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.)

image002

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.

image004

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.

District Government Expenditures, 2002-2014

The District government’s expenditures from its local resources increase every year (well, almost every year). In constant-dollar per-capita terms, however, expenditures have dropped since 2008. In other words, government spending since 2008 has not kept pace with the combination of inflation and the District’s population increase.

Total expenditures increased steadily from 2002 through 2008, peaking at nearly $6.3 billion, but fell in 2009 and 2010, during the great recession. By 2013, they had exceeded their earlier 2008 peak and reached nearly $7 billion in 2014 – almost double the 2002 level. However, two cost drivers (inflation and population, shown in dashed lines in the graph below) have also been increasing. Population today is 15 percent greater than where it was in 2002, and the price level is 38 percent higher. As a result, per capital spending, adjusted for inflation, has remained stagnant. Between 2008—the peak year—and 2012, per capita government spending, adjusted for inflation (in 2014 dollars), declined from $12,104 to $9,963, and since then it only marginally increased to $10,509.image002

One can examine spending trends by broad government function. District agencies are grouped into “appropriation titles” in the annual appropriations bill that Congress enacts to authorize the District’s spending. An appropriation title includes agencies with a common function. The three largest appropriation titles are:

  • Human Support Services – including the Departments of Human Services (and the local share of funds for Temporary Assistance for Needy Families (TANF)), Health, and Health Care Finance (including the local share of Medicaid funds).
  • Public Education System – including D.C. Public Schools, Public Charter Schools, the local subsidy to the University of the District of Columbia, and D.C. Public Library.
  • Public Safety – including the Metropolitan Police Department, the Fire and Emergency Medical Services Department, and the Department of Corrections.

Expenditures in Human Support Services, and to a lesser extent in Public Education, fell in 2010 as the District’s revenues fell during the Great Recession. However, the District was able to partially make up for these losses using federal stimulus funds (through the American Recovery and Reinvestment Act of 2009). During this period, the federal government paid for a larger share of our Medicaid bills, and we also received additional education funds. The federal stimulus funds are not in this chart, which shows only the District’s expenditures from its own funds, but they made up for some of the decline in local spending and allowed the District to keep its services closer to a constant level. Because we were able to use the federal funds, the District was able to shift its own dollars away from these areas – to be replaced by the federal funds – and toward other areas of need. For example, expenditures in Public Safety remained fairly steady in the face of the decline in revenue over the 2009-10 period.

image004

We show the smaller appropriations titles separately so that they can be displayed on a scale more relevant to their size. These appropriations titles are:

  • Governmental Direction and Support – including the Office of the Mayor, the District Council, and agencies that serve other government agencies such as the Department of General Services, the D.C. Department of Human Resources, and the Office of the Chief Financial Officer.
  • Economic Development and Regulation – including the Department of Housing and Community Development, the Department of Employment Services, and the Deputy Mayor for Planning and Economic Development.
  • Public Works – including the Department of Transportation, the Department of Public Works, and the District’s subsidy payment to the Washington Metropolitan Area Transit Authority.
  • Financing and Other – including all debt service agencies, the operating budget contribution to capital projects through Pay-as-you-go (Paygo) capital, and the District’s contribution to its retirees’ health care costs.

Expenditures on these functions fluctuated more over the 2002-2014 period than did those in the three largest functions. In particular, expenditures decreased by more than 45 percent between 2008 and 2012 in Economic Development and Regulation, and by more than 25 percent between 2008 and 2010 in Financing and Other. This might indicate that spending on economic development projects and capital projects (through debt service and Paygo capital) expand when revenues are strong and are easier to reduce when revenues decline.

image006

What exactly is this data set? The expenditure data include all District government agency spending from the General Fund. The General Fund, broadly speaking, means revenues and other resources the District raises locally, through taxes, fines and fees, and sometimes use of its own fund balance (accumulated surpluses from prior years). Spending of federal or private grants is not included in these expenditure data.  The data include slight adjustments from the data reported in the District’s Comprehensive Annual Financial Report to maintain comparability across years.

This study is for the operating budget only, as opposed to the capital budget.

  • The operating budget covers day-to-day needs and purchases that are generally consumed within the current year. For example, most government worker salaries, school operations, most public safety expenses, and transfer payments to residents (such as Medicaid) are paid for through the operating budget.
  • The capital budget covers purchases of assets with a long life, usually 5 years or more. For example, construction of schools or other government facilities, improvements to road and bridge infrastructure, and purchases of police cars and fire trucks are paid for through the capital budget.

A future post will discuss the District’s recent capital expenditures.