Viewpoint: Lessons learned while adjusting retiree health benefits

How Tempe, Ariz., adjusted its financial obligations and preserved employee benefits.

Lynna Soller and Steve BurrowsBy Lynna Soller and Steve Burrows

For many years, Tempe, Ariz., provided active and retired employees — about 2,450 individuals — with a generous health plan at little or no cost. But recently, the city faced up to a hard reality: that plan simply was not sustainable.

Tempe officials had to figure out how to make good on retiree medical benefit promises in a sluggish economy marked by staggering deficits, relentless health care inflation and growing numbers of retirees. It was a huge challenge to design a plan that would stem the fiscal bleeding, be fair to all parties and that could be communicated in a clear, concise way. We had our ups and downs along the way. In the end, however, by working with retirees and unions, we achieved a consensus and achieved a long-term solution.

Here are seven lessons we learned that may be instructive to other cities and counties contemplating reform of their retiree benefits plans:

Provide clear choices. We presented the stakeholders with stark choices: deep cuts in benefits for retirees and their dependents, elimination of the retiree health benefit entirely, or future cuts in municipal services as health benefit costs would increasingly eat up the city's operating budget. The final option — asking everyone, even current retirees, to shoulder more financial responsibility for their retirement — was perceived as a reasonable compromise.

Personalize the message. Using large numbers to make our case to the unions and retirees was not effective. For example, pointing out the city's $5.8 million annual required contribution would soar to more than $40 million in 20 years did not seem to make much of an impact. But framing the discussion in more concrete, personal terms was successful. We pointed out that while roughly 5 percent of every tax dollar we collect today is spent on retiree health care costs, by 2030 it would jump to 15 percent. As a result, vital municipal services that we all care about — schools, fire departments, police departments — could be disrupted.

Think creatively. By converting from a defined benefit to a defined contribution plan, Tempe changed how future retiree medical premiums were to be funded, not the coverage itself. Workers with fewer than 10 years of service as of a certain date were no longer eligible for subsidized coverage in retirement. Instead, they received a one-time $14,000 contribution from the city, plus $175 monthly until they separate from service, into a health reimbursement account (HRA) administered by OptumHealth.

Make people feel special. We found our union members and retirees appreciated seeing comparisons with neighboring cities. We pointed out that, even after the changes to the plan, we felt that our retiree health benefit was still head and shoulders above those of nearby cities. Indeed, we were proud that we were still able to provide a relatively rich benefit package at a time when many employers around the country were eliminating retiree benefits.

Don't underestimate resistance. We expected resistance from some union members and retirees to the suggested plan changes. But what surprised us was how deeply ingrained it was. It is very tough, frankly, to convince people who have enjoyed generous, low-cost benefits for many years — and who have known no other type of arrangement — that times have changed. We tried to be as empathetic as possible. And we also provided a foundation for the change by pointing out that the long-term fiscal challenges we face are not unique to Tempe, that it is a sign of the times and nobody's fault.

Rely on experts. Don't limit your actuary's role to simply developing models at the beginning of the process. One of the smartest things we did was to lean heavily on the actuary for advice and guidance throughout the entire journey. Our actuary proved invaluable in responding to "what-if" scenarios, identifying potential cost savings opportunities and, surprisingly, helping us break down this very complex subject into clear messages for a non-financial audience.

Be flexible. Earlier this year, city leaders realized that retirees faced a sharp increase in their share of monthly health care premiums (which Tempe partially subsidizes). To soften the blow, the city eliminated the pre-Medicare retiree health plan, moving participants to an HRA administered by OptumHealth. Tempe will contribute to the retirees' HRAs annually.

Making those changes was not easy, but most stakeholders came to realize that they were inevitable. Some final words of advice: make sure you do lots of advance planning, have a dedicated team to communicate the changes, don't get flustered by resistance and allow time for the changes to sink in.

Lynna Soller is manager of employee benefits for Tempe, and Steve Burrows is vice president of retiree solutions for Minnetonka, Minn.-based OptumHealth Financial Services.

Discuss this Blog Entry 1

Alan Partain (not verified)
on Nov 26, 2012

Enjoyed your article and spot on with your assessments. Would enjoy reading an update now that you have begun the process.

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