Charleston Daily Mail, November 11, 2009, Wednesday

Copyright 2009 Charleston Newspapers
Charleston Daily Mail (West Virginia)

November 11, 2009, Wednesday

HEADLINE: Many unsure unions can take over PEIA

BODY:
A plan by five of West Virginia's most powerful unions to take over the state Public Employees Insurance Agency faces political and practical obstacles.

While there is likely to be opposition from state lawmakers to giving unions control of the 200,000-member PEIA, a big question is whether or not the unions can do a better job than the state of controlling medical costs.

If they can't, union officials could find themselves in the perverse position of seeking to raise insurance rates and cut benefits for their members.

In the corporate world, unions have faced problems running what are called voluntary employee beneficiary associations. The so-called VEBAs for Caterpillar and Detroit Diesel both ran out of cash and went belly up.

"A VEBA may be a good idea, but it's not a panacea," said David B. Lipsky, a professor of industrial and labor relations at Cornell University. "It's not like the union has some magic dust it can use that management doesn't have."

The five unions suggesting a takeover of PEIA are the American Federation of Teachers, West Virginia School Service Personnel Association, United Mine Workers of America, Communication Workers of America, and American Federation of State, County and Municipal Employees.

Aon, a Chicago-based consultant hired by the group, suggested in a memo to Gov. Joe Manchin that the unions take over the several billion-dollar health care liability the state faces if the state would pledge to make hefty annual contributions to a union-managed trust fund.

It also suggested that unions should essentially replace the finance board that oversees PEIA.

Investment risk would be fully transferred to the unions, which "would have greater control over benefit plan structure, coverage levels and associated plan expenses."

While there are differences between a union takeover of a company health plan and a takeover of state-run health plan, the risks faced by the unions in both cases are similar.

"I think the union leaders are fully aware of the risk they are assuming by advancing this proposal," said John Ab-raham, director of AFT Benefits, the national group that helps local AFT chapters negotiate health benefits. "I don't think they've advanced this proposal by a rush to judgment."

But one question is whether the unions could do much differently than the current PEIA finance board. That board's membership is defined by state statute.

For instance, the unions would almost certainly have to employ an expert third-party administrator to run the agency. Right now, the state uses Wells Fargo, which processes claims for PEIA.

The unions can't do without such a company, perhaps even the same company, said Terry Rose, the director of West Virginia University's insurance and financial services center.

"The unions are certainly not in a position to do this without outside help, and I don't know that they'll get better outside help," Rose said.

Another way to potentially improve PEIA's finances would be to do a better job of investing money. That, too, could be hard, said Lipsky.

Investments are a key concern because medical inflation is rising faster than normal inflation. That means even good investors are struggling to catch up to rising medical costs.

Lipsky said financial expertise is clearly not going to come from inside the union, so the unions would be seeking help from the same pool of financial consults the state has access to.

"So the question is, 'Can you buy better expertise than I can?' " Lipsky said.

At the heart of the union's proposed takeover of PEIA is an accounting dispute.

The consultant hired by the unions says the state is overestimating by nearly $4 billion the liability it faces to cover future retiree health care costs.

The calculation dispute is over non-pension benefits promised to teachers and other public employees once they retire. These so-called "other post-employment benefits," also known as OPEB, reflect mostly health care and life insur-ance.

The unions say those benefits will cost the state $4 billion, which is far less than the $8 billion the state estimate.

The unions and the state differ most on the projected rate of medical inflation. The unions say that the rate will be about half what the state says it will be and that the state is using the higher number to justify cuts to employee benefits.

"Nobody's checking these numbers to see if these numbers are accurate," said Josh Sword, an AFT-WV lobbyist who sits on the current PEIA finance board.

Using its lower estimate of the projected deficit, the unions propose that the state pitch in $150 million in the first year to reduce the figure. The state would add 2 percent to the figure each year until the liability was eliminated in 20 years. In the 20th year, the debt payment would be $218 million.

That's in addition to what the state already spends on its pay-as-you-go method of funding health care coverage for public employees. The unions' figures put the state's total contributions at $359 million in the first year and rising to more than $1.9 billion by the 20th year.

The union does not suggest where the state would find the additional money for PEIA, especially as it braces for a budget crunch caused by the recession that is projected to last for at least a couple of years.

This scenario would have the deficit eliminated a decade sooner than state officials have discussed.

But WVU's Rose worries that just refiguring the numbers could be a problem.

"Just going in there and making adjustments to the actuaries' original assumptions, that's a dangerous thing," he said.

Rose also said he's "perplexed" about why the unions really want the responsibility.

AFT's Abraham said the goal is to do the right thing for the state and for retirees and future retirees.

"The biggest difference, I think, for the state would be for the state to remove the liability off the state's books," he said. "My guess is their bond rating would probably go up as a result of removing the liability."

In the past several years, Ford, General Motors and Chrysler have handed over about $60 billion in insurance liabilities to the United Auto Workers.

The unions perhaps saw it as a way to have better say over insurance benefits, but the companies also saw it as a way to clear their books.

In the end, if the underlying economic conditions are a problem, there might not be anything unions can do about it.

"Is that really an improvement?" Lispky said of the auto industry's decision to move insurance liability off their books.

"It looks like an improvement. In point of case of the auto companies, their success or failure depends on can they produce cars that people want to buy."

Also, there's nothing to prevent the unions - despite the risk they say they will assume - from going back to lobby the state Legislature for more money.

While some hope U.S. Congress' overhaul of the nation's health care system will drive down medical costs, it might not.

"If that turned out to be the case, these union people would really be in the soup," Rose said.
Contact writer Ry Rivard at ry. rivard@dailymail.com or 304-348-1796.

LOAD-DATE: November 11, 2009