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AGENDA #2d

Budget Savings Proposal #2
Retiree Healthcare Defined Contribution Plan

The Goal: Change retiree healthcare benefits for future employees to provide resources to protect the sustainability of benefits for current employees

The Proposal: 

• Develop a defined contribution plan for new employees hired after July 1, 2009 as a means to increase retiree responsibility for paying medical benefits.  A “defined contribution” plan establishes the Town’s contribution to retiree healthcare benefits as compared to our current “defined benefit” plan which establishes the benefit level and as costs increase, so does the Town’s liability and our costs. This change will help stop the growth in our liability and costs, freeing up funds to pay for current and future retirees that have the current defined benefit healthcare plan.
• Currently, the Town of Chapel Hill provides healthcare benefits to employees that retire from the NC Local Government Retirement System while working for the Town of Chapel Hill and have at least 5 years of creditable service.  The Town pays all or a portion of the cost of coverage based on years of service.  Retirees can also purchase coverage for dependents at the Town’s group rates.
• Recent changes in the rules that govern how local governments account for their long-term healthcare costs for retirees have created an unfunded liability of $45,000,000 for the Town.  Failure to manage and limit the retiree healthcare liability and costs will
  • Jeopardize the Town’s ability to fund healthcare benefits for current employees
  • Jeopardize the Town’s credit
  • Jeopardize the Town’s ability to provide any retiree healthcare benefits. 

What have we already done?

• Determined our unfunded liability is $45 million and started to fund that liability in FY2008-09 by setting aside $400,000 (approx. 1/10 of what is needed yearly to fully fund).
• Engaged Hill, Chesson & Woody, a benefits consulting firm, to provide options for reducing our liability without affecting our current employees’ retiree benefits.  

What needs to happen to implement this proposal?

• Design a plan for new employees on a defined contribution basis, determining the benefit, mandatory level of contribution and vesting schedule for the town’s portion of the contribution.
• Council must adopt a Defined Contribution Plan by changing Section 14.59.1 of the Town Code of Ordinances
• Change orientation materials, communication strategy and education on the plan and its benefits
• Budget for the contributions in FY 2009-10

How are current employees affected by this change?

• Current employees will not be affected by this change.  If we do not address the unfunded liability, the Town may eventually not have the resources to fund current employee retiree healthcare benefit plans.

The effect on the Budget:

• Reduce long term costs of funding retiree healthcare benefits.
• The Town’s contribution to the defined contribution plan will need to be funded on an annual basis beginning in FY 2009-10.  The amount of the contribution will depend on the number of new employees hired after July I, 2009.