SAN FRANCISCO — Orange County, Calif., this week concluded the final — and most difficult — piece of its negotiations with county employee unions as part of an effort to reduce its unfunded liability for retiree health care.
County officials estimate that they have reduced its unfunded liability for non-pension related retirement benefits from about $1.4 billion at the beginning of 2006 to approximately $440 million, including the estimated $140 million in savings from the new contract with the Association of Orange County Deputy Sheriffs, approved Tuesday by the Orange County Board of Supervisors.
The efforts were driven largely by the county’s response to the Governmental Accounting Standards Board’s Statement 45, which is phasing in the requirement that governments obtain and release the actuarial valuation of their other post-employment benefits, or OPEBs, which mostly relate to health care.
More than a year ago, Orange County officials concluded deals with the unions that represent most of the county’s 17,000 or so employees to restructure retiree medical benefits.
Negotiations with the union representing about 1,600 sheriff’s deputies dragged on for more than a year, until the agreement this week on a new contract, which includes a provision that will phase in the use of health care savings accounts as a substitute for the county’s traditional grants to retirees.
“We don’t know of any other public-sector entity that is doing this to pay for the subsidy for retiree health care,” said Patti Gilbert, the county’s assistant director of human resources for employee benefits.
The medical savings accounts were not part of the county’s revised contracts with its other unions. Those employees continue to be covered by a program that provides retirees with grants to help pay for their health care expenses.
Under the retiree benefit restructuring program most of the unions agreed to in 2006, the maximum cost of living adjustment for the grants was capped at 3% from the previous 5%; the insurance programs for retirees and employees were split into different pools, allowing them to be underwritten separately; and future retirees will have their grants reduced 50% after they are old enough to qualify for Medicare.
The deputies’ union did not agree to split the insurance pools of retirees and active employees. But they did agree to convert the program to individual health savings accounts.
Over decades, that defined benefit program will eventually eliminate the county’s unfunded liability.
“Because of GASB 45 and that unfunded liability we have to report on the books, everyone’s looking for ways to reduce that,” Gilbert said.
The county and each deputy will contribute payroll money to the health savings accounts. Employees will be able to determine how the money is invested, as with a 401(k) plan, Gilbert said. After they retire, the deputies will be able to use the money in those accounts for medical expenses or insurance premiums.
The program will be phased in — those who have already retired will continue to receive grants, Gilbert said. The grants will be subject to the same 3% cap on the annual cost of living adjustment, and the 50% reduction for Medicare eligible retirees as other county employees.
Active employees, after they retire, will receive health care grants based on their service through this year with the balance of their retiree medical benefit from the savings account. For new hires, the health savings account will be their only retiree health care benefit.
The three-year contract also includes raises averaging more than 4% per year, while the deputies agreed to allow an audit of the union-controlled medical benefits trust, which was one of the major sticking points that delayed the agreement.
County Supervisor John Moorlach — who has become something of a lightning rod for the union’s disagreements with county government — said the new contract, while not everything he was looking for in his efforts to reduce the county’s liabilities, is a good step in the correct direction.
“We still made a rather significant dent in this area, and we’re now able to meet our required annual contribution [toward the OPEB liability] on an annual basis,” Moorlach said. “That was the goal.”
The reduced liabilities will help the county for what Moorlach predicts will be some unpleasant economic times, he said.
“We’ve enjoyed some incredible real estate appreciation in Orange County, and now I think we’re going to enjoy some incredible depreciation,” he said. Moorlach added that real estate weakness could have a negative impact on property tax receipts. “Hopefully with these renegotiated contracts, we’ll be able to weather that storm,” he said.
While the new contract appears to bring an end to the long impasse between the county and the deputies’ union over retiree health benefits, it does not resolve another prominent possible conflict between the unions and the county supervisors.
At Moorlach’s urging, Orange County is studying a legal action to rescind some of the increased pension benefits granted to sheriff’s deputies in 2002. The deal changed the maximum pension payout to 3% for each year of employment from 2%.
Moorlach believes the retroactive component of the increase — which credited employees with the 3% formula for years worked prior to 2002 — violates the state constitution.
County supervisors voted last month to retain the law firm Kirkland & Ellis LLP to study the issue, report back to them, and represent the county if the supervisors decide to pursue litigation. The deputies’ union has hired the firm of Morrison & Foerster LLP to represent it.
