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1d. Bid specs for Health Ins. 1 . CITYOF i ct, .............. CHANHASSEN ts% c f . - 690 COULTER DRIVE • P.O. BOX 147 • CHANHASSEN, MINNESOTA 55317 . (612) 937 -1900 • FAX (612) 937 -5739 MEMORANDUM II TO: Mayor and City Council - • - FROM: Don Ashworth, City Manager 1 DATE: August 12, 1993. SUBJ: Authorization to Prepare. Bid Specifications, Health I Insurance Policy As stated in the "News and Blues - An Interim Report ", De3.oitte has prepared a tentative schedule forthisyear's health benefit RFPs. This item is being presented to ensure that the recommendations of Delo ire consistent with the, goels of the Council. Joe Harten has provided an overview_. of activities which occurred this_. past:__year in biading� _ emp1oyee..benefits:- as. _well as summarizing . the remaining benefit, packages for formal bidding this year. At the end of last year, the Council directed ' staff to research the feasibility of including dental insurance as a part of the city's t I, overall esnploye.e benefit program. Mr , Harten.has listed various reasons why the city should not consider : a. this coverage as a part of our program. a Tfiis office agrees with the positions I presented by Mr. �.ti` highlight Harten,. : I would like ti :.,fu�:ther 2ii hli ht one of Mr. Harten's suggestions - the establishment of a profit sharing plan through which " employer contributions' could help off -set the cost of dental expenses. The "profit sharing" concept comes into I play recognizing F,.cost __savings achieved or both the city and employees as , a resu .tl' of- °-thi '* Pastf - year's bidding /program modification pracessrWSpecifioa..ly: the,Lb,dd.ng ,process achieved I an approximate` ..$4, 200 /year cost savings in overa1.1 premitu'ns paid for long term disability. Our employee's participation in the new "cafeteria plan" has far exceeded all expectations. Both the p ' employee and employer gain through. sage'bf "the cafeteria plan in that social security withholdings Are not required either the city's contribution (75 %) or the:e iployee .contribution. For 3.991, the city itself will pay approximately $12,000 less in PICA I payments. It is highly likely that this next year's bidding process (primarily health insurance) will produce additional savings to the city. However, simply using the $16,200 gained by I the city ($12,000 from the cafeteria plan /$4,200 LTD) and sharing half of that with our employees could provide the means by which • employee dental costs could be reduced. Using the profit sharing J' PRINTED ON RECYCLED PAPER 1 1 r Mayor and City Council August 12, 1991 Page 2 concept, the city could justify making a contribution of approximately $200 to each employee's cafeteria plan account for 1992. Doing this would have the additional benefit to the employee of having these dollars as pre -tax dollars which, on an average, would mean that dental costs of up to $300 would be paid without cost to the employee. Those desiring not to expend their profit sharing dollars on dental expenses could similarly reduce their costs for the employee portion of their health insurance, increase their life insurance, etc. A final benefit of this approach i ' that it allows an employee to select the type of benefit he wished to receive versus being mandated to be a part of a dental coverage program which may have higher costs to him than if he had no ' coverage. Recommendation Approving the general time table for this year's RFP process, including preparing specifications for our group health coverages is recommended. Staff should also be instructed to further develop ' the "profit sharing" concept. This work should be ready for presentation in October and potentially included in the updating of our personnel policies - typically a task completed at year end. 1 1 • 1 1 , 1 1 1 1 1 1 5 Deloitte & Touche 1 /\ 4300 Norwest Center Facsimile (612) 339-6202 90 South Seventh Street Minneapolis, Minnesota 55402 -4150 Telephone (612) 344 -0200 June 28, 1991 1 Mr. Todd Gerhardt Assistant City Manager City of Chanhassen P.O. Box 147 Chanhassen, MN 55317 Dear Todd: You asked Deloitte & Touche to comment on the status of the City's employee benefit programs and report cr the desirability of making changes for the 1992 plan year. 1 Currently, the City provides the following welfare benefits: • Group Life /AD &D Insurance through Minnesota Mutual Life • Group Long -term Disability Insurance through UNUM • Self - administered flexible spending accounts for dependent care and unreimbursed medical care • Group Medical Coverage through Medica (formerly PHP) 1 Summaries follow for each of these programs. Group Life /AD &D ' The City's plan provides a life insurance benefit of 100 percent of annual salary, with an equal amount of AD &D. Minnesota Mutual insures these benefits at an approximate annual cost of $3,600. Benefits were increased from a flat amount of $10,000 to the current salary-based amount at our recommendation to make this benefit more tangible to employees and more comparable to other employers. The changes were made as part of last fall's RFP process. Because of Minnesota Mutual's low cost and experience with previous City plans, we recommended that the City accept their proposal. Since Minnesota Mutual's proposed rates were guaranteed for one year, the City should expect a renewal offer sometime in October or November. While we cannot recommend renewal with the current Minnesota Mutual program without reviewing actual renewal rates, we do not feel that the City should seek new proposals for several years as long as Minnesota Mutual's renewal rates are reasonable. Minnesota Mutual's plan service and financial stability are acceptable, and last year's premium differential between Minnesota Mutual and its competitors was significant. Reasonable renewals should maintain this positive premium differential. RECEIVED JUL 01 1991 1 Member " - '- N Member CITY OF CHANHASSEN , 1 I Mr. Todd Gerhardt June 28, 1991 Page Two . Long -term Disability 1 The City's LTD plan underwent extensive modifications for the 1991 plan year. Benefits were increased and contract provisions were strengthened. UNUM was awarded the I contract at the conclusion of the RFP process. Since UNUM's proposal included a two -year rate guarantee, no action is needed for the 1992 plan year. • Flexible Spending Accounts 1 The City implemented flexible spending accounts to allow employees to be reimbursed for eligible dependent and health care expenses on a pre -tax basis. After reviewing I proposals from several administrators, the'City elected to self- administer the plan. To the best of our knowledge, the City is providing prompt, accurate, and cost - effective service to its employees. Therefore, we recommend that the City maintain the current plan I provisions and method of administering the FSA program. Group Medical I The City's employees are currently covered under a point -of- service program with Medica (formerly PHP). Benefits vary based on provider selection: claims are generally paid at 100 percent if member providers are used; or 80 percent after a $300 calendar year I deductible if nonmember providers are used. The City did not request proposals for the medical plan as part of last year's RFP process. This decision was based on several factors: I • PHP's rates and benefit provisions were very competitive when compared to other available options. 1 • Employees strongly opposed changes in plan design or provider availability. 1 • The City made significant changes to its other benefit programs, so changes in the medical plan at the same time would have caused communication difficulties. We recommended that the City add a $10 office visit co- payment to the plan to control I costs and limit future rate increases. After consultation between the Council, staff, and employees, this recommendation was not adopted. However, the Council directed staff to seek proposals for the 1992 plan year in order to check options available in the I marketplace and to comply with the State's proposal statute. Therefore, we are ready to prepare the RFP for group medical insurance, effective January 1, 1992. We recommend the following timetable: I Develop RFP July 1991 Distribute RFP Au gust 1 . Proposals due Au;ast 26 I Review proposals September 2 -13 Report to City staff September 20 Board action October 1 Coverage effective January 1, 1992 _ De!oltte & Touche 1 0 1 Mr. Todd Gerhardt June 28, 1991 • Page Three 1 We will request proposals for the current plan design along with several alternate designs which may reduce the City's cost. Based on our knowledge of the small group market in the public sector, three to five companies should respond to the RFP. Group Dental Several council members and City employees have asked about the desirability of dental • insurance as an employee benefit. A recent Deloitte & Touche survey of Minnesota employers found that more than 75 percent of employers offer dental insurance to their employees. In addition, an informal survey of public sector groups in the southwestern metro area found that most of these jurisdictions offered dental coverage. Despite the City's position in the minority of employers without dental coverage, we do 1 not feel that the City should rush to implement a dental program. There are several reasons why a dental plan may not make sense for the City: ■ The City's overall benefit program is quite rich compared to programs sponsored by other employers of similar size. Although the City does not provide dental coverage, the medical, life, and disability benefits are first -rate, and employee contributions are very small. Dental coverage would push the value of the City's benefit offerings above comparable employers. • Political or economic realities may force cost reductions in the future. Adding a dental plan now may restrict the options available to the City later, since benefits are generally difficult to delete once they have been added. Annual premium increases for dental plans have averaged 8 to 10 percent for the past few years. These cost trends will add to the pressure on fixed or declining budgets. • Initial premium rates for groups without dental coverage include a significant load in anticipation of poor experience in the plan's first year, due to pent -up demand for dental services. We feel that market rates for a basic first -year dental plan ($50 deductible, 100 /80/50 coinsurance, $500 maximum, no orthodontia) will range from $12 to $18 per month for single coverage and $35 to $50 per month for family coverage. • Market realities will force the City to contribute most of the premium cost. Since dental plans are especially subject to antiselection, most carriers require a minimum number (50 percent to 75 percent) of participating employees. The only way for the City to ensure adequate participation is to limit the employee contribution to a low level. In other words, the City should not expect insurance carriers to write coverage for an employee -paid dental plan. 1 • 1 Deloitte& 1 Touche 1 Mr. Todd Gerhardt June 28, 1991 Page Four 1 • Employees can use the flexible spending account for dental expenses. The ' spending account allows employees to budget for their expenses and obtain reimbursement on a before -tax basis. If the City wants to partially fund dental insurance, it can make an employer contribution to each employee's flexible 1 spending account. This approach provides approximately the same results as a dental plan without incurring the overhead costs and increasing liability of a dental insurance program. 1 Please call me with any questions as you and the Council review this letter. S' • cerely, OS a -. 411 ► Jos •h . H.rten, CEBS 1 M- ager JEH:tlh ' T1047 cc: Don Ashworth 1 Steve Ogren Dan Mayleben 1 1 1 1 1 1 1 ' De!oitte& Touche es Deloitte & Touche 1 /\ 4300 Norwest Center Facsimile (6 339-6202 90 South Seventh Street Minneapolis, Minnesota 55402 -4150 • Telephone (612) 344 -0200 1 RECENT EVENTS HAVE TRIGGERED RATINGS REDUCTIONS FOR SEVERAL LIFE INSURANCE COMPANIES In the past few weeks, a great deal of attention has been given to the credit - worthiness of 1 insurance companies across the country and to the nature of their investments, mostly as a result of the State of New Jersey's recent takeover of Mutual Benefit. During the week of July 15, Moody's Investors Service Inc. downgraded its ratings for six major life insurance companies. These minor rating drops were precipitated by a perceived vulnerability due to possible real estate and investment losses. 1 Downgraded companies include: Company Former Rating New Rating , 1. John Hancock Mutual Life Triple -A Double -A -2 Insurance Company (Exceptional) (Excellent) 1 2. Massachusetts Mutual Life Triple -A - Double -A -1 Insurance Company (Exceptional) (Excellent) 1 3. Mutual Life Insurance Company Single -A -2 Baa -1 of New York (Good) (Adequate) 4. New England Mutual Life Double -A -1 Double -A -3 Insurance Company (High end of (Low end of excellent) excellent) 1 5. Principal Mutual Life Triple -A Double -A -1 Insurance Company (Exceptional) (Excellent) 1 6. Travelers Corporation Single -A -1 Single A -2 (Top of Good) (Middle of Good) In the present environment, it's a good idea to keep abreast of insurance ratings from a variety of sources, such as Moody's, Standard & Poors, and Weiss, and to take an analytical view of the company's investment portfolio. 1 • July 1991 L641 Member Liter Li::: international Delo s*Q & A periodic review and interpretation 1 To u LL c VV h a current compensation and benefits issues. I 0,, 1 J U N E 1 9 9 1 = om ensat and i . p Be nefits Report .. 1 _ -. .. - 1 .„. , ."- . _ _ 1 "Guaranteed Investment" Fails in Effort 1 to Join "Death and Taxes" 1 For decades, insurance company products forming asset of uncertain ultimate I have been a staple of retirement plan in- value. • vestment portfolios, evolving over the • One way for a retirement plan to shed its years to meet changing needs and compe- liabilities is to purchase individual annu- 1 tition from other forms of asset manage- sty contracts and distribute them to pay- ment. While insurers are unlikely to regain ticipants. This is an option for ongoing the near- monopoly of the pension market plans and is mandatory when a defined I that they once enjoyed, retirement plans benefit pension plan terminates. Puy - have several hundred billion dollars in- chasing annuities transfers the obliga- vested in insurance contracts of one sort tion to provide pension benefits from I or another. the plan to the insurance carrier. Unfor- Insurance company problems, such as tunately, another common practice of participants face the recent financial difficulties of Execu- state regulators is to reduce the payment I tive Life and First Capital Life, thus can under a seized insurer's annuity con - spawn dilemmas for thousands of plans: tracts. California, for example, currently and whether they will • Many retirement plans are funded allows Executive Life to pay only 70 per- I wholly or partly with annuity contracts. cent of each month's annuity obligation. gain access to One of the first steps that state regulators This sudden reduction in income can be 'guaranteed" funds. take upon seizing control of a troubled a great burden on retirees. I insurer is to limit access to the cash value • One insurance product that retirement of these contracts, and the reorganiza- plans have been purchasing with in- tion of the insurer's affairs may result in creasing avidity is the "guaranteed in- 1 losses to contract holders. The effect is vestment contract," or "GIC." GICs are to turn a reasonably liquid, income pro- much like medium -term bonds: the in- ducing plan investment into a nonper- surer guarantees that it will return the 1 1 2 1 1 • • principal after a fixed number of years on transfers between the competing - and promises interest payments in the tracts. (This was not a surprising dis meantime. Because they have been per- ery: if participants can transfer funds ceived as very safe and relatively high- readily from one GIC to another, they GICs are a popular option in engage in risk -free arbitrage at the plans that offer participants some de- ers' expense, and insurers naturally take gree of investment discretion (i.e., Most steps to discourage such practices.) section 401(k) plans). Now many plan The GoodHeart directors review a sponsors and participants face uncer- number of insurers and chose a GIC ro- tainty as to when and whether they will vider that offered an excellent yield d gain access to these "guaranteed" funds. enjoyed the highest possible ratings f i- Among the inconveniences that plan nancial strength. In 1990, when the GIC participants and sponsors must endure are fund held a sizeable percentage of�e uncertainties in valuing plan assets, diffi- plan's assets, the insurer's ratings beg o culties in determining the amount of dis- sink. Then, early in 1991, state regulator tributions to terminating employees, and took over and stopped GIC investors n strained relations with participants. More - taking out funds for such purposes as over, plan sponsors face potential lawsuits ing distributions to participants. The re The government's for alleged imprudence in selecting insur- lators also intimated that, when C ance providers or failure to diversify redemptions were again permitted, attempts to shield workers among insurance companies. might be at a rate of less than one hundrec from all possible Ironically, efforts to respond to these cents on the dollar. dilemmas are often made more difficult by The terms of the GoodHeart plan a disappointments and laws and regulations that have been en- participants to receive a lump sum distri risks have led to inflexible acted for the purpose of protecting plan bution of their account balance when e} participants. The government's attempts terminate employment. When pa i rules that make it hard to to shield workers from all possible disap- pants separate from service and ask for dis respond quickly and pointments and risks have led to inflexible tributions, the plan administrator i e: rules that make it hard to respond quickly several alternatives, none of which is tl effectively and effectively. palatable and clearly legal. 1. Continue to pay out GIC i st Untangling an ERISA Knot ments at face value. Since cash ' o available from the GIC contracts, this re Let's look at a typical scenario: quires "borrowing" from other in st GoodHeart Inc. set up a section 401(k) went funds and subjecting the rema plan in 1982. At that time, a committee of participants to risk of eventual losses if the directors carefully examined the invest- GICs are not redeemed in full. ment options that should hL made availa- 2. Attempt to value the GICs at it ble to participants. One option was a GIC market value and make distributions 01 fund. Investigation revealed that partici- that basis. This alternative reduce pants would get poorer returns if the plan risk of loss to other participants, bu u invested in GICs of more than one insurer, merous imponderables make a meaningfo unless stringent restrictions were imposed valuation virtually impossible. 1 J U N E 1 9 9 1 3 1 1 • I 3. Hold the GIC and in sus ense f p u nder section 415 of the Internal Revenue making distributions only after the in- Code, or could be construed as nonde- I surer's problems are resolved. This seem- ductible contributions subject to a 10 per ingly straightforward solution is cent excise tax under section 4972. Labor I prohibited by ERISA and the Internal Reve- and IRS officials are reportedly discussing nue Code. A 1984 change in the law bars these issues. plan amendments that eliminate lump sum At the moment, most employers who distribution options with respect to ac- are in this predicament seem to be playing I count balances that were accumulated be- for time, in hopes that the government fore the date of amendment. will offer guidance on how to simultan- Even if this solution were legal, it might eously obey incompatible legal mandates. I be undesirable, since participants could lose the opportunity to elect favorable in- Many Choices But No Alternatives come tax treatment of the amounts that I they did receive. Rollovers to individual In one set of circumstances, government retirement accounts might also be jeop- pension rules make the purchase of insur ardized. The applicable statute seems on ance contracts not merely an option, but I its face to permit distributions to be rolled an obligation. When a defined benefit • At the 711o))1ent, most over, provided that the initial distribution pension plan terminates in a "standard ter - equals at least 50 percent of the total ac- urination" (that is, with sufficient assets to I employers in this count balance, but IRS personnel have re- satisfy all benefit liabilities), it must pur- predicament seem to be portedly cast doubt on this interpretation. chase insurance company annuity con - 4. Have the employer repurchase the tracts for its participants. (There are I playing for time, in hopes offending GICs from the plan, thus ab- exceptions to this requirement: a benefit that the government will sorbing the risk. A purchase by a plan fhat is not yet in pay status may be cashed sponsor of assets of its own plan is a pro- out if the participant and his or her spouse I offer guidance on how to hibited transaction under ERISA, but the consent or if its present value is $3,500 or simultaneously obey Department of Labor has the authority to less.) 1 grant exemptions and has indicated its Annuity purchases by terminated plans inco legal willingness to do so in cases like the one represent a minute portion of total retire- mandates. that we are considering. We are told, how- ment plan assets (no more than two or ever, that IRS officials have raised objec- three percent) but are highly visible politi- I tions under the tax laws, arguing that the cally. One of the recently seized insurance employer's repurchase may be tantamount companies did a modest amount of termi- to an additional contribution to the plan. nation annuity business. Those plan par- I If that is so, the transaction could violate ticipants who received annuities when the prohibition against skewing benefits in their employers' pension plans terminated favor of highly compensated employees (if now face cutbacks of 30 percent in their I higher paid employees have invested more monthly annuity checks. These losses may in GICs than the rank- and -file or could someday be restored; on the other hand, result in violations of the limitation of an- they may increase if the effort to rehabili- ' nual allocations to participants' accounts tate the insurer falters. 1 J 11 N E 1 9 9 1 4 II 1 • 1 It is conceivable that the annuitants be possible to provide supplements legally will be able to look to the federal govern- in the guise of cost -of -living adjustments, , ment for help. In the preamble to its regu- which employers are permitted to pay lation establishing the annuity purchase directly. requirements, the Pension Benefit Guar-' anty Corporation stated that, "In the un- Insurance and an Unassured Future likely event. that an insurance company s- ' should fail and its obligations cannot be Most retirement plans have little or no satisfied (i.e., through a reinsurance sys- contact with imperilled insurance com- tem), the PBGC would provide the neces- parries. Nevertheless, the current turmoil sary benefits" may eventually cast a shadow on how This conclusion was, according to reli- these plans are operated. able sources, the outcome of a casual con- versation among PBGC officials. It was . Selecting an insurance company to pro- regu- vide GICs, annuities, or other products is not incorporated into the text of the re g an investment decision subject to the fidu- lation and has since been firmly repu- ciary standards of ERISA. In the past, era- diated by the agency as legally incorrect. ployers have generally relied on rating ' Nonetheless, there is some possibility agencies to determine whether prospec- 7Jiere is some possibility financially either Congress or the courts will in- tive insurers were ancially sound. Some sist on seeking restitution for annuity government officials now assert that this ., that either Congress or the holders from the PBGC's not- too -abun- approach is not enough: employers should Courts will insist on seeking dant resources, do their own research on insurance com- State governments may help in a num- parries before buying their contracts. I restitution for annuity ber of cases. Most states have guaranty "Investigate before you invest" is a holsters from the PBGC's funds to protect residents who hold poli- time- honored admonition but one cannot cies issued by a failed insurer. Not all of help wondering whether retirement plan nut - too - abundant these funds are in great financial condi- sponsors are in a position to second -guess resources. tion, however, and the extent to which specialized rating agencies. Gathering de- they guarantee annuity payments varies tailed information about insurers is a widely. daunting task in itself. Drawing useful ' Another potential source of solace is conclusions from that information re- employers, a few of whom have already quires experience and skills that few com- I announced that they will make their retir- panies have readily at hand. ees whole. Carrying out this promise may • Sponsors of section 401(k) plans and prove to be a complex exercise. There are other retirement plans that give partici- ' practical problems (how much retirees pants investment options are likely to face have lost may not be known for several pressure to change their disclosure materi- years) and legal impediments. ERISA pro - als. It has been common to characterize I hibits employers from making pen-ion GICs, directly or by implication; as a payments out of general corporate at -•_ is, "safe" alternative to stocks and bonds. thus barring the simple device of supple- This emphasis on safety will probably give menting retirees' annuities. But it should way to fuller discussions of the risks and i 1 U ,■ E r 9 9 r t 5 1 1 ' rewards of all investment choices. The downside is that, in time, communica such transfer restrictions defeat much of the purpose of offering a choice of com- tions to participants may come to resem- peting GICs. ble Wall Street prospectuses. The ultimate moral is that there are no Regulators or participants may also be- truly "guaranteed" investments and no gin to demand choices among GIC pro - risk -free ways to run retirement plans. viders. As we have already noted, For more information, please contact however, the price of diversification may your local Deloitte & Touche office. be lower investment returns. GIC issuers normally quote lower interest rates where Editor:. Robert Cooper 1 a plan has competing investments, and Chicago many will not provide any quote in such (312)9463038 ' cases. Their objections can be overcome Contributor: Tom Veal by imposing a waiting period (typically six Washington, D. C. months or longer) on participants who (202) 879 -5355 want to switch funds to competitors, but 1 1 1 • 1 1 1 1 mber D Me TInternational 1 Copyright © 1991 by Deloitte & Touche. All rights reserved. Printed in USA. J U N E 19 91 1