Interview of Morgan Armstrong - Medical Tourism & OPEB
THE STATE.COM newspaper - Columbia, SC
Sunday, Jun 1, 2008
By ADAM BEAM
Myrtle Beach budget director Mike Shelton got a colonoscopy in Thailand because of a change in accounting standards for local governments. ( Morgan Armstrong, CEO of Plan Benefit Services, sponsored the trip for Mr. Shelton and a large group of business clients to Thailand and Singapore to introduce them to the immense savings available to their companies via a new "Medical Tourism" insurance benefit option. Mr. Shelton and other members of the sponsored trip had various medical procedures performed as part of the investigative tour).
The change has to do with how local governments pay their health insurance costs. It essentially creates a multimillion-dollar debt that cities and counties have to pay to cover their employees' future health costs.
It is so significant S.C. lawmakers are mulling changing the state's 113-year-old Constitution. Richland County officials could eliminate retiree health insurance for new employees and Myrtle Beach officials plan to start sending their employees to Thailand for cheaper medical procedures.
But the change affects more than just government workers. How your city or county tackles the change will determine how much money it has to set aside each year to cover the cost of health care.
That could mean less money for police and fire protection, garbage pickup, and parks and recreation. It also could mean you have to pay more in property taxes or fees.
Historically, local governments have paid their retired employees' health insurance benefits on a year-to-year basis. They have had no plan to cover what they might have to pay out to cover the medical costs of their current employees when they retire.
In 2004, the Governmental Accounting Standards Board, known as GASB, said local governments would have to start acting as if all of their employees would retire today.
That means local governments would have to have enough money set aside to pay for all of their promised health insurance payments.
For most cities, that pot of money is enormous - in some instances in the hundreds of millions of dollars.
The accounting board decided to treat that money as a debt local governments owed and gave them 30 years to pay it off - with interest. Starting now.
In the city of Columbia, that debt is estimated to be at least $96 million. Local governments with more than $100 million in revenue have to decide how they are going to pay the debt by June 30. Smaller governments can wait until next year.
"Most of these groups just can't pay it," said Morgan Armstrong with Plan Benefit Services, a consulting firm that is helping many S.C. local governments tackle the problem. "It's bankrupting these cities and counties. And the bad thing is that everyone loses with this."
CHANGING THE RULES
The General Accounting Standards Board was formed in 1984 to set standards on how local governments keep track of taxpayer money.
Local governments don't have to follow the board's standards because they are not laws. But they might as well be. If a city ignores any standards from the accounting board, its accountants have to explain why in a letter attached to its budget.
Those budgets are poured over by investors, creditors, debt rating agencies - basically anyone who ever loaned the city money for a parking garage or a streetscaping project.
Those investors don't like it when cities ignore the board's standards. They can punish the city by charging it more interest on loans or, in some cases, not loaning the city money at all.
That's why cities' hands are tied when it comes to the accounting board. They have to comply with its standards or face the wrath of investors. The board's latest requirement, called GASB 45, deals with health insurance for retired local government workers.
Years ago, health insurance was cheap. Really cheap. Cities and counties realized they could pay employees less money than they would earn in the private sector but make up for that by providing really good health insurance.
Richland County employees can retire, if eligible, after working just one day and receive full health insurance benefits for the rest of their lives, County Administrator Milton Pope said.
"That's what people come to county government and state government for," Councilwoman Bernice Scott said.
Until now, cities and counties did not plan for how much money they would have to pay if all of their current employees retired. The accounting board felt governments should put all of their expenses on paper - including the ones promised to future retirees. In other words, cities and counties now have to have enough money set aside to pay up if all of their employees were to retire tomorrow.
A MULTIMILLION-DOLLAR DEBT
If every Columbia employee retired tomorrow, the city would need an estimated $96 million to pay health insurance for all of them. The city has 30 years to pay off that debt.
To put that sum in context, it's enough to pay the salaries and operating expenses for the city's police, fire, public works, and parks and recreation departments for one year.
Just to make its yearly payments, it's estimated the city will have to set aside more than an $10 million- equal to how much it spends on public works each year.
Columbia could decide to pay only part of its annual payment. However, at the end of each year, the amount that is not paid rolls over with interest into next year's payment.
"That's where they get you," Columbia Interim Finance Director Missy Caughman said.
The worst part is the estimate of how Columbia owes - $96 million - is two years old. The city is re-evaluating its debt now and should have a new figure in a few weeks.
"It's going to be higher," Caughman said. "That's the scary piece."
Cities and counties are searching for ways to keep their annual payments as low as possible.
For example, Richland County owes as much as $114 million. Its annual payment would be close to $12 million.
But county administrator Pope has proposed some drastic changes that could lower Richland County's debt to $72 million and make its annual payment $4 million.
Pope's plan, which has not been approved by council, would eliminate retiree health insurance for all employees hired after June 30. All current employees, instead of getting full retirement benefits after working just one day if eligible, would have to work 25 years for the county to pay all of their health insurance. The county also would eliminate health insurance for every retiree once they reach age 65, when they qualify for Medicare.
"This is a responsible attempt to address this issue," Pope told council members at a budget work session last month.
Council members were not pleased. Some laughed when Pope announced details of the plan.
"We're getting ready to snatch the rug out from under them," Councilwoman Joyce Dickerson said of county employees. "We're getting ready to tamper with somebody's livelihood."
SOLUTIONS
Just as the accounting board requires local governments to pay off this debt, it also has specific requirements for how they can pay it off.
The most popular way is by setting money aside each year in an irrevocable trust - a special bank account with ironclad rules about where and when the money can be spent. When cities put money into an irrevocable trust, they are paying out money they lose all control over.
Cities like Columbia - with its more than $96 million debt - want any trust fund to grow as fast as possible so it can lower burdensome yearly payments. The money in the trust fund is invested. As the money grows each year, the yearly payments Columbia will have to make will decrease.
If all of S.C. cities and counties pooled their payments into the same trust account, that money could grow faster and reduce the yearly payments quicker. Further, if that money could be invested in the stock market, instead of the traditional low-risk government bonds, it could grow even faster, assuming the stock markets go up.
The S.C. Municipal Association has set up an irrevocable trust to do just that. It's called the South Carolina Other Retirement Benefits Trust, or S.C. ORBIT. Charleston was the first city to sign up. Six other local governments soon followed.
But there's a problem. Investing public money in the stock market violates the state Constitution. The Constitution is set up to protect the public's money. The thinking is governments should be extra careful when investing public money because it's public money. It belongs to all of us. And in this case, it is promised to pay for the health insurance of retired government workers.
But the Municipal Association is fighting back. It argues that once the cities and counties pay into the fund, that money becomes property of the fund. It then can be invested wherever the fund's board of trustees desires, the group argues.
Currently, the fund is growing at a rate of 2.3 percent a year. If it could invest in the stock market, the fund's analysts project it could grow by 7 percent a year.
The Municipal Association knew this would be an issue. It recruited a city of Charleston employee, Thomas Francis O'Brien, to sue the S.C. ORBIT fund before the state Supreme Court. It's known as a "friendly lawsuit" because it is meant to test the law.
"Both sides need an answer," said Nancy Bloodgood, an attorney who represents O'Brien.
If O'Brien loses and the court OKs investing in stocks, more cities may start contributing to the fund and it can buy stocks immediately. If the Municipal Association loses, it must change the state's Constitution to get around the court ruling upholding the ban on investing in stocks.
Just in case, a bill that would put the question to voters in the November general election is awaiting Gov. Mark Sanford's approval.
"Either way the decision goes, it's going to affect a large group of people," Bloodgood said. "Some cities may not be able to afford that and may have to reduce benefits."
MYRTLE BEACH TO THAILAND
That brings us back to Mike Shelton, Myrtle Beach's budget director. Shelton panicked when he saw the $66 million health-care debt his city owed - nearly half of the coastal city's annual budget.
Instead of eliminating benefits for retirees - like some cities have done - Shelton and Human Resources Director Coleman Randall flew to Bumrungrad International Hospital in Bangkok, Thailand to explore the insured Medical Tourism solution proposed by Plan Benefit Services.
There, Shelton had what would have been a $3,500 colonoscopy for $700.
The quality of care was superior and persuaded Shelton and Randall to add the benefit to the city's medical plan. Starting in about a year, Myrtle Beach employees will have the option of getting cheaper treatments in Thailand, all expenses paid by the city.
"It could save us some money, get the employee the care that they needed and also give them an adventure," Randall said.
Officials expect the move will reduce the cost of Myrtle Beach's medical plan and, in turn, bring down the cost of its debt to pay retiree health insurance. It's one of the more creative - and drastic - measures S.C. local governments are taking to tackle the GASB beast.
Shelton said the city won't send people to Thailand for simple procedures, like colonoscopies. Shelton had one because he was scheduled to and wanted to have a procedure while he was invited to visit the Thai hospital.
But Myrtle Beach could send someone to Thailand for angioplasty surgery, which can cost up to $50,000 here. In Thailand, it costs $15,000, according to Shelton. That means it would be cheaper for Myrtle Beach to send its employee to Thailand, with a guest, pay for the surgery and travel expenses, and toss in a few days to spend as a tourist.
Factor in $23,500 for travel, food and other expenses for two people for two weeks, and the city still would save $11,500.
While he was there, Shelton went out to dinner, took a cruise down a river in Bangkok and saw a few temples. Shelton's goal is to have one, maybe two, people use the benefit in the first year.
He said if the city paid for two cases a year, with a savings of $20,000, and you compound that $20,000 twice a year over decades, it turns into a lot of money.
"That saves the plan a lot of money over that period of time and helps regulate the cost and helps make the plan something that you can continue to afford," he said. "Those are the things we are looking for."
