July 9, 2014
A court ruling on health insurance for retired State of Illinois workers could put additional pressure on the State’s stopgap budget for the year that began on July 1, 2014.
In a 6 to 1 decision on July 3, the Illinois Supreme Court ruled that health insurance subsidies for State retirees are protected by the Illinois Constitution’s pension protection clause. The provision 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.”
The case was sent back to Sangamon County Court, which 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 a law enacted in 2012 impairs or diminishes retirees’ rights and, if so, what remedies are required. The Supreme Court’s decision reportedly could take months to implement.
Another closely watched question—whether a recent overhaul of State pension benefits will pass constitutional muster—has not yet reached the high court. The July 3 ruling prompted widespread speculation that the Supreme Court would reject pension changes enacted in December 2013. Supporters maintain that the pension law involves a different legal issue: whether the State’s dire financial situation permits the reduction of pension benefits under its police powers, despite the constitutional protection.
As discussed here, the Illinois General Assembly approved the changes to retiree health insurance after years of debate about whether the State’s contributions for retiree healthcare were too generous. 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.
Approximately 91% of the 81,900 retirees covered by the State’s group insurance program in January 2011 did not pay any health insurance premiums, according to documents compiled by the legislature’s Commission on Government Forecasting and Accountability (COGFA). The total cost of State retiree health insurance in FY2010 was $473 million, of which only about $12 million, or 2.5%, was paid by retirees themselves and the remainder was paid by the State. (Dependents of retirees, who paid 26.7% of the cost of their premiums, are not included in these figures.)
In June 2012, Illinois enacted legislation that eliminated premium-free health coverage for retirees. State retirees challenged the law in four separate lawsuits that were consolidated and became known as the Kanerva litigation after Roger Kanerva, the lead plaintiff in one of the cases.
The legislation did not specify how retiree health insurance premiums would be determined, leaving that decision to the State’s Department of Central Management Services (CMS). 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 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. In addition, the State was permitted to move Medicare-covered retirees into 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.
As discussed here, Governor Pat Quinn’s administration estimated that it would save $903 million on employee and retiree health insurance costs over two years under the new contract, which would be partially offset by $222 million in wage increases. Of the $903 million in savings, increased retiree premiums accounted for $128 million. The switch to Medicare Advantage was expected to generate total savings of $232 million. The actual savings in FY2014 have not been made publicly available.
A COGFA report in March 2014 showed that the total cost of retiree health insurance in FY2014 was estimated at $570.1 million. Of the total, retirees were expected to pay $105.7 million, or 18.5%, and the State was expected to contribute $464.4 million, or 81.5%. (These figures again do not include retirees’ dependents.)
Since the Kanerva case is ongoing, it remains to be seen whether retirees will be reimbursed for the increased charges due to the 2012 law. A notice on the CMS website states that the agency is still reviewing the impact of the high court’s ruling on current retirees.
The backlog of unpaid group health insurance bills has risen sharply in recent years, as the State has underfunded the program to prop up the budget. As explained here, group health insurance claims can be deferred and paid out of future year appropriations under an exception to Section 25 of the State Finance Act.
Before the Supreme Court ruling, at a meeting of the Budgeting for Results Commission on June 27, 2014, State officials said that unpaid group health insurance bills were expected to total $1.4 billion at the end of FY2014. The general operating fund appropriation of $1.6 billion in FY2015 was expected to permit the backlog to be reduced by $50 million to $1.35 billion at the end of that fiscal year.