Chapter 5: Asset and Financial Management
Maximize the Recovery of Retiree Insurance Costs from Federal Programs
Summary
Texas’ General Revenue Fund carries much of the burden of the costs of insuring the state’s retired employees. Retirees’ insurance is an allowable cost that can be recovered from various state-federal programs, but the General Revenue Fund receives little reimbursement for retirement funding from federal sources. The State should ensure that retirees’ insurance costs are recovered from federal programs and that the General Revenue Fund is reimbursed appropriately.
Background
In 1999, Texas contributed more than $100 million to provide insurance for its retired employees.[1] The state’s General Revenue Fund carries much of the burden of this significant state expenditure. Retirees’ insurance is an allowable cost that can be recovered from various programs funded jointly by the state and federal governments. Because of the way the state appropriates and charges for this benefit, however, the General Revenue Fund receives little in the way of reimbursement for retirement funding from federal or other non-general revenue sources.
The federal Office of Management and Budget (OMB), through its Circular A-87, has ruled that the states may recover retiree insurance benefits paid to workers connected with jointly funded state-federal projects on a pay-as-you-go basis or on an actuarial basis. With the pay-as-you go basis, the method used in Texas, the cost of retiree insurance is funded after the employee retires; under the accrual basis, amounts necessary to repay the state for retiree insurance are accumulated over the employees’ active work careers, just as pension benefits.
The accrual method ensures that every source of funding during an employee’s career pays its proportionate share of the cost of retiree insurance; the cost of insurance can be included in the benefit rate charged to each federal program. Under the pay-as-you-go basis, the cost of retiree insurance can be recovered only by accounting for it as part of the joint program’s indirect costs. By shifting to the actuarial method for cost recovery, the accounting firm of DMG Maximus has speculated that Texas could improve its cost recovery to General Revenue for retiree insurance by as much as a hundred-fold.[2]
For example, the Employees Retirement System (ERS) drew just over $6.8 million from General Revenue in fiscal 1999 to cover the cost of retirees from the Department of Human Services (DHS).[3] While DHS reimbursed the General Revenue Fund for active employees’ insurance and retirement match, no reimbursement was made to the General Revenue Fund for retirees’ insurance. Based on DHS’s 51 percent federal funding, General Revenue funded retirees insurance of $3.37 million that should have been borne by federal programs.[4] The Department of Protective and Regulatory Services (DPRS) projected that an additional $200,770 or 22 percent of its $912,592 cost for retirees’ insurance could have been recovered from federal entitlement programs for fiscal 1999 if the state had used an actuarial charge for active employees.[5]
It is unclear as to which agencies are recovering retirees’ insurance costs through their indirect cost rates and which are not. It is clear, however, that virtually no agencies are reimbursing the General Revenue Fund for such costs. Had General Revenue been reimbursed by federal programs for retirees’ insurance in proportion to agencies’ funding as reported in their Agency Benefits Proportional Report, an estimated $15.3 million in reimbursements would have been received in fiscal 1999.[6] Assuming DPRS’ estimate of 22 percent is representative, the increased recoveries from federal programs could exceed $3.3 million per year.
A similar situation exists with respect to retirees’ insurance paid by the local funds of institutions of higher education. For fiscal 1999, higher education local funds paid 32.8 percent of the insurance contribution for active employees, while General Revenue paid 67.2 percent. For retirees’ insurance contributions, the General Revenue Fund paid 90.2 percent, while local funds paid only 9.8 percent. Had retirees’ insurance costs been paid in the same proportion as active employees, higher education local funds would have paid an additional $6.9 million.[7]
The most effective way to ensure proportional payment of the cost of retirees’ insurance from the various sources that pay employee salaries is to collect a portion of the cost from each of those fund sources during each pay period. Because no per-employee amount is calculated for retirees’ insurance match, payment through the payroll process is not currently a viable option.[8] Moving to an actuarial charge for retirement insurance for all active employees would allow for the payment of this benefit through the payroll process, ensuring proportional funding of these costs as well as increasing recoveries for the General Revenue Fund. Making the cost of retirees’ insurance flow through payroll each month also would make the total cost of each agency’s programs more apparent.
Recommendations
A. The Employees Retirement System should consider implementing an actuarial-based charge on active employees to fund the cost of retirees’ insurance.
If an actuarial charge can be established, appropriations for retirees’ insurance should be allocated to the individual agencies for payment through their payrolls.
B. The Health and Human Services Commission and the Governor’s Grants Team should work with agencies to ensure that retirees’ insurance is recovered from federal programs and, when appropriate, that the General Revenue Fund is being reimbursed.
When the commission and the Grants team determine that the cost of retirees insurance has not been recovered, the agencies should attempt to recoup any allowable costs from prior years that still may be recovered.
Fiscal Impact
The fiscal impact of these recommendations cannot be estimated. The adoption of an actuarial rate for active employees to cover the cost of post-retirement health benefits would result in increased recoveries to the General Revenue Fund from federal and local funds and fee-generated revenues. The shift to an actuarial rate would also require that any unfunded liability for post-retirement health benefits be amortized in accordance with Generally Accepted Accounting Principles. The cost to the General Revenue Fund and other funding sources related to the amortization of any unfunded liability cannot be determined until an actuarial study is conducted by the Employees Retirement System.
Endnotes
[1] Analysis by the Texas Comptroller of Public Accounts of Employees Retirement System (ERS) draws for retirees’ insurance and reimbursements to the General Revenue Fund made by state agencies and universities based on data provided by ERS, Agency Benefits Proportional Reports, and data from the Uniform Statewide Accounting System for fiscal 1999.
[2] Interview with Joel E. Nolan, regional director of State Services, DMG Maximus, Inc. Phoenix, Arizona, August 7, 2000.
[3] Employees Retirement System, “Payroll Related Costs, Fiscal Year 1999: Non-USPS Agencies, State Agencies, General Revenue,” Austin, Texas, September 9, 1999.
[4 ] Department of Human Services, Benefits Proportional by Fund Report for Fiscal Year 1999, Austin, Texas, January 7, 2000.
[5 ] Interview with Drew Thigpen, deputy director for Finance, Texas Department of Protective and Regulatory Services, Austin, Texas, August 7, 2000.
[6 ] The estimate was calculated by applying the 26.1 percent overall proportion of federal funds reported by agencies in their Benefits Proportional by Fund Report for Fiscal Year 1999 to the $58.8 million paid for retirees’ insurance from general revenue for fiscal 1999.
[7 ] Analysis by the Texas Comptroller of Public Accounts of Employees Retirement System draws for retirees’ insurance and reimbursements to the General Revenue Fund made by state agencies and universities based on data provided by ERS.
[8 ] Interviews with Darrell Leslie, director for Administration and Finance, Employees Retirement System, May and August 2000.
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