Editors Note: Ask an ICMA Manager is a monthly blog series where ICMA asks a current or former local government manager or local government professional to answer a question on a management issue facing local government.
Ask an ICMA Manager: What Can Local Governments Do to Control Benefit Costs?
Consider Cutting Health, Pension, and Debt Expenses
by Steve Mokrohisky, county administrator, Lane County, Oregon
Economic conditions have largely rebounded from the Great Recession, with unemployment at historic lows and housing prices, job, and wage growth trending positive. These factors have generally contributed to steady growth in tax collections and greater revenue stability for many local governments.
Despite these positive revenue trends, growth in personnel expenses often can exceed a local government's ability to fund its obligations with operating revenue. This creates structurally imbalanced budgets that force a manager to consider increasing taxes and fees, reducing services, or spending reserves to meet obligations. Employee health insurance and pension costs are typically the greatest contributors to expense growth and are also often viewed as costs outside the control of local government leaders.
Lane County, Oregon, like other local governments across the United States, has seen steady growth in property tax revenue during the past several years, and it also has experienced steep declines in federal forest funding since 2001. This has resulted in significant cuts in critical public safety and infrastructure services during the past two decades.
As federal funding evaporated, Lane County focused on structurally balancing the budget through internal cost controls, primarily with health insurance, pension, and debt expenses, as opposed to additional service cuts. Since 2015, we shifted to a self-funded health insurance plan, opened a wellness clinic for employees, implemented numerous wellness initiatives and incentives, refinanced and pre-paid existing debt, and implemented policies to improve long-term cost control.
The results have been remarkable, including zero growth in health insurance costs for three years in a row; smaller annual pension increases; reduced interest payments on debt; a structurally balanced budget; a historic Moody’s bond rating increase; and an award as the third healthiest employer in Oregon. Most importantly, every dollar the county saves in internal expenses is a dollar it doesn't cut from critical services to residents.
Here are the top five ways Lane County has reduced health, pension, and debt costs:
1. Moved to a self-funded health plan.
In 2015, the county moved from contracting with a private insurance company to self-insuring its employee medical benefits. This change means more risk to the county, as the actual cost of approximately $2 million per month in medical claims is now the responsibility of the county and not an insurance company. We were well positioned to make this move, with opportunities for economies of scale from 3,700 total participants, including 1,400 benefit-eligible employees, on our medical plans. We also purchased “stop-gap” insurance in the event that total claims exceeded the annual budget, and we established a reserve to cushion impacts from large claims. As part of this shift, we conducted a thorough audit of plan participants to ensure that only eligible employees and dependents are covered on our plans. The rewards are worth the effort—$2 million in annual net savings, zero growth in expenses for three years in a row, and cash flow benefits that were not possible when we were fully insured.
2. Opened a wellness clinic and create incentive programs for employees.
Healthcare is not defined by the insurance card we carry in our pocket, but rather the ability to access quality care and create accountability for individual health and wellness. With this in mind, we opened a health clinic for plan participants in 2016. The health clinic provides primary care services, including biometric screenings, health coaching, basic medications, and more. Employees use the clinic for routine and preventative care, thereby reducing the cost of county claims. We have also established numerous exercise, diet, cooking, stress, and allergy management programs that are fueled by incentives and rewards. These efforts have been embraced by employees, and our long-term goal is to improve overall health, improve productivity, and reduce costs.
3. Refinanced and pre-paid existing debt.
Local governments issue debt for capital projects and other long-term needs. It is wise to regularly evaluate an organization’s debt and consider taking advantage of low-interest rates in the market by refinancing debt, as well as prepaying any callable portion of principle with available one-time resources. Lane County has pursued both options by refinancing debt and prepaying principle. These strategies have eliminated $3.1 million in future interest and reduced annual debt payments by $1 million.
4. Took out a bond to prepay unfunded pension liability.
Lane County incurred debt at a low rate and invested those funds with the state pension system, where a higher investment return can be achieved. Our bond payment rate is still lower than what our projected pension system rate would have been. Market timing is critical to the success of this option and consulting with financial and bond counsel is critical before pursuing this course.
5. Monitored and advocated for legislative changes, and adopted the county's own policies.
The county closely monitored and advocated for support and flexibility from the Oregon legislature. The state legislature recently approved a state-matching program that provides 25 percent of funds local governments contribute to pension side accounts. The funds are invested in the state system, thereby reducing annual pension rate increases. Local governments can also make sure there are policies that limit pension spiking through excessive use of overtime, as well as cashing out of vacation and sick time. Finally, consider offering employees a voluntary separation incentive plan with a one-time payment, while ensuring net savings by using the transition to implement modified wage and benefit packages for new employees.
Bonus idea: Review workers' compensation and general liability claims, and pursue aggressive management of costs. Audit claims ensure that a local government is only paying for legitimate costs.
Highlighting Healthcare: Examining Government Employee Coverage. This blog post looks at the results of an ICMA survey on local government employee healthcare benefits.
Pension Costs to Contribute to Economic Slowdown. This article by the Center for State and Local Government Excellence looks at the economic effects of rising pension costs.
A Healthier Bottom Line. A PM magazine article from 2017 lays out the financial benefits of having a wellness program.