Interim Joint Committee on State Government


Minutes of the<MeetNo1> 1st Meeting

of the 2002 Interim


<MeetMDY1> August 28, 2002


The<MeetNo2> first meeting of the Interim Joint Committee on State Government was held on<Day> Wednesday,<MeetMDY2> August 28, 2002, at<MeetTime> 1:00 PM, in<Room> Room 149 of the Capitol Annex. Senator Albert Robinson and Representative Geveden, Co-Chairs, jointly chaired the meeting. Senator Robinson called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Albert Robinson, Co-Chair; Representative Charles Geveden, Co-Chair; Senators Walter Blevins, Charlie Borders, David Boswell, Alice Kerr, Ed Miller, Ernesto Scorsone, Elizabeth Tori, and Johnny Ray Turner; Representatives Woody Allen, Adrian Arnold, Eddie Ballard, Joe Barrows, Carolyn Belcher, John Bowling, James Bruce, Buddy Buckingham, Dwight Butler, Jim Callahan, Larry Clark, Perry Clark, James Comer, Tim Feeley, Charlie Hoffman, Jimmie Lee, Paul Marcotte, Mary Lou Marzian, Lonnie Napier, Tanya Pullin, Jon David Reinhardt, Arnold Simpson, Tommy Turner, and Jim Wayne.


Guests: Carol Palmore, Carl Felix, and Diane Collins – Personnel Cabinet; Don Speer, Finance and Administration Cabinet; Bill Hanes and Brad Gross, Kentucky Retirement Systems; Gary Harbin and Bill Leach, Teachers' Retirement System; Donna Early, Judicial Form Retirement System; Gerald Stewart, Kentucky Firefighters' Association; and Ben Lampton, Kentucky Public Retirees.


LRC Staff: Joyce Honaker, Joyce Crofts, Laura Hendrix, Mark Roberts, Jim Roberts, Tom Troth, Stewart Willis, and Peggy Sciantarelli.


After welcoming remarks by Senator Robinson, Representative Geveden assumed the chair. Mark Roberts and Joyce Honaker, LRC staff, briefed the Committee on the background and status of a study mandated by HB 846, which was enacted in the 2002 Regular Session. (Section 3 of HB 846 directed the LRC to have a study conducted by the Interim Joint Committee on State Government, with assistance from the LRC Chief Economist, to determine the cost, if any, to members of the state health insurance group as a result of agencies participating in state-administered retirement systems while insuring their active employees outside the state health insurance group; directed LRC to hire an actuary to assist with the study and specified that the Committee report its findings to the LRC on or before October 1, 2002. HB 846 also directed that the Committee conduct a study focusing on the entire state-sponsored health insurance program, with the findings to be reported to the LRC on or before October 1, 2003.)


Mr. Roberts gave an overview of developments that led to the HB 846 study, as outlined in his August 20, 2002, memorandum to the Committee entitled "State Group Insurance Subsidy Study." In summary, Mr. Roberts explained that the medical insurance program for state retirees was created in 1978. From the beginning, it has been recognized that inclusion of retirees in the state group with active employees—who are generally younger and generate fewer claims—holds down the premiums for retired members. In 1984, this subsidy arrangement was codified in KRS 18A.225. However, participation in the state group is not mandatory for all employers. For example, local government entities that elect to participate in the County Employees Retirement System (CERS) have the option to include their employees in the state group but are not required to do so; but by law their employees are included in the state group for medical insurance upon retirement, until age 65. Similarly, in the KERS system, the regional universities do not participate in the state group, although some of their retirees are in the state group. The annual report issued in October 2001 by the Kentucky Public Employee Health Insurance Board ascribed an additional cost of $9.9 million to the state group health insurance plan for calendar year 2000 to cover retirees and dependents of employers not participating in the group. HB 846, as introduced, would have required that the retirees of these employers be rated separately for insurance purposes and that their employers would have to pay the difference between the premium charged for these individuals and the premium cost for others in the group. There was not enough time during the legislative session to determine how such a program should be administered, and there was opposition from some of the affected parties. As a result, HB 846 was amended to create the cost study.


Joyce Honaker discussed the timeline for the study. She explained that it will be impossible to meet the October 1, 2002, reporting deadline, due to the necessary time involved in selecting an actuary and because of the amount of work involved in analyzing the state group insurance data provided by the Personnel Cabinet. Restrictive conflict-of-interest language in HB 846 prevented use of LRC's existing contract with Buck Consulting because it is currently the consulting actuary for the Kentucky Teachers' Retirement System. Therefore, LRC issued a Request for Proposal (RFP). She said that staff discussed the scope of the project last week with the three firms that responded to the Request For Proposal (RFP), and it is hoped that selection of the actuary will be completed by next week. The three firms were asked to submit revised, cost-specific proposals. It is anticipated that the actuary's report will be available for review two weeks prior to the Committee's October 23 meeting.


Representative Geveden noted that Representative Roger Thomas, primary sponsor of HB 846, had hoped to attend today's meeting but was unable to.


Next on the agenda was a report by Personnel Cabinet Secretary Carol Palmore on the status of state group health insurance for 2003. She was accompanied by Carl Felix, Executive Director of the Office of Public Employee Health Insurance, and Diane Collins, who assisted with their Powerpoint presentation relating to the health insurance RFP and the bid results for plan year 2003. (Copies of the Powerpoint presentation were provided to the Committee.) A summary of the presentation follows:


When reviewing prior plan issues, attention was paid to concerns raised by legislators, in particular with regard to network sufficiency. The RFP for 2003 included a requirement that carriers bidding to offer in a county must have at least 25 percent of the number of primary care physicians in its network as the bidder with the most primary care physicians. The reason for the requirement was to avoid having the state contribution rate for a county set by a carrier with an insufficient network, since carriers with lesser networks typically charge lower premiums. There was a similar requirement of 40 percent for specialists in a network. The RFP was initially released April 5 and was amended April 26 to include statutory changes made during the 2002 Regular Session—for example, hearing aid coverage, mail order drugs, and the contiguous county issue. Contracts with the carriers were signed in late July.


Bids were requested for three scenarios. The first scenario ("fully insured") would have a single statewide carrier offering PPO (Options A and B) and EPO coverage. Up to two other carriers would be able to offer HMO and POS Option-A products. It was hoped that the PPO would be structured to the satisfaction of a vast majority of employees and would set the state contribution rate, but only one carrier responded. If this scenario had been accepted, 12 counties that have hospitals would not have had a contract with the sole bidder, no HMO's or POS's would be offered, and network sufficiency would have been a concern. This scenario would have resulted in the largest increase in cost—approximately $191 million, or 35.6 percent.


The second scenario was a self-insured plan offering a statewide PPO and EPO, with the selected carrier having the option of offering an HMO in any county. Three carriers bid, none bid an HMO product, and only one qualified. The projected cost increase would have been $116 million, or 21.7 percent (excluding administration costs), and the Commonwealth would be assuming the fiscal risk, which is growing at a rate of almost 15 percent annually. About 124,000 persons would have been required to change their coverage under this scenario.


The third scenario was the "current plan"—fully insured, with up to three carriers per county. Four carriers bid on this scenario. The overall cost increase to the Commonwealth would be $52.5 million, or 9.8 percent. Aetna chose not to offer in 2003. Anthem, which had offered in 66 counties in 2002, offered in only 16 counties. Scenario #3 proved to be the best compromise for 2003, with the least amount of disruption to members. The challenge was to find coverage for five counties that had no coverage under this scenario.


Secretary Palmore remarked during the presentation that if the Commonwealth should decide to self-insure in the future, it will cost more and that there will have to be enough lead time to get the administrative structure in place. With the presentation concluded, she and Mr. Felix offered to answer questions from the Committee.


Representative Larry Clark asked the total number of people for whom coverage was being sought. Secretary Palmore said the number varies on any given day but that there are approximately 171,000 public employees eligible to receive insurance in the state group. This includes state employees of all three branches, all employees of local boards of education, all health departments, as well as employees of KCTCS, the Lottery Corporation, and others. Adding dependents, the figure increases to about 233,000.


Representative Arnold asked whether any cities or counties are participating in the state group. Secretary Palmore said that a few have opted to come into the system, primarily within the last two years.


Secretary Palmore discussed the situation in Powell County. She said that three carriers bid for Powell County. Humana listed two specialists in its network. Bluegrass Family Health and CHA each indicated "zero" specialists in their network for Powell County and were, therefore, not eligible to offer in that county, pursuant to the "40-percent rule." After all the contracts for 2003 had been signed it was discovered that Bluegrass and CHA do have specialists for Powell County, which they did not realize when they submitted their original bids. She said this has presented a dilemma, since the residents of that county would like to have additional choices besides Humana.


When asked by Senator Robinson, Mr. Felix said that for 2002, 12 counties have only one provider; in 2003, 51 counties will have only one provider. Senator Robinson asked which counties other than Powell County will lose current carriers in 2003. Secretary Palmore said she would get that information to Senator Robinson after the meeting.


Senator Robinson asked whether it would better serve the state to have one statewide insurance carrier. Secretary Palmore said that, in her opinion, that would at the very least ensure that all employees would pay the same premium and retain access to their usual physicians. Senator Robinson said that Powell County is a victim to the system and that its people deserve better. He questioned whether Humana, which currently insures only 15 members in that county, will be able to handle the membership increase. Secretary Palmore said that the RFP process requires all companies that bid to meet certain administrative standards but that representatives of Humana could answer this question more specifically. Senator Robinson asked what can be done to prevent this from happening again. Secretary Palmore said that if the carriers had turned in correct information initially, the problem would not have occurred.


Senator Boswell noted that 11 counties in 2003 will have an employer contribution rate well in excess of $300—including Daviess and McLean, which are in his district, and six counties that are in his area development district. He asked what is driving the higher cost in those counties. Secretary Palmore said that part of the cost driver is the increase in group utilization, which has been growing at approximately 15 percent per year, but the biggest cost driver overall is pharmaceuticals. She said that the carrier [Anthem], however, could better answer how they determined their premiums for 2003.


Representative Lee said that in Hardin County, the fourth largest county in Kentucky, Anthem chose not to bid for 2003 and that Humana will be the only provider in that county. He questioned why there are only three counties that were bid by both Anthem and Humana. He said he is greatly concerned about the inconsistency across the state. It is his understanding that Anthem has pulled out of 50 counties. In Hardin County, for example, many people will have to change primary care physicians, and some doctors are unwilling to take new patients or accept Humana. He said it is time to answer the questions about what self-insuring would involve. He suggested that all the affected parties should come together—including groups representing local governments—perhaps as a task force, to look at all the issues, so that there will be enough understanding to make an informed decision whether self-insuring would be advisable, even if it costs more. Secretary Palmore said that the Personnel Cabinet would be willing to assist in any way possible and that they already have much information that will be useful in making decisions regarding self-insuring.


Senator Borders said it is time to work together to address the problem in a bipartisan spirit. He expressed concern about the scope of care and the cost of the health insurance. He went on to say the legislature is not getting the job done and that legislators have an obligation to "step up to the plate" and do what is necessary. He suggested that maybe the carriers should be asked to account for their decisions. He said legislators must learn more about self-insurance but that he does not believe it is the way to go—large companies have tried it and it does not work.


Representative Wayne said he is concerned that the Commonwealth is not being served well by the market or the insurance companies. He said that thinking needs to be more creative. For example, would it not be reasonable to research and determine how much it would cost to have a more inclusive pool of employees in a statewide self-insured system—a pool that would include the universities and all the cities and counties? After initial startup costs level out, in the long run it may well be less expensive to self-insure. Profit margins will not be a factor. The assertion that self-insuring will not cost less is based on current data for a limited pool of insureds. He said he finds it hard to believe that self-insuring will not be cheaper and better, if there is a streamlined system that is administered efficiently and which includes a large membership pool.


Don Speer, Commissioner of the Department for Administration, Finance and Administration Cabinet, was asked about the situation in Powell County. Representative Arnold asked whether the contracts with the carriers can be amended, since it has been determined that Bluegrass and CHA have specialists in Powell County. Mr. Speer said that he did not have an answer at this time but that they are looking into the situation and will do the best that they can to address the problem.


Representative Feeley said he gets more calls from constituents about health insurance than any other issue. He asked what explanations have been offered by Aetna for pulling out of the program and by Anthem for offering in only 16 counties. Secretary Palmore said she has heard from both companies regarding the reason for their actions but that she thinks it would be more appropriate to hear from them directly. She added that in both cases it was a business decision. (Chairman Geveden inquired whether anyone from Anthem or Aetna was in the audience, but no one was present.) Representative Feeley requested that the Committee ask both companies to send someone to the next meeting. He said that if they will not come voluntarily, maybe they could be subpoenaed. He added that the Commonwealth apparently is doing something wrong if companies like Aetna and Anthem are being driven out. Chairman Geveden said that they will be invited to the September meeting. Representative Bruce indicated that the Banking & Insurance Committee is also interested in hearing from the companies. Representative Larry Clark suggested that, if the insurance companies will be coming to the next meeting, it might be more productive for members of the State Government and the Banking & Insurance Committees to hear the testimony at the same time. He went on to say that Secretary Palmore and her staff are collecting the data and doing the best job they can but that it will fall back on the legislature to make tough choices. He suggested that different model health plans be looked at and that the universities and municipalities perhaps should not be allowed to continue to "pick and choose." He said it's time to decide how to best serve the employees, even if it requires going to a self-insured program. He pointed out that the Kentucky Employers' Mutual Insurance Authority, the workers' compensation insurance program, is working, in spite of the naysayers.


Representative Marcotte said he finds it curious that in Boone, Campbell, and Kenton Counties only one company is offering an HMO plan. He said he will suggest to the Northern Kentucky Caucus that they look at this and meet with the area insurance companies. He went on to say that several of his teacher constituents recently expressed concern to him about the health insurance situation. He said that northern Kentucky is already at a disadvantage, since teachers can seek employment across the river in Ohio, where the salaries and benefits are better. He said health insurance issue should probably be the number one priority for legislators.


Representative Belcher said she would like copies of the Powerpoint presentation to be provided to state employees, to help them understand the RFP process—and that members of the legislature should also receive it, along with the list of companies that are offering in each county. She also said she thinks the plan choices and cost are unacceptable and asked about the possibility of doing a rebid for 2003. Mr. Speer said he does not think that a rebid could be done in the timeframe that is left. He said the RFP process would take two or three months, but the open enrollment period and membership enrollment takes a lot of time. He said that even if the timeframe were to be shortened, he could not guarantee that the program could be in place before beginning of the 2003 plan year.


Representative Marzian commended Secretary Palmore and staff for their hard work. She said she is intrigued by the possibility of self-insuring and asked whether the Medicaid population could be brought into the state group. She noted that many of the Medicaid recipients are children, who typically would have lower utilization. Secretary Palmore said she does not know the answer but that she would be glad to discuss this with some of the lawyers in the Cabinet for Health Services.


Representative Callahan asked how many states currently self-insure. Secretary Palmore said that many of the states that do are not totally self-insured, which makes it difficult to do a comparison between states. Representative Callahan said that the insurance companies will continue to control the situation year after year and that he thinks the Commonwealth should aggressively look at the possibility of self-insuring. He said it would give the state control over the health insurance program and a greater ability to identify and deal with problem areas.


Representative Bowling said he is concerned about the role state government is playing in increasing the cost of health care in Kentucky. He said that the added layers of bureaucracy in all areas of government, for example, help drive up costs. He recommended that any examination of the health insurance program also focus on this issue.


Representative Geveden said that the impediments created by HB 250 have been practically eliminated, in the hope of creating competition and bringing insurance companies back into Kentucky. He said there's nothing to stop Anthem or Bluegrass or Humana or any other company from offering health insurance in every county, but they refuse to do so. Competition has not lowered costs because the utilization of health care has increased, and, absent regulation of fees, health care costs will continue to escalate. He said there's not much to do about it except to have insurance companies bid for the services, or to take the self-insured route. He expressed appreciation to Secretary Palmore and staff for their hard work and thanked them for their presentation today.


Representative Geveden and the Committee applauded Joyce Honaker for her recent ASI Chair's legislative staff achievement award, which is given annually by the National Conference of State Legislatures. Representative Geveden noted also that Ms. Honaker is one of three state legislative staff who have been chosen to travel to Hong Kong in October to work with their legislative body under NCSL and U. S. State Department sponsorship.


Senator Robinson assumed the chair and recognized Representative Geveden for a motion. Representative Geveden moved that the Committee request the Legislative Research Commission to authorize a joint subcommittee of the Interim Joint State Government and the Interim Joint Banking & Insurance Committees to study the state health insurance program. The motion was seconded and passed by unanimous voice vote. Representative Lee said this is an excellent idea and that he had intended to offer a resolution to this effect. He recommended adding a timeline to the request and suggested that the joint subcommittee should complete it work by the end of 2002. Senator Robinson said it might be better to simply acknowledge that time is of the essence and strive to finish the study by the end of the year, without being locked into a definite timeframe. Representative Lee concurred.


Without objection, Senator Robinson said that items #5 and #6 on the agenda would be deferred until the next meeting, due to shortness of time. Next on the agenda was discussion of state contributions toward insurance for retirees.


The first speaker was Bill Hanes, Executive Director of Kentucky Retirement Systems. Brad Gross, Kentucky Retirement Systems staff, assisted Mr. Hanes in his Powerpoint presentation. (Copies of the Powerpoint presentation were provided to the Committee.) Mr. Hanes gave a detailed presentation that focused on the following topics: retiree insurance benefits; financing of retirement benefits; actuarial funding; unfunded actuarially accrued liability (UAAL) for the insurance funds of the Kentucky Employees Retirement System (KERS), the County Employees Retirement System (CERS), and the State Police Retirement System (SPRS); contribution rates for retirees; projected payments for insurance premiums for the three systems; and Representative Geveden's proposal for funding future retiree benefits.


Key points of Hanes' presentation are as follows. The General Assembly created the medical insurance benefit for retirees of KERS, CERS, and SPRS in 1978. In 1989, an extensive liability modeling study was completed, and the target funding level under the Entry Age Normal actuarial funding method was determined, with a goal of reaching that level by 2016. Kentucky Retirement Systems is well funded for pension benefits but not for the medical insurance benefit. The medical insurance benefit for retirees is mandated by the "inviolable contract" provision in KRS 61.692. There are two different methods of funding retirement benefits. "Pay as you go" is the method employed by most retirement systems. Kentucky's system is based upon actuarial funding and uses the "entry age normal" cost method. KRS' survey of several surrounding and southern states revealed that none of those states had a contract for providing medical insurance, and that a reduction of benefits is occurring in many states which, like Kentucky, are faced with budgetary constraints.


In the Governor's current spending plan, the Retirement Systems Board's recommended actuarial rate of 5.89 percent for the employer contribution in KERS-Nonhazardous has been reduced to 3.76 percent, with the reduction being allocated to the Insurance Fund. As of June 2002, based on the increase in payroll, it appears there will be a shortfall of more than $40 million in the KERS Insurance Fund. If current rates were adjusted to fund at the full-actuarial funding rate, the KERS-Nonhazardous employer contribution rate for 2002-2003 would have to be increased to 10.45 percent (0.34 percent to the Retirement Fund and 10.11 percent to the Insurance Fund). The KERS Insurance Fund was 71.3 percent unfunded for 2001-2002, but the unfunded liability has improved over the past decade. The CERS Insurance Fund was 77.7 percent unfunded for 2001-02, and SPRS was 49.5 percent unfunded.


Kentucky Retirement Systems (as of July 2002) provides health insurance coverage for 16,829 "under 65" retirees and 26,865 "over 65" retirees. The "over 65" group represents the bulk of the Systems' liability. From July 1978 to January 2002, the Systems' cost for single "under 65" retiree health insurance increased 861 percent; the increase was 1,700 percent for High Option coverage in the "over 65" age group. Payments from the KERS insurance trust for FY 2001-02 totalled approximately $52 million. In FY 2010-11, the payments are projected to be $143 million, as there will be a large increase in the number of retirees. Pharmaceuticals are also a major cost driver. The trend is similar for CERS, which has a larger membership than KERS.


In the final part of his presentation, Mr. Hanes focused on Representative Geveden's proposed plan to insure future retirees. Mr. Hanes said that Kentucky has a system different from any other system he knows of, in that there is a "promised benefit" for the medical insurance, and the Kentucky Constitution requires that this benefit not be impaired. He explained that Representative Geveden's proposal would establish a different insurance benefit for employees hired after July 1, 2003. Instead of a premium, an employee would earn a dollar benefit, which could be applied toward the cost of the medical insurance premium. All employees, both hazardous and nonhazardous, regardless of position, would receive the same medical benefit. The maximum medical benefit would be $200 in 2003 and in future years would be adjusted for inflation, based on the CPI. An employee would have to work 25 years rather than 20 to earn a full medical benefit, and there would be no benefit for less than 10 years of service. For 10-14 years the medical benefit would be $50; for 15-19 years, $100; and for 20-24 years, $150. Under the proposal, the General Assembly would have the flexibility to increase the benefit.


When asked by Senator Robinson, Mr. Hanes said the proposal is very much in line with the benefits offered in other state systems. He said that Mr. Gross found in his research that Ohio seems to be the only state in which the retirement system pays the full health insurance benefit. However, Ohio is in the process of reducing benefits. Many states are reducing benefits for current retirees because of budget constraints.


Representative Belcher asked whether the proposal would allow employees who purchase service credit to apply that toward the medical insurance benefit. Mr. Hanes said it would depend on how the bill is ultimately drafted but that it would likely be based on actual service earned.


Representative Callahan said that, unless the Commonwealth decides to self-insure, in order for Representative Geveden's proposal to work, it would be necessary for the insurance companies to return to Kentucky. Mr. Hanes said that is probably correct, from the standpoint of getting the companies to participate in order to keep premiums down. Representative Callahan said that years ago employees were more interested in the amount of their annuity, whereas now many are less concerned about the annuity and want to continue working to qualify for health insurance benefits. Mr. Hanes agreed. Representative Callahan also commended Mr. Hanes and Secretary Palmore and their staffs for doing an excellent job.


Mr. Hanes noted that the charts showing projected savings under Representative Geveden's proposal are based on numbers run two years ago but that are still reasonably accurate. He explained that savings would not be immediate, since the proposal only applies to employees hired after July 1, 2003. The projected total savings for KERS-Nonhazardous would be $94.9 million by the end of FY 2010-11. Representative Geveden and Mr. Hanes noted that the cities and counties that participate in CERS would also see significant savings under the proposal ($121.6 million by the end of FY 2010-11), and the projected total savings for all three retirement systems would be $310.6 million. Representative Geveden added that the projected savings over a 20-year period would be well over $1 billion. Mr. Hanes concurred and indicated that the savings would be expected to increase significantly over time.


The next speakers were Gerald Stewart, representing the Kentucky Firefighters' Association, and Ben Lampton, who spoke on behalf of Kentucky Public Retirees. Mr. Stewart said that about half of the firefighters (CERS-Hazardous system) in the state belong to the Association. He said he is not convinced that Representative Geveden's proposal is the way to go and that he believes firefighters are opposed to the idea, in part, because they feel it could end up costing more for cities and counties in the long term because of its potential impact on recruitment and retention of employees, particularly police and firefighters. He said the people he represents are very interested in the state health insurance plan and want all employees to be treated equally under the plan. His organization is concerned and is willing to look at the proposal and work to find a solution. He thanked the Co-Chairs for the opportunity to speak and said he hopes to attend future meetings of the Committee.


Mr. Lampton said that public employees realize the seriousness of the health insurance funding problem and want to see what can be done about it but feel that retirees should not be singled out. He also gave his own interpretation of the Entry Age Normal actuarial funding method and the amount of the projected unfunded insurance liability. He suggested that the method of calculating the unfunded liability would include a new hire even if that person worked only one day. Mr. Lampton went on to say that probably 95 percent of retired city and county public employees would not be retired today if it were not for the insurance benefit provided by their retirement system. He thanked Senator Robinson and Representative Geveden for their efforts in trying to solve the problem. He said his constituents are not entirely happy with Representative Geveden's proposal but if that is what is needed to address the problem, legislators and future employees will have to deal with it.


Responding to Mr. Stewart's and Mr. Lampton's concern about the proposal, Senator Robinson suggested that the concerns of current employees should probably take precedence over issues relating to employees who are yet to be hired.


Representative Geveden said that Mr. Stewart, Mr. Lampton and others have expressed concern that under the proposal some employees would be entitled to lesser benefits than their coworkers. He countered that paying for the health insurance benefit for Kentucky public retirees is a big obligation for the Commonwealth and has resulted in the unfunded liability. He asked Mr. Hanes to respond to Mr. Lampton's comments about how the unfunded liability is calculated.


Mr. Hanes said that the Board shares many of the public policy issues raised by Mr. Lampton, which is why the Board has not endorsed any particular plan to deal with the unfunded liability. He said he does not think that, from an actuarial standpoint, Mr. Lampton's understanding of the Entry Age Normal method is correct. He said the actuary makes a number of assumptions but does not assume that an employee who just begins to work is retired. The actuary considers the actual experience, to determine the number of people expected to retire.


Senator Robinson thanked Mr. Hanes for his presentation. Next on the agenda was a presentation by Gary Harbin, Executive Secretary of the Kentucky Teachers' Retirement System (KTRS). Bill Leach, Director of Member Services, accompanied Mr. Harbin. Mr. Harbin gave a Powerpoint presentation (copies provided to the Committee), outlining the benefits, funding, and actuarial status of the KTRS retirement and medical insurance programs. Topics included the KTRS funding formula; comparison of benefits offered by surrounding states; actuarial status of the System as of June 30, 2001; rates of service retirements; contributions to the System as of and prior to July 1, 2002; field of membership; active/retired teacher ratio; "100-day Retire/Return to Work Program; 2002 House Bill 637; health plan for "under 65" retirees; Medicare-eligible health plan for "over 65" retirees; board actions relating to health insurance; implemented and recommended cost-saving plan changes; and addressing future costs of medical benefits.


Following are key points made by Mr. Harbin in his presentation. KTRS has provided the medical insurance benefit for retired teachers since 1964, was one of the first retirement systems in the nation to provide this benefit, and is one of only three states that currently offer full medical benefits for retired teachers. The other two states are Alaska and North Carolina. In 1990, Alaska entered into a plan similar to the one proposed by Representative Geveden. The employer contribution for KTRS is fixed by statute. Teachers are not covered by Social Security in Kentucky, Illinois, Ohio, or Missouri; they are subject to Social Security in Indiana, Tennessee, Virginia, and West Virginia. Most members contribute 9.855 percent of their salary, with a state match of 13.105 percent. Ohio is the only one of the seven surrounding states that has a meaningful medical benefit for teachers, although it is not as good as Kentucky's. Kentucky is the only state in this eight-state group—and one of the few states in the nation—that provides retirement, with full medical benefits, after 27 years service.


KTRS retirement benefits are 90.8 percent funded. The medical benefit is a "pay as you go" benefit. For comparison purposes, if the benefit were determined actuarially, the funded liability would be 4.1 percent. An actuarial expense study found that during the past six years the number of retirements was greater than anticipated; 35 percent more male and 43 percent more female teachers retired than expected. As of July 1, 2002, after the actuarial study, one percent of the funding for the medical benefit was shifted to the retirement fund, in order to keep the retirement benefit funded in under 30 years. Of KTRS's 52,600 active members, 11,600—the bubble of "baby boomers"—are currently eligible to retire. Total membership is 88,400, including retirees, their beneficiaries and survivors, and inactive members. In 1971, 84 percent of members were active and contributing; their contributions and the state matching contribution paid for the medical benefit of the 16 percent who were retired. When the bubble of "baby boomers" retires, the ratio will be 56 percent active to 44 percent retired members.


Prior to enactment of HB 637, only active full-time teachers were contributing to KTRS and contributing toward the medical benefits for retirees; and there was a great increase in the number of noncontributing positions—e.g., the 100-day program in which retirees return to work in the classroom. HB 637 brought all teaching positions back into active contributing status and also expanded return-to-work opportunities for retirees in an actuarially sound way. KTRS also has a new retirement program that allows up to four percent of the population in a school district to be filled by retirees returning to work in full-time, contributory positions.


KTRS maintains two medical insurance benefits for retirees. Retirees under age 65 are in the state group health plan. Retirees 65 and over belong to the self-insured, Medicare-eligible health plan, administered by Aetna. Medicare pays approximately 80 percent of the medical benefit, KTRS picks up approximately 16 percent, and the retirees over age 65 pick up the remaining four percent cost. KTRS pays the entire cost of the drug benefit, except for associated deductibles and copays. The self-insured plan has been in place for over 11 years. The prescription drug benefit is a key component of medical costs for retirees over 65. KTRS spends approximately $14 million annually on the medical benefit for retirees over age 65 and about $26 million for the drugs. Since 1998, the cost of drugs has increased approximately 61 percent for that age group.


Two years ago the Board contracted with a national benefit advisor to conduct a long-term strategy study. The Board implemented many of the suggestions produced by the study, including plan design changes and improved ways to communicate with members and educate them in ways to contain costs. The drug copay for 65-and-over members was increased in March, 2000; new contracts were negotiated with Merck and Aetna that reduced costs; "double dipping" for members under age 65 was eliminated in January, 2001; beginning January 2002, incentives were offered to encourage the use of generic drugs; and the medical benefit percentages changed for members new to the system on or after July 1, 2002. Many teachers were coming from out of state to work in Kentucky late in their careers in order to take advantage of the medical benefit. KTRS pays 25 percent of the cost of the medical benefit for life for under-65 members with 5-9.99 years of service; but after age 65, the benefit increases to 70 percent. Therefore, the Board rescaled the drug and medical benefit for new members hired after July 1, 2002. (Under the new scale, members with 5-9.99 years of service would be entitled to a medical benefit of only 10 percent.) To address future costs of medical benefits, KTRS will continue its cost-containment measures; implement plan design changes as needed; further the education of members; attempt to improve the ratio of active to retired members; and, if necessary, seek additional funding and/or implement further plan design changes.


Mr. Harbin concluded his presentation and answered questions from the Committee. Representative Arnold asked whether teachers who work outside the school system during the summer and pay into the Social Security system will qualify for Social Security benefits. Mr. Harbin explained that under the pension offset and windfall elimination provisions in federal law, they would most likely not have enough qualifying time to be eligible for Social Security benefits.


Senator Robinson thanked Mr. Harbin. Business concluded, and the meeting was adjourned at 3:45 p.m.