February 28, 2012

Diagnosis: Disaster The $44 billion price tag of state retiree health insurance
The problem
Illinoisans are beginning to see the dangers of another unfunded liability: free or subsidized health care for retired state workers. The state has liabilities of more than $100 billion in health benefits for state retirees during the next 30 years, yet it has set aside nothing to pay for them.1 These unfunded liabilities are growing 2 times faster than state revenues and, if left unreformed, will work in tandem with rising pension costs to dramatically cut government services. One of those services is health care to the poor and disadvantaged. In Illinois, three general groups of people receive free or subsidized health care: The states poor, both children and adults; The disabled and the elderly; and Retired state employees, many who sit on million dollar pensions. The state simply cannot pay the health care costs of all these groups, and certainly not with the costs of the federal health reform, more commonly known as ObamaCare, on the horizon. Generous health care coverage for retired state employees competes with resources for the steadily eroding services that Illinois poor receive under Medicaid. The states budget woes and mismanagement of Medicaid already have led to low reimbursement rates and long payment delays to doctors and hospitals, leaving the states most vulnerable population with few options.2-7 They must wait much longer to receive care, if they can get it at all.8-9 With nowhere left to turn, Medicaid patients have no choice but to seek nonurgent care from hospital emergency rooms.10-11 The programs mismanagement has created huge access barriers that only will worsen in the coming years as more unpaid bills pile up and ObamaCare kicks in.12-13 Meanwhile, many state retirees contribute little or nothing to their health insurance premiums. In fact, for the states largest retiree health program, the State Employee Group Insurance Program, retirees only contribute 9 percent toward their premiums. Thats a lot less than other states, which require state retirees to pay six times that amount.14 In the private sector, the vast majority of retirees are not offered coverage at all, and the few who are must pay the majority of their insurance costs.15-16 Finally, to make matters worse, the states health coverage policies incentivize early retirement of state employees, significantly driving up costs for the state. State politicians have a clear choice on the reform of retiree health care costs. If they fail to act, they will continue to favor free Cadillac coverage for well-off state retirees, while the most vulnerable search for a doctor willing to see them.17-18 The states prioritization of retirees over core government services and the social safety net already has hurt many. As the cost of providing these generous benefits continues to climb, it only will get worse.

Health Care Brief

Jonathan Ingram is a Health Care Policy Analyst with the Illinois Policy Institute.

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Graphic 1. More than 180,000 people receive state-provided retiree health insurance
Total retirees, dependents and surviving spouses with state-provided health insurance in 2009
Program
State Employee Group Insurance Program

Enrollment
110,862 65,031 5,539

Serves
Retired employees of state agencies, boards, commissions, universities and elected officials Retired employees of school districts Retired employees of community colleges

Fortunately, there is a solution for Illinois. The solution properly aligns state retiree benefits in Illinois with those in other states by taking into account a retirees years of service, age at retirement and ability to pay.

Teachers Retirement Insurance Program College Insurance Program

Source: Illinois Policy Institute calculations.

Fortunately, there is a solution for Illinois. The solution properly aligns state retiree benefits in Illinois with those in other states by taking into account a retirees years of service, age at retirement and ability to pay. It also reduces incentives for early retirement by capping subsidies for future retirees, ensuring that those who choose to retire several years early are not given special rewards. The states three major insurance programs Illinois administers three major health insurance programs for retired state employees; the State Employee Group Insurance Program, or SEGIP; the Teachers Retirement Insurance Program, or TRIP; and the College Insurance Program, or CIP. Together, these three programs provide health insurance coverage to more than 180,000 retirees, dependents and surviving spouses.19 As the costs of providing retirees with this benefit continue to climb, however, more

and more state money will be redirected from other core government services. The state pays for the costs of these heath care plans each year from that years revenues. These costs are expected to rise an average of 4.5 percent a year, although this future growth might be understated, as it is far below the historical average. 20-21 Even so, it is almost two times faster than the states expected tax revenue growth. Even assuming the modest 4.5 percent growth in retiree health care costs, the total cost to taxpayers for providing this insurance will exceed $100 billion during the next 30 years.22-23 The latest actuarial valuation for these programs estimates it has an unfunded liability of almost $44 billion, the amount the state should set aside today in order to meet these obligations in the future.24-25

Graphic 2. Retiree health insurance to cost taxpayers more than $5 billion annually within 30 years
Annual employer costs for retiree health insurance, by program

Source: Illinois Policy Institute calculations.

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Who pays for state retirees health care? The state finances each of these programs through different means, but the vast majority is covered with state and local money (see Appendix A for the methodology used throughout this report). The state finances SEGIP through a combination of retiree premiums and state contributions. Members who retired before 1998 pay no portion of their premiums and, therefore, receive free coverage. Members who retired later pay 5 percent less of the total premium for every year of service.26-27 This means that employees who worked for 20 years or more pay no portion of their premiums. Altogether, the state pays more than 90 percent of the costs for retirees SEGIP coverage.28

Separately, the state pays for TRIP and CIP individually through a combination of retiree premiums and payroll contributions from active employees, local school districts or community colleges and the state.29 In many communities, the local school district pays the full teacher share of TRIP as a benefit, much as they pay the teacher pension contributions.30 For comparison, Graphic 3 shows that other states only cover 46 percent of the health care premium costs, while Illinois three systems subsidize significantly more. 31 See Appendix A for a breakdown of annual employer costs by program and revenue components.

Altogether, the state pays more than 90 percent of the costs for retirees State Employee Group Insurance Program coverage.

Graphic 3. Taxpayers shoulder larger burden in Illinois than in other states

Employer share of retiree health insurance costs, by program

Source: Illinois Policy Institute calculations.

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State retiree health care costs These programs will cost Illinois more than $100 billion during the next 30 years. Because the state has not designated money for these three programs, they operate on a yearly pay-asyou-go basis. This means that as retiree health care costs rise faster than the states total revenues, they will squeeze out state spending on other core services. As can be seen in Graphic 4, these costs are expected to increase by 4.5 percent annually, more than twice the rate of Illinois tax revenues. With little to no money set aside for these future costs, the actuarial shortfall today is equal to almost $44 billion. Graphics 5, 6, and 7 (below, and page 5) show the detail of each programs money sources and the increasing requirements on General Funds sources.

With little to no money set aside for these future costs, the actuarial shortfall today is equal to almost $44 billion.

Graphic 4. Current and projected costs of providing health care programs ($ billions)
Average General State Full Projected Projected annual Revenue retirement employer Unfunded FY2013 FY2041 projected insurance cost over liability taxpayer taxpayer Fund cost increase program 30 years cost cost in FY2041 in cost
SEGIP TRIP CIP Total $62.1 $37.3 $4.7 $104.1 $27.1* $14.9 $1.9 $43.9 3.7% 5.7% 5.6% 4.5% $1.1 $0.5 $0.1 $1.6 $2.8 $2.3 $0.2 $5.2 $1.9 $0.9 $0.1 $2.9

*For a breakdown of SEGIPs unfunded liability by retirement system, see Appendix B Totals might not sum because of rounding Source: Illinois Policy Institute calculations.

Graphic 5. SEGIP coverage to cost taxpayers almost $3 billion annually within 30 years
$3,000 $2,500 $2,000

Excludes retiree contributions

Millions

$1,500 $1,000 $500 $0 2009 2013 2017 2021 2025 2029 2033 2037 2041

General Revenue Fund

Other state funds

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Graphic 6. TRIP coverage to cost taxpayers more than $2 billion annually within 30 years
Excludes retiree contributions
$2,500 $2,000 $1,500

$1,000 $500 $0 2009 2013 2017 2021 2025 2029 2033 2037 2041

General Revenue Fund

Other state and local funds

Graphic 7. CIP coverage to cost taxpayers almost $250 million annually within 30 years
Excludes retiree contributions
$250 $200 $150 $100 $50 $0 2009 2013 2017 2021 2025 2029 2033 2037 2041

It should be clear that as the costs of providing these programs grow, and because no money has been set aside to cover these future costs, fewer state resources will be available to provide for other core services, including the states safety net.

Millions

Millions

General Revenue Fund

Other state and local funds

It should be clear that as the costs of providing these programs grow, and because no money has been set aside to cover these future costs, fewer state resources will be available to provide for other core services, including the states safety net. In order for Illinois to continue to provide for those most in need, the state must reform these programs.

Page 6 of 17 The solution: Reform OPEB

There is no single silver bullet for skyrocketing retiree health care costs. Instead, the state will need multiple reforms that, together, ensure that the cost of providing these benefits does not crowd out other state spending. These reforms include:

benefit points and income brackets. Because early retirees are the most expensive to cover, this proposal would save the state several billion dollars during the next 30 years. 3. Ending retiree subsidies. Private sector employees rarely are offered retiree health insurance. When they are offered coverage, many have to pay the full cost of their premiums. Because the state already has increased the pension full benefit retirement age to 67 for newly hired employees, it simply should end retiree subsidies for new hires, as well. These new employees will be Medicareeligible by the time they are able to collect their full benefits, making the states supplemental coverage largely unnecessary and even further out of sync with the private sector. Yearly savings beginning in fiscal year 2013 are expected to equal $425 million when compared with fiscal year 2012. Total five-year savings will be $2.7 billion when compared with spending under the status quo retiree health care plan. Savings in the longer term also will rise as the number of early retirements cease and as the number of new employees with no benefits increase.

There is no single silver bullet for skyrocketing retiree health care costs. Instead, the state will need multiple reforms that, together, ensure that the cost of providing these benefits does not crowd out other state spending.

1. Benchmarking benefits to other states. By benchmarking retiree contributions to the average contributions retirees make in other states, Illinois can save more than $40 billion in the next 30 years.32 In addition, beginning in fiscal year 2013, the state should determine premium subsidies on a sliding scale according to a combination of a retirees ability to pay, years of service and retirement age. This would reward current retirees for lifelong service, discourage early retirement and protect low-income retirees. 2. Capping retiree subsidies. Many employees retire before reaching retirement age. The state should not be rewarding these retirees for choosing to retire early. Beginning in fiscal year 2013, the state should cap subsidies for all new retirees at the same level the state pays for Medicare-eligible retirees in the same

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Benchmarking benefits to other states Illinois can save a substantial sum by raising state retiree contribution levels to national averages. By having retirees contribute as much toward the cost of their health care as other state governments require, the state can save more than $40 billion during the next 30 years.33 In 2041, the annual savings to taxpayers would be almost $2 billion in that year alone.34 That $40 billion could be directed toward solving the coming crisis in Medicaid.35-36 These savings also would reduce the states unfunded liability of $44 billion by $18 billion, or 40 percent. While other reforms are necessary to reduce the remaining $27 billion unfunded liability, increasing retiree contributions is an important first step in getting the states fiscal house in order and improving its credit. In SEGIP, the state subsidizes coverage based on service only. Members who retired before 1998 pay no portion of their premiums and, therefore, receive free coverage. Members who retired later pay 5 percent less of the total premium for every year of service.37-38 This means that employees who worked for 20 years or more pay no portion of their premiums. Altogether, the state pays more than 90 percent of the costs for retirees SEGIP coverage.39 The state must look beyond years of service in calculating retiree contributions. If it fails to do so, the unsustainable path will lead to less money available for core government programs and services. In general, those who retire later in life cost the state much less than those who retire earlier. Those who retire later in life will, on average,

Graphic 8. Illinois taxpayers can save $40 billion by increasing retiree contributions to national average
Annual employer costs for retiree health insurance, by program, with and without reform

By having retirees contribute as much toward the cost of their health care as other state governments require, the state can save more than $40 billion during the next 30 years.

Source: Illinois Policy Institute calculations.

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collect fewer benefits, simply because their life expectancy at the time of retirement is shorter. When comparing early retirees with those who retired at 65, the disparity in cost grows. This largely is because Medicare bears the cost for much of the care older retirees receive, while the state must bear the full burden for early retirees. By not accounting for these important factors, the system punishes the lifelong servant wishing to work until retirement age, while rewarding those who choose to retire early. A simple way to take into account retirement age and years of service is by calculating benefit points. The formula for these points is simple: the number of years of service plus the age at which the retiree begins to collect benefits. As the benefit points scale increases, premium subsidies increase. This new model would reward lifelong employees for their service and encourage people to wait until retirement age before starting to collect benefits. According to estimates provided to the Commission on Government Forecasting and Accountability, this formula could reduce the states contribution in SEGIP from 91 percent to 55 percent.40 If matched in all three insurance programs, the state would save $28 billion during the next 30 years.41 The state also should base these generous subsidies on a retirees ability to pay. While the state may wish to protect low-income retirees from rapidly rising health care costs, the fact of the matter is that most retirees are earning more in retirement than the average taxpayers household income.42-45 Those who are able to pay for their own health care should be required to do so. The state no longer can afford to provide Cadillac coverage to upper class retirees at the expense of providing core services to the poor and the public at large. The state should determine premium subsidies on a sliding scale according to a combination of a retirees ability to pay, years of service and retirement age. The formula in Graphic 8 would reduce the states contribution from 91 percent to 51 percent.46 If matched in all three insurance programs, the state would save $34 billion during the next 30 years.47 This formula could be modified slightly to reduce the states contribution to the national average of 46 percent, further controlling the crowd-out effect that retiree health insurance has on other programs.

While the state should seek to protect low-income retirees from rapidly rising health care costs, the fact of the matter is that most retirees are earning more in retirement than the average taxpayers household income.

Graphic 9. Illinois taxpayers can save billions while still rewarding long service, discouraging early retirement and protecting low-income retirees
Suggested retiree SEGIP contribution by benefit points and ability to pay

BENEFIT POINTS = AGE AT RETIREMENT + YEARS OF SERVICE

Household income
$0 - $30K $30K - $60K $60K - $100K $100K - $200K $200K - $250K $250K +

Benefit points
0 - 78
50% 60% 70% 80% 90% 100%

79 -85
35% 45% 55% 65% 75% 100%

86 - 92
20% 30% 40% 50% 60% 100%

93 +
5% 15% 25% 35% 30% 85%

Source: Mercer.

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Capping retiree subsidies for new retirees Although requiring retirees to contribute toward the cost of their health insurance achieves significant savings for taxpayers, it does not substantially slow this growth rate going forward. The cost for these generous benefits has risen by 7.1 percent a year for the past decade, while revenue only has grown by 2.8 percent.48-50 As these costs continue to grow far faster than revenues, more and more valuable government services will be crowded out of the budget. In order to control this growth rate, Illinois must stop subsidizing employees who retire early, as these early retirees are the most expensive to provide with coverage. While these retirees represent only a third of all state retirees, their coverage accounts for almost 60 percent of retiree health care costs.51 During the past decade, the cost for early retirees health insurance has been more than twice the cost for those who retire at 65.52 In fiscal year 2011, non-Medicare retirees cost $11,585 to cover, compared with $4,530 for retirees on Medicare.53 Both groups have seen their costs rise by more than 7 percent a year.54

Generous health insurance subsidies frequently lead a greater number of workers to retire earlier than average and earlier than they might otherwise choose to retire.55 While the benefit points model will discourage early retirement to some degree, it is not sufficient to constrain overall cost growth. The state should discourage this costly early retirement by capping its subsidies at Medicare-eligible levels. These reforms would have the added benefit of reducing costs by encouraging retirees to move from the most expensive health insurance plans into less expensive plans. There is no reason why taxpayers should be on the hook for the extra costs associated with state workers choosing to retire early. Instead, the state should set aside a defined contribution for all retirees equal to the subsidy given to Medicare retirees. If state workers choose to retire before they are eligible for Medicare, they should be required to pay for the enormous difference in these costs. If all the state did was cap subsidies at the Medicare level, it could save billions of

The cost for these generous benefits has risen by 7.1 percent a year for the past decade, while revenue only has grown by 2.8 percent.

Graphic 10. Early retirees cost much more to insure than normal retirees
Average cost per retiree by Medicare status in fiscal year 2011

Source: Illinois Policy Institute calculations.

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dollars into the future. However, by implementing capped subsidies and adjusting the subsidy for years of service, retirement age and ability to pay, the state finally could be able to bend down the cost curve. It also could consider indexing the capped subsidies to an inflation-adjusted formula for future certainty. cap these subsidies for all new retirees at Medicare levels and stop rewarding employees for retiring early. Because the state has increased the retirement age to 67 for new employees, it should end retiree subsidies for these new hires as well, as they will have Medicare coverage by the time they are able to retire. Yearly savings beginning in fiscal year 2013 are expected to equal $425 million when compared with fiscal year 2012. Total five-year savings will be $2.7 billion when compared with spending under the status quo retiree health care plan. Savings in the longer term will rise as the number of early retirements cease and as the number of new employees with no benefits increase. Even with these reforms, retired state workers will have benefits virtually unheard of in the private sector. The vast majority of private sector retirees are not offered retiree health insurance at all. When they are offered coverage, they generally pay all or most of the cost of their premiums. Retiree health benefits are not protected by the state constitution.61-63 Lawmakers can change them in order to ensure that the state can provide assistance to those most vulnerable. The states prioritization of retirees over those most in need has hurt many. If lawmakers care about ensuring that they can provide health care for the most vulnerable, they must reform these obligations now.

Without reform, Illinois taxpayers will pay more than $100 billion during the next 30 years, largely from general revenues, to provide health insurance to state retirees.

Ending retiree subsidies for new employees Private sector employees rarely are offered retiree health insurance. Only a quarter of large employers offer health insurance coverage to retirees.56 Small employers, which employ 80 percent of the labor force, only offer coverage to their retirees 4 percent of the time.57 In all, only 8 percent of all retirees are offered health insurance coverage through their former employers.58 When they are offered coverage at all, many have to pay the full cost of their premiums.59 The state already has increased the pension full benefit retirement age to 67 for newly hired employees.60 These employees will be eligible for Medicare by the time they are eligible for full retirement, making the states supplemental coverage largely unnecessary. If they wish to keep this coverage, they should be responsible for the entirety of their premiums. This ultimately would eliminate the states future liabilities, showing the light at the end of the tunnel as the state pays down the obligations already incurred.

Conclusion

Without reform, Illinois taxpayers will pay more than $100 billion during the next 30 years, largely from general revenues, to provide health insurance to state retirees. Lawmakers will sink billions of dollars into providing Cadillac coverage for well-off retirees instead of protecting the states most vulnerable. Illinois has no time to waste. It should follow the lead of other states and require retirees in Illinois to contribute toward the cost of their health insurance. By simply having Illinois retirees contribute the same share that retirees in other states contribute, taxpayers will save more than $40 billion. Beginning next fiscal year, the state should determine these premium subsidies on a sliding scale according to a combination of a retirees ability to pay, years of service and retirement age. Moving forward, the state should

Page 11 of 17 Appendix A
Methodology To calculate total employer costs, this report uses employer cost projections provided by Gabriel, Roeder, Smith & Company in its 2009 GASB No. 43 and No. 45 actuarial valuations for SEGIP, TRIP and CIP. These valuations were prepared for the Department of Healthcare and Family Services and published by the Commission on Government Forecasting and Accountability. To calculate the share of employer costs by revenue source, this report uses historical cost and program revenue data provided to the Institute by the Department of Healthcare and Family Services. The report uses the 10-year average share for each revenue source to distribute the employer cost projections among the different sources of revenue. Where a portion of the costs is unfunded, this report allocates it to general revenue funds. To calculate the share of total costs by revenue source, this report uses historical cost and program revenue data provided to the Institute by the Department of Healthcare and Family Services. Because SEGIP covers current employees and retirees, and because revenue sources are not allocated between the two classes, this report also uses a study prepared for the Commission on Government Forecasting and Accountability by Mercer Health & Benefits LLC to determine the retiree share of costs within SEGIP. To calculate total savings by benchmarking retiree contributions to average retiree contributions in other states, this report uses contribution data from the Mercer Health & Benefits LLC study. This report projects the savings in employer costs from shifting from the 10-year average of retiree contributions to the benchmarked contributions.

Graphic 11. Share of annual employer cost for SEGIP coverage, by revenue component, for fiscal years 2002-11
2002
General Revenue Fund Road Fund Agency reimbursements Other funds 69.7% 8.6% 20.2% 1.5%

2003
71.9% 8.5% 18.5% 1.1%

2004
74.2% 7.7% 16.9% 1.2%

2005
69.7% 8.9% 20.2% 1.3%

2006
70.0% 8.3% 20.3% 1.4%

2007
69.0% 8.2% 18.7% 4.1%

2008
68.0% 8.5% 19.3% 4.2%

2009
67.7% 8.9% 19.2% 4.2%

2010
68.4% 9.0% 18.3% 4.4%

2011
60.6% 11.0% 22.6% 5.9%

Average
68.9% 8.7% 19.4% 2.9%

Source: Illinois Policy Institute calculations.

Graphic 12. Share of annual employer cost for retiree TRIP coverage, by revenue component, for fiscal years 2002-11
2002
General Revenue Fund School districts Active employees Other funds Unfunded 48.3% 14.1% 36.0% 1.6% 0.0%

2003
42.5% 23.6% 31.8% 2.1% 0.0%

2004
42.2% 21.5% 34.0% 2.3% 0.0%

2005
40.9% 20.7% 36.8% 1.6% 0.0%

2006
39.9% 25.3% 33.7% 1.1% 0.0%

2007
33.9% 23.6% 31.4% 11.1% 0.0%

2008
30.2% 25.0% 33.3% 10.2% 1.3%

2009
30.5% 24.6% 32.8% 9.1% 3.0%

2010
29.7% 24.0% 32.0% 9.1% 5.3%

2011
28.6% 21.1% 28.2% 9.0% 13.1%

Average
36.7% 22.4% 33.0% 5.7% 2.3%

Source: Illinois Policy Institute calculations.

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Graphic 13. Share of annual employer cost for retiree CIP coverage, by revenue component, for fiscal years 2002-11
2002
General Revenue Fund Community colleges Active employees Other funds Unfunded 31.1% 31.5% 31.6% 5.8% 0.0%

2003
30.7% 32.1% 32.1% 5.2% 0.0%

2004
28.6% 29.8% 29.8% 4.8% 6.9%

2005
19.6% 21.8% 21.8% 5.0% 31.9%

2006
25.5% 23.5% 23.5% 7.1% 20.4%

2007
25.6% 24.5% 24.5% 21.8% 3.5%

2008
29.1% 23.4% 23.4% 13.1% 10.9%

2009
20.6% 18.9% 18.9% 10.7% 30.9%

2010
17.2% 17.1% 17.1% 13.7% 35.0%

2011
16.6% 16.6% 16.6% 13.2% 37.0%

Average
24.5% 23.9% 23.9% 10.0% 17.7%

Source: Illinois Policy Institute calculations.

Page 13 of 17 Appendix B

Graphic 14. SERS and SURS make up majority of SEGIP costs

Annual employer cost for retiree SEGIP coverage, by retirement system

Source: Illinois Policy Institute calculations.

Members of five retirement systems receive retiree health insurance through SEGIP. Members of the State Employees Retirement System, SERS, make up the largest share of those costs, with an unfunded liability of $16.5 billion. The next largest share belongs to members of the State Universities Retirement System, SURS, which has an unfunded liability of $9.9 billion. Members of the remaining three retirement systems make up a much smaller percentage of the overall costs. Members of the Teachers Retirement System, TRS, have an unfunded liability of $414 million; members of the Judges Retirement System, JRS, have an unfunded liability of $266 million; and members of the General Assembly Retirement System, GARS, have an unfunded liability of $82 million.64

Graphic 15. SEGIP unfunded liabilities total more than $27 billion
SEGIP unfunded liabilities, by retirement system
SERS
$16.5 billion

SURS
$9.9 billion

TRS
$414 million

JRS
$266 million

GARS
$82 million

All systems
$27.1 billion

Source: GASB No. 45 actuarial valuations for SEGIP.

Page 14 of 17 Endnotes
denied an appointment for urgent follow-up care, even at safety net clinics. See, e.g., Brent R. Asplin et al., Insurance status and access to urgent ambulatory care follow-up appointments, Journal of the American Medical Association 294(10): 124854 (2005), http://jama.ama-assn.org/content/294/10/1248.

1 Authors calculations based upon 2009 GASB No. 43 and

No. 45 reporting of total members by status for SEGIP, TRIP and CIP.

2 Only six states have lower Medicaid reimbursement fees. For

primary physicians, these fees only are 57 percent of the alreadylow Medicare reimbursement fees. See, e.g., Stephen Zuckerman et al., Trends in Medicaid physician fees, 20032008, Health Affairs 28(3): 510-19 (2009), http://content.healthaffairs.org/ content/28/3/w510.full.html.

10 Medicaid patients, on average, use emergency rooms twice

as often as privately insured and uninsured patients. See, e.g., National Center for Health Statistics, Health, United States, 2010: With special feature on death and dying, Centers for Disease Control and Prevention (2011), http://www.cdc.gov/ nchs/data/hus/hus10.pdf.

3 The states long payment delays and low reimbursement rates

discourage doctors from accepting Medicaid patients. See, e.g., Peter J. Cunningham & Ann S. OMalley, Do reimbursement delays discourage Medicaid participation by physicians? Health Affairs 28(1): 17-28 (2008), http://content.healthaffairs.org/ content/28/1/w17.full.html.

11 Between 1997 and 2007, per-capita emergency room use

4 Medicaid patients are six times more likely than privately

insured patients to be denied an appointment with a specialist. When they can get an appointment, they must wait weeks or months longer before seeing a doctor. See, e.g., Joanna Bisgaier & Karin V. Rhodes, Auditing access to specialty care for children with public insurance, New England Journal of Medicine 362(24): 2324-33 (2011), http://www.nejm.org/doi/full/10.1056/ NEJMsa1013285.

increased for Medicaid patients and decreased for uninsured and privately insured patients. Emergency room use for preventable conditions was much higher for Medicaid patients than privately insured and uninsured patients. See, e.g., Ning Tang et al., Trends and characteristics of US emergency department visits, 1997-2007, Journal of the American Medical Association 304(6): 664-70 (2010), http://jama.ama-assn.org/ content/304/6/664.

12 Illinois will need to appropriate $3.1 billion more in

5 Medicaid patients are more likely than the uninsured to be

denied an appointment for urgent follow-up care, even at safety net clinics. See, e.g., Brent R. Asplin et al., Insurance status and access to urgent ambulatory care follow-up appointments, Journal of the American Medical Association 294(10): 1248-54 (2005), http:// jama.ama-assn.org/content/294/10/1248.

fiscal year 2013 than in 2012 just to keep a record six-month backlog and $2.4 billion in unpaid bills. Without reform or additional appropriations, the states Medicaid program will be almost $5 billion in debt to hospitals and doctors. See, e.g., Jonathan Ingram, Medicaid FAIL: Why cutting appropriations doesnt control costs, Illinois Policy Institute (2011), http:// illinoispolicy.org/uploads/files/MedicaidFAIL.pdf.

13 Illinois can expect to pay another $1.4 billion from state

funds on Medicaid the first year that ObamaCares massive expansion of Medicaid kicks in. See, e.g., Jonathan Ingram, Overloaded: One in three Illinoisans on Medicaid by 2019? Illinois Policy Institute (2011), http://illinoispolicy.org/ uploads/files/overloaded10-20.pdf.

6 Medicaid patients, on average, use emergency rooms twice as

often as privately insured and uninsured patients. See, e.g., National Center for Health Statistics, Health, United States, 2010: With special feature on death and dying, Centers for Disease Control and Prevention (2011), http://www.cdc.gov/nchs/data/hus/ hus10.pdf.

14 Mercer Health & Benefits LLC, Retiree Healthcare

7 Between 1997 and 2007, per-capita emergency room use

increased for Medicaid patients and decreased for uninsured and privately insured patients. Emergency room use for preventable conditions was much higher for Medicaid patients than privately insured and uninsured patients. See, e.g., Ning Tang et al., Trends and characteristics of US emergency department visits, 19972007, Journal of the American Medical Association 304(6): 664-70 (2010), http://jama.ama-assn.org/content/304/6/664.

Contributions, Commission on Government Forecasting and Accountability (2011), http://www.ilga.gov/commission/ cgfa2006/Upload/2011-MAY-17MercerRetireeHealthcareCo ntributions.pdf.

15 About 80 percent of the labor force work for employers

8 Medicaid patients are six times more likely than privately

insured patients to be denied an appointment with a specialist. When they can get an appointment, they must wait weeks or months longer before seeing a doctor. See, e.g., Joanna Bisgaier & Karin V. Rhodes, Auditing access to specialty care for children with public insurance, New England Journal of Medicine 362(24): 2324-33 (2011), http://www.nejm.org/doi/full/10.1056/ NEJMsa1013285.

with fewer than 500 employees. Only 4 percent of these employers offer coverage. About 20 percent of the labor force work for large employers. Only 25 percent of these employers offer coverage. See, e.g., Mercer Health & Benefits LLC, Retiree Healthcare Contributions, Commission on Government Forecasting and Accountability (2011), http://www.ilga.gov/commission/ cgfa2006/Upload/2011-MAY-17MercerRetireeHealthcareCo ntributions.pdf.

16 The average retiree contribution rate for large employers is

9 Medicaid patients are more likely than the uninsured to be

54 percent. See, e.g., Mercer Health & Benefits LLC, Retiree Healthcare Contributions, Commission on Government Forecasting and Accountability (2011), http://www.ilga.gov/ commission/cgfa2006/Upload/2011-MAY-17MercerRetireeH ealthcareContributions.pdf.

Page 15 of 17
17 In general, state-provided health insurance benefits for
ributions.pdf.

employees and retirees are far more generous than the benefits provided in the private sector. See, e.g., Josh Barro, Cadillac coverage: The high cost of public employee health benefits, Manhattan Institute (2011), http://www.manhattan-institute.org/ pdf/cr_65.pdf.

29 Gabriel Roeder Smith & Company, Teachers Retirement

Insurance Program: GASB No. 43 actuarial valuation report, Commission on Government Forecasting and Accountability (2009), http://www.ilga.gov/commission/cgfa2006/Upload/ FY2009TRIPGASBvaluation.pdf.

18 About 80 percent of the labor force work for employers with

fewer than 500 employees. These small employers rarely offer retiree coverage at all. About 20 percent of the labor force work for large employers. Only 25 percent of those large employers offer coverage. When coverage is offered, retirees must pay more than half of the cost of their premiums. See, e.g., Mercer Health & Benefits LLC, Retiree Healthcare Contributions, Commission on Government Forecasting and Accountability (2011), http://www.ilga.gov/ commission/cgfa2006/Upload/2011-MAY-17MercerRetireeHeal thcareContributions.pdf.

30 Authors review of hundreds of school district collective

bargaining agreements. School districts pick up all or some of a teachers pension contributions in 84 percent of school districts. See, e.g., Ted Dabrowski & Michael Wille, Teachers pensions: Whos really paying?: Many teachers contribute nothing; taxpayers shoulder burden, Illinois Policy Institute (2011), http://illinoispolicy.org/ uploads/files/teacherpensions10-13.pdf.

31 About 80 percent of the labor force work for employers

19 Authors calculations based upon 2009 GASB No. 43 and

No. 45 reporting of total members by status for SEGIP, TRIP and CIP.

20 Authors calculations based upon 2009 GASB No. 43 and

No. 45 actuarial valuations for SEGIP, TRIP and CIP for fiscal years 2012-41.

with fewer than 500 employees. These small employers rarely offer this coverage. About 20 percent of the labor force work for large employers. Only 25 percent of those large employers offer coverage. When coverage is offered, retirees must pay more than half of the cost of their premiums. See, e.g., Mercer Health & Benefits LLC, Retiree Healthcare Contributions, Commission on Government Forecasting and Accountability (2011), http://www.ilga.gov/ commission/cgfa2006/Upload/2011-MAY-17MercerRetireeHeal thcareContributions.pdf.

21 This is substantially below the historical average of 7.1

percent a year.

32 Authors calculations based upon 2009 GASB No. 43

22 Authors calculations based upon 2009 GASB No. 43 and

No. 45 actuarial valuations for SEGIP, TRIP and CIP for fiscal years 2012-41.

23 The total cost to taxpayers represents the total employer cost:

total liabilities less retiree contributions. While a portion of these costs is paid by payroll deductions from active employees in TRIP and CIP, these deductions often are picked up by local school districts and community colleges.

and No. 45 actuarial valuations of SEGIP, TRIP and CIP, for fiscal years 2012-41, historical trends in revenue component shares for fiscal years 2002-11, and benchmarked retiree contributions. Figures assume a current retiree contribution trend of 9.1 percent for SEGIP, 40.9 percent for TRIP and 38.4 percent for CIP. Figures also assume a benchmarked retiree contribution of 54 percent.

33

24 Authors calculations based upon 2009 GASB No. 43 and

No. 45 actuarial valuations for SEGIP, TRIP and CIP.

25 GASB No. 43 and No. 45 actuarial valuations were

required for fiscal year 2011, but have not been completed as of the date of this publication.

Authors calculations based upon 2009 GASB No. 43 and No. 45 actuarial valuations of SEGIP, TRIP and CIP, for fiscal years 2012-41, historical trends in revenue component shares for fiscal years 2002-11, and benchmarked retiree contributions. Figures assume a current retiree contribution trend of 9.1 percent for SEGIP, 40.9 percent for TRIP and 38.4 percent for CIP. Figures also assume a benchmarked retiree contribution of 54 percent.

34

26 Members of TRS and SURS receive the state contribution

starting at the fifth year of service. Members of SERS receive the state contribution starting at the eighth year of service. Members of GARS receive the state contribution starting at the fourth year of service. Members of JRS receive the state contribution starting at the sixth year of service.

Authors calculations based upon 2009 GASB No. 43 and No. 45 actuarial valuations of SEGIP, TRIP and CIP, for fiscal year 2041, historical trends in revenue component shares for fiscal years 2002-11, and benchmarked retiree contributions.

35 Medicaid underfunding has left the state with $2.4 billion in

27 State Employees Group Insurance Act, 5 ILCS

375/10 (2011), http://www.ilga.gov/legislation/ilcs/ documents/000503750K10.htm.

unpaid bills. Without reform, these unpaid bills likely will grow to almost $5 billion by the end of fiscal year 2013. See, e.g., Jonathan Ingram, Medicaid FAIL: Why cutting appropriations doesnt control costs, Illinois Policy Institute (2011), http://illinoispolicy. org/uploads/files/MedicaidFAIL.pdf.

28 Mercer Health & Benefits LLC, Retiree healthcare

36 ObamaCares massive expansion of Medicaid will

contributions, Commission on Government Forecasting and Accountability (2011), http://www.ilga.gov/commission/ cgfa2006/Upload/2011-MAY-17MercerRetireeHealthcareCont

cost the state more than $62.8 billion by 2041. See, e.g., Jagadeesh Gokhale, The new health care laws effect on state Medicaid spending: A study of the five most populous states, Cato Institute (2011), http://www.cato.org/pubs/wtpapers/

Page 16 of 17
StateMedicaidSpendingWP.pdf. Accountability (2011), http://www.ilga.gov/commission/ cgfa2006/Upload/2011-MAY-17MercerRetireeHealthcareCo ntributions.pdf.

37 Members of TRS and SURS receive the state contribution

starting at the fifth year of service. Members of SERS receive the state contribution starting at the eighth year of service. Members of GARS receive the state contribution starting at the fourth year of service. Members of JRS receive the state contribution starting at the sixth year of service.

47 Authors calculations based upon 2009 GASB No. 43

38 State Employees Group Insurance Act, 5 ILCS

375/10 (2011), http://www.ilga.gov/legislation/ilcs/ documents/000503750K10.htm.

and No. 45 actuarial valuations of SEGIP, TRIP and CIP, for fiscal years 2012-41, historical trends in revenue component shares for fiscal years 2002-11, and benchmarked retiree contributions. Figures assume a current retiree contribution trend of 9.1 percent for SEGIP, 40.9 percent for TRIP and 38.4 percent for CIP. Figures also assume a benchmarked retiree contribution of 45 percent.

39 Mercer Health & Benefits LLC, Retiree healthcare

48

contributions, Commission on Government Forecasting and Accountability (2011), http://www.ilga.gov/commission/ cgfa2006/Upload/2011-MAY-17MercerRetireeHealthcareCont ributions.pdf.

Authors calculations based upon historical GRF expenditures for SEGIP, TRIP and CIP.

49 Authors calculations based upon historical revenue growth

40

Mercer Health & Benefits LLC, Retiree Healthcare Contributions, Commission on Government Forecasting and Accountability (2011), http://www.ilga.gov/commission/ cgfa2006/Upload/2011-MAY-17MercerRetireeHealthcareContri butions.pdf.

for fiscal years 2002-10, indexed from fiscal year 2002, as reported by the National Association of State Budget Officers. See, e.g., Brian Sigritz et al., State expenditure report: Examining fiscal 2009-2011 state spending, National Association of State Budget Officers (2011), http://nasbo.org/ LinkClick.aspx?fileticket=C3LJlSFxbdo%3d&tabid=79.

41 Authors calculations based upon 2009 GASB No. 43

50

and No. 45 actuarial valuations of SEGIP, TRIP and CIP, for fiscal years 2012-41, historical trends in revenue component shares for fiscal years 2002-11, and benchmarked retiree contributions. Figures assume a current retiree contribution trend of 9.1 percent for SEGIP, 40.9 percent for TRIP and 38.4 percent for CIP. Figures also assume a benchmarked retiree contribution of 45 percent.

Authors calculations based upon historical state-source general revenue growth for fiscal years 2002-10, indexed from fiscal year 2002, as reported by the Commission on Government Forecasting and Accountability. See, e.g., Dan R. Long, FY 2012 economic forecast and revenue estimate and FY 2011 revenue update, Commission on Government Forecasting and Accountability (2011), http://www.ilga.gov/commission/ cgfa2006/Upload/FY12econforecastrevestimate.pdf.

42 The average first-year pension for TRS members who retired

51

in 2010 with 30 years of credible service was $65,109. See, e.g., Kristina Rasmussen, Average $30,000 pension?: Pensions may be larger than they appear, Illinois Policy Institute (2011), http:// illinoispolicy.org/uploads/files/FactFinderPensions.pdf.

Authors calculations based upon costs and enrollment figures for fiscal year 2011 in SEGIP, TRIP and CIP for Medicare and non-Medicare retirees.

52 Authors calculations based upon historical trends in

43

The average first-year pension for SURS members who retired in 2010 with 30 years of credible service was $68,203. See, e.g., Kristina Rasmussen, Average $30,000 pension?: Pensions may be larger than they appear, Illinois Policy Institute (2011), http://illinoispolicy.org/uploads/files/FactFinderPensions.pdf.

44 About 54 percent of retirees with SEGIP coverage have

per-member costs in TRIP and CIP for fiscal years 2002-11 for Medicare and non-Medicare retirees. HFS officials could not provide the 10-year historical data for per-member costs in SEGIP for Medicare and non-Medicare retirees. In fiscal year 2011, the cost gap between Medicare and non-Medicare retirees was slightly larger in SEGIP than in TRIP or CIP. Accordingly, it is likely that SEGIP saw similar growth rates for Medicare and non-Medicare retirees.

household incomes greater than $60,000. See, e.g., Mercer Health & Benefits LLC, Retiree Healthcare Contributions, Commission on Government Forecasting and Accountability (2011), http:// www.ilga.gov/commission/cgfa2006/Upload/2011-MAY-17Merc erRetireeHealthcareContributions.pdf.

53 Authors calculations based upon per-member costs in

SEGIP, TRIP and CIP for fiscal year 2011, for Medicare and non-Medicare retirees.

54 Authors calculations based upon historical trends in permember costs in TRIP and CIP for fiscal years 2002-11 for Medicare and non-Medicare retirees, indexed at 2002 levels.

45 The median household income in Illinois is $50,761. See, e.g.,

U.S. Census Bureau, Median household income by state: 1984 to 2010,Current Population Survey: 2010 Annual Social and Economic Supplement, http://www.census.gov/hhes/www/income/ data/historical/household/2010/H08_2010.xls.

55 Steven Nyce et al., Does Retiree Health Insurance

Encourage Early Retirement? National Bureau of Economic Research (2011), http://www.nber.org/papers/w17703.

46

Mercer Health & Benefits LLC, Retiree Healthcare Contributions, Commission on Government Forecasting and

56 About 25 percent of employers with 500 or more

employees offer health insurance coverage to pre-Medicare-eligible

Page 17 of 17
retires, while 19 percent offer health insurance coverage to Medicareeligible retirees. See, e.g., Mercer Health & Benefits LLC, Retiree Healthcare Contributions, Commission on Government Forecasting and Accountability (2011), http://www.ilga.gov/commission/ cgfa2006/Upload/2011-MAY-17MercerRetireeHealthcareCont ributions.pdf.

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57 About 4 percent of employers with 10 to 499 employees

offer health insurance coverage both to pre-Medicare-eligible retirees and Medicare-eligible retirees. See, e.g., Mercer Health & Benefits LLC, Retiree Healthcare Contributions, Commission on Government Forecasting and Accountability (2011), http://www. ilga.gov/commission/cgfa2006/Upload/2011-MAY-17MercerRet ireeHealthcareContributions.pdf.

58 Authors calculations based upon Mercer reports of offer rates

by small and large employers and share of labor force by small and large employers.

59 One-third of large employers that offer retiree health

insurance require the retiree to pay the entire premium. See, e.g., Mercer Health & Benefits LLC, Retiree Healthcare Contributions, Commission on Government Forecasting and Accountability (2011), http://www.ilga.gov/commission/ cgfa2006/Upload/2011-MAY-17MercerRetireeHealthcareCont ributions.pdf.

60 Illinois Pension Code, 40 ILCS 5/1-160 (2012), http:// 61 Illinois law specifically states that TRIP benefits are not

www.ilga.gov/legislation/ilcs/documents/004000050K1-160.htm.

protected under the pension clause of the state constitution. See, e.g., 5 ILCS 375/6.5(h) (2012).

62 Illinois law specifically states that CIP benefits are not

protected under the pension clause of the state constitution. See, e.g., 5 ILCS 375/6.9(h) (2012).

63 Retiree health insurance is unprotected by the New York

Constitutions pension clause, which was the model for the Illinois Constitutions pension clause. See, e.g., Lippman vs. Board of Education of the Sewanhaka Central High School District, 66 N.Y. 2d 313 (1985).

64 Gabriel Roeder Smith & Company, Illinois State

Employees Group Insurance Program: GASB No. 45 actuarial valuation report, Commission on Government Forecasting and Accountability(2009), http://www.ilga.gov/commission/ cgfa2006/Upload/FY2009StateGASBvaluation.pdf.