1. Retiree Medical Insurance Update March 10, 2003 Sue Autry, Human Resources Manager Steve Hilfers, Director of Finance Marisa Walker, Principal Analyst

2. Current Issues … The Retiree Perspective Significant upsurge in medical healthcare costs in recent years of 15%-30% per year Impact on employees/retirees through cost shifting: Higher deductibles Higher co-pays, co-insurance Higher out-of-pocket maximums Higher premiums Increase in share of premiums Future uncontrolled escalation of healthcare costs

3. Current Issues … The Employer Perspective Significant increase in medical healthcare costs Growing retiree population Failure of Medicare to offer prescription drug coverage Decreasing Medicare reimbursements GASB consideration of employer accounting for retiree health coverage liability

4. Employer Trends in Offering Retiree Benefits Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits: 1999-2000 and KPMG Survey of Employer-Sponsored Health Benefits: 1988, 1991, 1993, 1995 for Large Employers (1,000-4,999 workers)

5. Industry Trends in Offering Retiree Benefits Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits 2001 (Large Firms 200 or more workers)

6. Comparison City Retiree Benefit Trends - 2002 Survey 94% have a medical coverage program for retirees 28% subsidize retiree medical coverage

7. City of Colorado Springs Retiree Profile

8. City of Colorado Springs Sworn Retirees On City Medical Plan

9. PreMedicare City Retirees: Health Insurance Continuation Options SWORN RETIREES Remain on City health insurance plan Obtain health insurance coverage elsewhere CIVILIAN RETIREES Join PERA health insurance plan Obtain health insurance coverage elsewhere

10. City Health Insurance Subsidy Levels 1.Fully paid (Eligible to retire before 1/1/1979) 2.Partially paid - $91.40 per month (Eligible to retire on or after 1/1/1979 and hired before 8/1/1988) 3.No subsidy (Employees hired on or after 8/1/1988)

11. Sworn Retiree Subsidy Level Summary

12. Civilian Retiree Subsidy Level Summary

13. PreMedicare Sworn/Civilian Retiree 2003Health Insurance Cost Comparison

14. 2003 PreMedicare Monthly Rate Comparison Sworn/Civilian Retirees

15. 2003 PreMedicare Monthly Rate Comparison With PERA Subsidy* Sworn/Civilian Retirees * Presumes employee has earned full 20 year credit subsidy amount of $230 per month

16. Medicare Sworn/Civilian Retiree 2003Health Insurance Cost Comparison

17. 2003 Medicare Monthly Rate Comparison Sworn/Civilian Retirees

18. 2003 Medicare Monthly Rate Comparison With PERA Subsidy* Sworn/Civilian Retirees * Presumes employee has earned full 20 year credit subsidy amount of $115 per month

19. Retiree Subsidy Program Funding 2002 Annual Funding Sworn Retirees Partial Subsidy : $312,588 Full Subsidy : $309,512 “PERA” Subsidy * : $525,000 Sworn Retiree Total $1,147,100 Civilian Retirees Partial Subsidy : $442,010 Full Subsidy : $ 62,750 Civilian Retiree Total $504,760 Total Annual City Cost : $1,651,860 * Technically, the “PERA” subsidy goes to sworn actives, but works to the benefit of sworn retirees

20. Current and Future Retiree Partial Subsidy Level Summary

21. Funding the Future Partial Subsidy Program Current Retirees Current Retirees +Future Retirees

22. Future Funding Requirements for Partial Subsidy Program Annual Cost to City - $91.40 (includes current and future partial subsidy eligible retirees) Sworn Retirees - $728,275 annual cost to City Civilian Retirees - $914,731 annual cost to City Total $1,643,006 Increase of $ 888,408

23. Sworn Retiree City Rate Setting Process In 1997 Council authorized staff to set sworn retiree rates using a 'blending' process. Blending process averages projected active and retired claims experience for setting rates.

24. City Rate Setting Process Blending Strategy Step 1: Average the projected higher claims experience of retirees with the projected lower claims experience of actives to arrive at a blended or average rate. Step 2: Utilizes an additional subsidy from General Fund, “PERA subsidy” to buy the higher active sworn rates back down to or as near as possible, to civilian rates. Amount of PERA subsidy is number of PreMedicare and Medicare retirees times comparable PERA Health Trust fund subsidy. (currently approximately $525,000 per year) RESULT: Lower retiree rates and slightly higher active sworn rates.

25. Sworn Retiree Claims Experience 1999-2002 $- 1,149,505 deficit $- 328,404 deficit $ -225,724 deficit

26. Active Partial Subsidy Eligibility Summary Summary Eligibility Status as Percent of Current Employee Population: Active Sworn 37% eligible 63% ineligible Active Civilian 29% eligible 71% ineligible

27. Future Pre-Tax Funding Options PERA 'carved out' a separate Health Care Trust fund from existing pension fund. Bill in Legislature for FPPA to establish a health care trust fund similar to PERA Several vehicles available to save money for post retirement health care expenses..IRC section 457, 401(k), IRA's, Roth IRA's, VEBA's City is examining a custom plan offered by ICMA that allows employee to set aside dollars for future health care expenses Recent federal proposals to restructure defined contribution plans and individual retirement arrangements could alter all plans in future