Administration October 31, 2014

City of Stockton Bankruptcy Plan Approved

A bankruptcy court judge has approved a plan for the city of Stockton, California, to exit bankruptcy while continuing to pay for pensions.
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A federal bankruptcy judge in the U.S. Bankruptcy Court for the Eastern District of California has approved a bankruptcy exit plan from the city of Stockton that allows it to continue paying its obligations to the California Public Employees Retirement System (CalPERS) while giving other creditors pennies on the dollar for debts.  “This plan, I’m persuaded, is the best that could be done in terms of restructuring the city’s debts,” U.S. Bankruptcy Judge Christopher Klein said at a hearing in Sacramento, California, according to Bloomberg.

Earlier in October, Klein ruled that the city of Stockton may eschew paying its pension obligations, and treat them just like other debts in its bankruptcy plan. The city has reached deals with all of its major creditors, except for Franklin Templeton Investments, which took Stockton to trial. An attorney for the investment firm said the firm is being offered one cent on each dollar for a $35 million loan given to Stockton in 2009 to build firehouses and parks, and to move its police dispatch center. In the lawsuit, Stockton argued that it must make its pension contributions for public employees before its creditors are paid the entire amount they are owed.

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According to news reports, during proceedings Stockton often argued its employees have suffered enough in the bankruptcy. In a statement last year, CalPERS said, “The city of Stockton, its employees and its citizens have already endured years of painful cuts, reductions and sacrifices.”

In a statement following Klein’s approval of the exit plan, Anne Stausboll, chief executive officer of CalPERS, said, “The judge recognized that the city’s employees and retirees have already made significant concessions with respect to their pension and health benefits and that further impairing pensions would harm them even more. The City has made a smart decision to protect pensions and find a reasonable path forward to a more fiscally sustainable future. We will continue to champion the integrity and soundness of public pensions—to protect the benefits that were promised to the active and retired public employees who participate in the CalPERS pension plan.”

The National Conference on Public Employee Retirement Plans (NCPERS) also released a statement applauding Klein’s decision, saying, “His ruling means the city will be able to emerge from two years of financial uncertainty with its public pensions and public safety services intact… It has been years since city employees have received a raise, salaries for some employees have been cut by as much as 23%, large numbers of employees have been laid off and employees have already lost their retirement health benefits. To further reduce pension benefits as part of a financial reorganization plan would not only have been unfair to the city’s workers, but destructive to the city’s reputation and its ability to provide public services.”
Data and Research October 31, 2014

Amount Needed for Health Care in Retirement Dips

Less could be needed to meet health care costs in retirement, according to new modeling by the nonpartisan Employee Benefit Research Institute (EBRI). 
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Projected savings targets needed so that the American elderly can cover their health care costs in retirement continue to decline, in part because of enhanced prescription drug coverage provided by the Patient Protection and Affordable Care Act (ACA), EBRI finds.

Savings targets declined between 2% and 10% between 2013 and 2014, according to the EBRI report, an update of previous computer modeling of retiree health savings needs. For a married couple both with drug expenses at the 90th percentile throughout retirement who wanted a 90% chance of having enough money saved for health care expenses in retirement by age 65, targeted savings fell from $360,000 in 2013, to $326,000 in 2014.

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In 2014, a man would need $64,000 in savings and a woman would need $83,000 if each had a goal of having a 50% chance of having enough money saved to cover health care expenses in retirement. If either instead wanted a 90% chance of having enough savings, $116,000 would be needed for a man and $131,000 would be needed for a woman.

As the report notes, Medicare beneficiaries can expect to pay a share of their costs out of pocket because of program deductibles and other cost sharing. In 2011, Medicare covered 62% of the cost of health care services for Medicare beneficiaries ages 65 and older, while out-of-pocket spending accounted for 13%, and private insurance covered 15%.

Medicare was never designed to cover health care expenses in full. Individuals older than age 65 have to pay for their own deductibles for inpatient and outpatient services, as well as for uninsured costs of outpatient prescription drugs, says Paul Fronstin, director of EBRI’s Health Research and Education Program, and lead author of the report.

As the EBRI report notes, when outpatient prescription drugs were added as an optional benefit under Medicare, the program included a then-controversial coverage gap known as the so-called donut hole. The ACA included provisions to reduce the size of this coverage gap. By 2020, enrollees will pay 25% of the cost of prescription drugs when they are in the coverage gap for both generic and brand-name drugs.

However, Fronstin notes, regardless of the effects of the ACA, individuals may pay a greater share of their overall costs in the future because of the combination of the financial condition of the Medicare program and cutbacks to employment-based retiree health programs.

Projections of savings needed to cover out-of-pocket expenses for prescription drugs are highly dependent on the assumptions used for drug utilization, EBRI points out, which is why the analysis provides three sets of estimates: prescription drug use is at the median (midpoint, half above and half below) throughout retirement; prescription drug use at the 75th percentile throughout retirement; and in prescription drug use is at the 90th percentile throughout retirement.

Many individuals will need more than the amounts cited in this report, Fronstin says, because it does not factor in the savings needed to meet long-term care expenses or take into account that many individuals retire before becoming eligible for Medicare. However, some workers will need to save less than what is reported if they choose to work past age 65, thereby postponing enrollment in Medicare Parts B and D if they receive health benefits as active workers.

“Amount of Savings Needed for Health Expenses for People Eligible for Medicare: Good News Not So Rare Anymore” is in the October EBRI Notes, online at www.ebri.org. 

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