NOTE: As provided in LFC policy, this report is intended for use by the standing finance committees of the legislature.  The Legislative Finance Committee does not assume responsibility for the accuracy of the information in this report when used in any other situation.

The LFC is only preparing FIRs on bills referred to the Senate Finance Committee, the Senate Ways and Means Committee, the House Appropriations and Finance Committee and the House Taxation and Revenue Committee. The chief clerks are responsible for preparing and issuing all other bill analyses.

Only the most recent FIR version, excluding attachments, is available on the Intranet. Previously issued FIRs and attachments may be obtained from the LFC office in Room 416 of the State Capitol Building.

(Parenthesis ( ) Indicate Expenditure Decreases)

(Parenthesis ( ) Indicate Revenue Decreases)

Relates to SB263 Conflicts with SB223

SOURCES OF INFORMATION

Public School Insurance Authority

Department of Finance and Administration

Retiree Health Care Authority

LFC Files

SUMMARY

Synopsis of Bill

The proposed legislation would increase the 3 percent cap limit on retiree contributions (premiums) for the basic plan of benefits to be increased up to a maximum of 9 percent.

Significant Issues

Briefly, the retiree contributions for the basic plan of benefits has had a statutory cap of 3 percent per year since the inception of the program. According to Retiree Health Care Authority (RHCA) staff, the medical trend (inflationary rate) has consistently exceeded the 3 percent cap contributing to a deficit which has been paid from the contributions of employees and employers. These employer and employee contributions are intended to pre-fund the contributing employees future benefits. The level of subsidy to retirees has increased and the solvency of the program. The programs solvency is targeted for a rolling 25 year (mandated) period. The fund is currently projected for a solvency period of 11 years. Increasing the cap from 3 percent to 9 percent is projected to extend the solvency period by three years.

Staff from the Department of Finance and Administration (DFA), the proposed legislation will continue to impose an "artificial limitation". Current proposed increases, by providers of the basic plans in the RHCA program, range from 15 to 32 percent. Given these increases, the fund will deteriorate at a rate faster than projected by the actuaries.

FISCAL IMPLICATIONS

DFA staff states the life the fund will by extended by less than 24 months with the proposed legislation. Under Senate Bill 224, the projected fund balance as of July 2013 will be $303.1. Under the current statutory provisions, the projected fund balance as of the same date will be ($125,075.3).

As presented by the RHCA staff, Senate Bill 224 would assist to extend the solvency of the program. It would generate about $410,000.0 over the 25 year mandated solvency period.

CONFLICT/DUPLICATION/COMPANIONSHIP/RELATIONSHIP

Senate Bill 224 relates to SB223 and SB263.

OTHER SUBSTANTIVE ISSUES

DFA staff has offered the following comments: The state has statutorily defined the responsibility for the financial viability of the program to limit exposure to the State. It is questionable whether fiduciary responsibility can be limited given the inability of the Board to properly increase premiums due to usage and medical inflation.

ALTERNATIVES

DFA staff suggests:

Increase statutory limitations based on non-artificial criteria. Basing the limit on the New Mexico retiree population medical inflation rate or the national medical inflation rate would be more appropriate.

Limiting subsidization that the RHCA can expend from the Trust Fund or employee based contributions, to a fixed dollar amount and allowing retiree's the opportunity to more fully participate in insuring the long-term financial stability of the program.

In addition the LFC budget document includes:

...modify the three percent limit but grandfather those members over a certain age (65, 70, 75, 80, 85...); grandfather those members below a certain income level (100 percent, 120 percent, 125 percent, 150 percent... of poverty level); set a rate schedule based on age at retirement and number of dependents.

Eventually, the entire contribution structure of the fund will have to be modified to reflect more realistically the trends in the cost of health care.

CONSEQUENCES

Should Senate Bill 224 not be enacted, the current basic benefit package will be reconfigured. It is likely, the basic benefit package would be reduced.

According to DFA staff, if the cap is not increased and no benefit design changes to the current program will be that the Trust Fund will be bankrupt before July 2011. Given the fact that the State has defined that it has no financial obligation to provide funding, litigation will most likely be initiated with an unknown outcome of the financial responsibility of the State toward the participants in the program.

WJC/njw:gm