Retiree Health Insurance Ruling to Increase State Costs by $128 Million

July 17, 2014

The Illinois Supreme Court’s recent ruling on health insurance for State retirees is expected to increase State costs by approximately $128 million through FY2015, according to the Department of Central Management Services.

Although litigation is ongoing, the high court’s decision apparently means the State will bear the cost of health insurance premium increases previously charged to retirees. Officials at the Department of Central Management Services (CMS) said that those premiums amounted to $42 million in FY2014 and were expected to total $86 million in FY2015.

As discussed here, the Supreme Court ruled on July 3 that health insurance subsidies for State retirees are protected by the Illinois Constitution’s pension protection clause. The clause states that “[m]embership in any pension or retirement system of the State… shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

At issue was a law enacted in 2012 that eliminated premium-free health coverage for all retirees. Before the 2012 changes, the State paid the entire bill for health insurance premiums for those who retired prior to 1998. For those who retired beginning in 1998, the State contributed 5% of the premium cost for each full year of service, up to a maximum of 100% for retirees with 20 or more years of service. General Assembly members and constitutional officers could retire with as few as four years of service and not pay any premiums, and judges could retire with as few as six years of service and not pay premiums.

After the law was enacted, the State negotiated retiree health benefits with its largest union, the American Federation of State, County and Municipal Employees (AFSCME), during the collective bargaining process for a new three-year contract to replace an agreement that expired on June 30, 2012. The new contract was not executed until May 2013, and changes to the State’s health insurance program did not take effect until FY2014, which began on July 1, 2013.

The new contract included numerous health insurance changes for both employees and retirees. In FY2014 retirees who were covered by Medicare, for whom the State provided supplemental coverage, were required to pay 1% of their pension benefit amount for health insurance and those not covered by Medicare were required to pay 2%. Those amounts doubled to 2% and 4% in FY2015.

As a result of the new law, retiree premium contributions in FY2014 increased by roughly $42 million, a portion of which is being held in escrow by the Illinois Comptroller’s Office on behalf of members of the State Employees’ Retirement System. An additional $86 million in retiree contributions was expected to be collected by the State in FY2015.

The FY2014 retiree premium contributions will not be refunded until pending legal issues are resolved. The Supreme Court sent the case back to a Sangamon County judge who had previously dismissed it on the grounds that health care benefits were not covered by the pension guarantee. Now the lower court must decide whether the 2012 law impairs or diminishes retirees’ rights and, if so, what remedies are required.

The State is still expecting savings from other changes to retiree health insurance that are not related to the 2012 law. One of the changes involved shifting Medicare-covered employees to Medicare Advantage plans, which are offered by private companies that contract with the federal government to provide Medicare benefits and also provide supplemental benefits similar to those offered by the State group insurance plan. Retirees were also required to pay more because of changes in Medicare coordination, with the State no longer paying 100% of the balance of medical claims after Medicare pays its portion. It remains unclear whether the Supreme Court’s interpretation of the pension clause could lead to successful legal challenges of any changes in retiree health insurance benefits.

Including all the changes to employee and retiree health insurance, CMS estimated in April 2014 that the State would save $864 million due to the new union contract. This total includes $108 million in savings that are still being negotiated and $75 million in savings from Medicare Advantage that will actually be realized in FY2016. Without the increased retiree premium contributions, the total savings amount declines by $128 million to $736 million.

A question that could have a much larger impact on the State’s budget—whether a recent overhaul of State pension benefits will pass constitutional muster—has not yet reached the high court. On May 14, 2014, a Sangamon County judge temporarily blocked implementation of pension changes enacted in December 2013. Following a hearing in June 2014, lawyers for retirees and employees who are challenging the pension law said an initial ruling by the lower court is not likely until 2015. The pension changes were estimated to reduce State contributions by $1.2 billion in FY2016.