Retiree Health Benefit Task Force Recommendations UK Employee Benefits

Overview of Retiree Health Benefits Discuss current retiree health plan “Why does the University have to make changes?” “Proposed changes” “What do ‘I’ need to do?”

Recommendations of the Health Care Task Force July 1, 2001 Additional funding for dependent subsidy Additional plan choices A proactive strategy for the management of health care and benefits

Response FY 2003: $10.4 million funding for health plans FY 2004: Central Funding of health care cost increase New plan options were introduced New health and wellness programs were put in place (e.g., Healthtrac)

Health Care Costs to UK’s Budget $17 million increase over the past two years $57 million in the current budget

Retiree Health Care Issue Not an accounting problem Retiree health care costs are escalating in sync with national trends  People are living longer  Health care costs increase significantly more than inflation  Health care is most expensive for the young and the old  A growing retiree base is being supported by a relatively static employee group

Retiree Health Care Task Force Appointed March 14, 2003 Professor Tom Samuel (Chair) Report Issued August 12, 2003 Recommendation: move from a defined benefit to a defined contribution plan

Issue Limited dollars Increasing demands

Retiree Health Benefits Task Force Focus of the Task Force was the GASB exposure draft that will require some type recognition of the unfunded liability of the retiree health benefit. Brad Canon University Senate Shelia Brothers Staff Senate Jean Cox Retiree Bruce Miller Retiree Jean Pival Retiree Nancy Ray Retiree Karen Stefaniak EBC Joey Payne Director, University Benefits Henry Clay Owen Controller and Treasurer Tom Samuel Chair

Effects of Private Employers Recording Unfunded Liability >500 employees offering retiree health benefits to current and future employees > 1,000 employees offering pre-65 retiree health benefits > 1,000 employees offering Medicare eligible retirees health benefits %29% 89% 72% 80%61% Note: Based on responses from private-sector firms with 1,000 or more employees that offer retiree health benefits. Source: Kaiser/Hewitt 2002 Retiree Health Survey, December 2002.

Ratio of Working Age Population (20 to 65) to Retirement Age (over 65) Year20 to 65 – workersOver 65 - retirees

Benchmarks (information on 17) Retiree has zero contribution Retiree contribute between $50 and $223 per month NumberPercent 635% 1165%

Year Cost in Millions

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Estimated Real Growth Contributions to Kentucky Public Employee Pension Programs % increase# times low assumption employer contribution to retiree benefits – General Fund and Road Fund # times high assumption employer contribution benefit – Personal Income increase General Fund and Road Fund State of Kentucky 27% Personal Income – residents of Kentucky 46% Employer (LOW) Contribution Retirement State System 98%3.6 times2.1 times Employee (HIGH) Contribution Retirement State System 152%5.6 times3.3 times Source: Kentucky Long Term Policy Research Center, No. 14, October dollar contribution $453 (2003 dollars) million 2014 dollar contribution $898 (2003 dollars) million LOW Estimate 2014 dollar contribution $1.142 (2003 dollars) billion HIGH Estimate

Current Retiree Health Benefits Eligibility for health benefits: Rule of “75” = Age + Years of service Must have 15 consecutive years of service (if hired after March, 1997) Example: Tim is 52 years old and has worked at UK for 27 years = 79, so Tim can retire with health benefits

Current Retiree Health Benefits Retiree under 65 Retiree receives “single-credit” towards any University Health Plan UK pays $275 towards any plan Retiree over 65 Retiree receives the “single-credit ” towards UK Medicare Carveout Plan UK pays $249 Retiree pays $21

Current Retiree Health Benefits “Credit” is the monthly amount the University pays towards an individual’s health plan Surviving Spouse Credit: Surviving spouse receives half of “credit” towards health plan UK pays $125

National Average Monthly Premiums for Retirees and Spouses, 2002 Note: Based on responses from private-sector firms with 1,000 or more employees that offer retiree health benefits. Premiums for full-time employees retiring on or after January 1, 2002, in plans with the largest number of enrolled retirees. Source: Kaiser/Hewitt 2002 Retiree Health Survey, December 2002.

University of Kentucky Average Monthly Premiums for All Retirees and Spouses Source: University of Kentucky Employee Benefits Booklet,

“Why does the University have to make changes?” Change in governmental accounting standards: The University must set aside enough money to pay for all employee’s future retiree health benefits Current retiree health benefit costs $351 million $46 million annually for 30 years Proposed retiree health benefit will cost $256 million $32 million annually for 30 years

“Why does the University have to make changes?” To account for high costs and funding of future retiree health benefits, the national trend has been to drop health benefits for retirees. 38% of all firms offer retiree health benefits in 2003, as opposed to 66% who offered retiree health benefits in % of State and Local government organizations currently offer retiree health benefits 91% of large employers (10K employees or more) offer retiree benefits Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits: 2003

Note: Based on responses from private-sector firms with 1,000 or more employees that offer retiree health benefits. Source: Kaiser/Hewitt 2002 Retiree Health Survey, December % 36% 14% 17% 29%

Note: Based on responses from private-sector firms with 1,000 or more employees that offer retiree health benefits. Source: Kaiser/Hewitt 2002 Retiree Health Survey, December % 13% 7%

Note: Based on responses from private-sector firms with 1,000 or more employees that offer retiree health benefits. Source: Kaiser/Hewitt 2002 Retiree Health Survey, December % 76% 5% 22% 75%

Government Effect on Employers Offering Retiree Health Benefits Employers Have Capped the Contribution toward Retiree Health Benefits 45% of firms that offer pre-65 benefits have capped Employer Contribution 49% of these firms have already reached the cap 50% of firms that offer over-65 health benefits have capped Employer Contribution 57% of these firms have already reached the cap Source: Kaiser/Hewitt 2002 Retiree Health Survey, December 2002

“Proposed Changes for UK” Those retired prior to Jan 1, 2005 Continue to receive “single-credit” health credit “Single-credit” has a monthly cap; UK will pay up to $625 a month ($7,500 annually) Once the cap is reached, the employee will pay 100% of the annual cost increase over $625 to continue coverage

“Proposed Changes for UK” Those retired prior to Jan 1, 2005 Year 1 Year 5 Total Annual Premium $3,240 $4,916 UK Annual Credit $2,988 $4,534 Your Annual Cost $ 252$ 412 Premium includes national healthcare trend between 5.25% - 13%

“Proposed Changes for UK” Those retired prior to Jan 1, 2005 Year 15 Year 20 Total Annual Premium $8,636 $11,155 UK Annual Credit $7,500 $7,500 Your Annual Cost $1,136 $3,655 Premium includes national healthcare trend between 5.25% - 13%

20 Year Contribution Projection Cap has been reached

“How does this affect me?” You will pay more money for your health premiums after the “cap” has been reached Cap placed on “single-credit” Projected cap will be reached within 14 years based on actuarial projections

“Proposed Changes for UK” Jan 1, 2005 and after:  All employees who retire after Jan 1 will receive a Health Credit Account Money from Health Credit Account will be used to pay the “single-credit” for your health plan When your Health Credit Account reaches $0, you will begin paying your entire health premium

“Proposed Changes for UK” Health Credit Account Health Credit Account starts with $50K in 2005 and is increased 4% each year. Health Credit Account will earn 4% annually on the balance after your retire until account is depleted. Health Credit Account will last approximately 13 years based on actuarial projections

Health Credit Account Index $50,000 X 4% $50,000 $10,833 $60,833 X 4% $13,179 $74,012 X 4% $60,833 $74,012 $16,035 $90,047 Jan 1, 2005Jan 1, 2010Jan 1, 2015Jan 1, 2020

Health Credit Account During Retirement $50,000 $2,988$1,880 $47,012 $48,892 X 4% $3,376 $45,516 $1,820 $47,336 X 4% $3,781 $43,555 $1,742 $45,297 X 4% $4,159 $41,138 $1,645 $42,783 Dec. 31, 2005Dec. 31, 2006Dec. 31, 2007Dec. 31, 2008

“Proposed Changes for UK ” Jan 1, 2005 and after Year 15 Year 20 Total Annual Premium $8,636 $11,155 Your Annual Cost $8,636 $11,155 Premium includes national healthcare trend between 5.25% - 13%

“How does this affect me?” You will pay your entire health premium after your health credit account reaches $0 Projected health credit account will be depleted within 13 years (based on actuarial projections)

“What do ‘I’ need to do?” Prepare to begin paying a larger portion of your health benefit Save extra money in your voluntary retirement account [403(b) and 457(b)] to help cover your health plan premium Encourage your co-workers to become involved in their health to help the University control health care cost

“What do ‘ I’ need to do?” Become aware of your health to help control healthcare cost Participate in UK Healthtrac Rewards Participate in the UK Wellness Program Use the tools and resources provided by the Health Literacy Project and REACH program Make lifestyle modifications to live a healthier life and to save money

Contact Information Retirement Planning Benefits Office press #1 Wellness and Health Resources Wellness Program Health Literacy REACH Elder Care

Contact Information