police officers, firefighters, and teachers belong to defined benefit pension plans. These so-called “traditional” pension plans provide retirees a benefit that is based on a formula incorporating the employee’s number of years of service and final salary. The District is responsible for funding the plans, and if plan assets decrease (e.g. because of a year of negative returns on assets invested in the stock market), the District must make up the loss, generally smoothed over several years.
  • District employees (non-police, fire, teacher) hired before 1987 are in the federal Civil Service Retirement System (CSRS), a defined benefit plan that the District makes payment into.
  • District employees (non-police, fire, or teacher) hired after 1987 are in a District-sponsored defined contribution plan. The District generally contributes 5 percent of employee pay to a retirement account, but that is the limit of the District’s responsibility. Any investment risk for funds in this account is borne by the employee.

The District pays the employer share of Social Security taxes for most employees (CSRS employees and employees in the defined benefit plans do not participate in Social Security) and the employer share of Medicare taxes for nearly all employees. Depending on union status and a variety of other factors governing their employment, employees may have other fringe benefit options, such as life insurance, disability insurance, transit benefits, legal assistance, and employee assistance plans.

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