SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 2489 words

COMMITTEE: HOUSE EDUCATION AND THE WORKFORCE

SUBCOMMITTEE: EMPLOYER-EMPLOYEE RELATIONS

HEADLINE: RESIDUAL COSTS OF RETIREES HEALTH CARE

TESTIMONY-BY: MS. LOUISE NOVOTNY, ASSISTANT DIRECTOR OF RESEARCH,

AFFILIATION: COMMUNICATIONS WORKERS OF AMERICA

BODY:
Statement of Ms. Louise Novotny Assistant Director of Research, Communications Workers of America

Committee on House Education and the Workforce Subcommittee on Employer-Employee Relations

May 16, 2002

Thank you Mr. Chairman and Members of the Subcommittee. I am pleased to be given the opportunity to speak with you this morning about our experience with retiree health care benefits. My name is Louise Novotny. I am the Assistant Director of Research for the Communications Workers of America. CWA has just concluded negotiations with two of our major employers, AT&T and Cincinnati Bell, and retiree health care benefits were a major issue at both those bargaining tables. I have been asked to describe how our union has negotiated for these benefits, at these and other employers, the typical retiree health benefits package, how accounting standards have impacted our ability to bargain for retiree health benefits, and to offer any recommendations for securing access to health care for retirees. As you all may know, bargaining for retirees is a tricky business. The National Labor Relations Board (NLRB) defines retirement benefits for active workers as a mandatory subject of bargaining. But bargaining for retirees, that is individuals already retired, is a permissive subject of bargaining. Nevertheless, CWA has consistently made retiree benefits, including health care, a key demand in our negotiations with major employers in the telecommunications industry.

For our older retirees, age 65 and older, the benefits we have negotiated supplements to Medicare, which cover the substantial cost sharing requirements and pay for benefits not covered by Medicare, notably prescription drugs. Our benefit packages may be even more valuable to retirees under age 65. In recent years, many of our members in the telecommunications industry have been forced to take early retirements as a result of downsizing to avoid layoffs. The early retirees are too young to qualify for Medicare, but they are at that vulnerable age when health care needs are increasing. If they had to purchase coverage in the individual market, they would find it prohibitively expensive.

Our retiree health benefits, therefore, offer an important source of retirement security, protecting retirement income from erosion due to rising health costs, as well as assuring access to necessary health care services.

CWA first won health coverage for retirees in the 1960s. The benefits were designed for workers age 65 and older and supplemented coverage provided under the newly enacted Medicare program. Over the years as benefits for active workers were improved through bargaining, we were also able to improve the level of benefits for workers who retired over the term of the contracts but because bargaining for retirees is permissive, we could not demand. A contract, for example, for a worker who retired in 1984 was covered by the benefits package we negotiated in 1983, but could not access preventive coverage negotiated in 1986. As a result, the benefit package for retirees was different depending on when they retired.

In 1989, bargaining in the telecommunications industry reached new heights of contentiousness around our health care benefits. In those days CWA bargained with AT&T and the so-called "Baby Bells" at the same time. AT&T's contract expired in May and the seven Regional Bell Operating Companies expired in August. That year all eight of the companies drew a line in the sand demanding major cost shifting to workers. They wanted premium sharing, severe cuts in coinsurance levels, removal of out of pocket limits that protect workers, and finally, they wanted to cap the amount of money paid toward retiree health coverage.

The retiree health proposals were in response to the Financial Accounting Standards Board which had just issued a proposal for a new rule which would require employers to account for their retiree health costs as an ongoing liability. Employers were to begin accruing for the projected costs of retiree benefits over the working lives of the eligible employees. At the time, companies booked these costs only when benefits were actually paid to retirees, because any accrual wouldn't be tax deductible, as are reserves for future pension costs. The rule came to be known as FAS 106, but at the time we were bargaining, the rule was still a proposal. However, there was every expectation that it would be implemented. The concept was simple and straightforward. If firms are making promises to pay retiree health benefits into the future, then honest accounting would treat that obligation as a liability, not a short term expense. As an example, when we bargained with AT&T that year, the company estimated that when applied to the FASB rule would impose a new, ongoing annual expense of about $1.7 billion and a total benefit obligation of $9.5 billion.

The agreements we reached in that round of bargaining followed a general pattern, though there are differences at each company. CWA agreed to cap the employer contribution to retiree health coverage. The intent of our agreements was to help the companies deal with the problem that the FASB rule imposed. We set company contribution limits for retirees based on age over or under 65 and based on single or family coverage. If costs were to rise above the caps, then retirees would be required to pay the excess. At the same time, we also included several safeguards that we hoped would provide extra levels of protection for retirees to limit their exposure to rising health costs. The safeguards included:

-grandfathering the already retired workers so that they would never be required to pay;

-setting the caps at generous levels, high enough to preclude any retiree cost sharing at least during the course of the contract.

-waiving the requirement for retiree cost sharing during the term of the contract;

-linking the scope and level of retiree benefits to those negotiated for active workers;

-and negotiating an agreement to bargain for retiree health benefits into the future.

We also bargained the establishment of separate VEBA trusts to prefund retiree health benefits. This new asset would help offset the companies liability.

To greater or lesser degrees, those were the elements that became the model for bargaining health benefits in the telecommunications industry. In the ensuing years different trends in health delivery and economic conditions have offered a variety of opportunities and challenges to our continuing goal of preserving retiree living standards and access to health care.

While it is true that the FASB rule made has changed the way employers - the way they implement.

When the FASB rule kicked in 1993, AT&T took an after-tax charge of more than $7 billion to cover the reserve for future retiree health benefits. Companies could take the catch up charge all at once, or spread it out over up to 20 years. AT&T took it all at once in order to stem the impact on earnings in future years.

When AT&T and Cincinnati Bell calculated their respective retiree health liabilities, the companies assumed the negotiated caps would never be changed, that the company would never pay more than the contribution limits negotiated in 1989. This is in spite of the fact that the collective bargaining agreements committed the companies to bargain over the contribution limits in the future.

Other companies took a different approach. Some of the regional Bell Operating Companies calculated their liabilities using an assumption that the company's contribution limit would continue to increase over time. For example, when the company then called Bell Atlantic calculated its liability, it used an assumption that the company and retirees subject to the contribution cap will share in the future cost increases in medical benefits. These different approaches have crated different dynamics at the bargaining table - less margin to explore alternatives that will impact access and cost goals. Other factors also influence telephone companies in regulated

These different approaches have created different dynamics at the bargaining table. The first locks employers and unions into an unrealistic framework which forces fights over cost shifting. The second provides an opportunity for the parties to explore alternatives that will meet mutual access and affordability goals.

In subsequent rounds of bargaining, we have struggled to come up with new and effective measures to continue to protect retirees from health care payments on the union side, while recognizing the companies sensitivity to increasing the annual expense. In the words of one company, the union's goal has been to keep the caps from biting. This has not always been easy. Because of the strict accounting rules, it is difficult to increase the negotiated caps without the company incurring huge new expense. There are two basic strategies: revising the plan design to come up with less expensive, more efficient health plans or providing alternative funding sources to ease the company's expense burden. Under the heading of plan design changes, in some cases we were able to lift the caps by including different benefits, such as dental benefits, under the cap. In other cases we were able to reduce the actual cost of retiree health care in some years by shifting more retirees into our point of service managed care networks negotiated for active workers.

In one of our most labor intensive and frustrating efforts to modify plan design in order to reap cost savings, we bargained retiree HMOs. At Qwest (then U.S. WEST), Verizon in the mid- Atlantic region (then Bell Atlantic) and AT&T we bargained participation in Medicare HMOs. We were able to negotiate a processing to assure that under the plans, our retirees would have access to benefits equal to or a better than the benefits they enjoyed as active workers. At the same time the plans promised to hold down costs giving both management and the union some confidence that our negotiated caps would hold for many years. But no sooner did we begin to implement the program, then HMOs began dropping out of Medicare droves. The squeeze on Medicare reimbursements and the revision of Medicare HMO rate setting sent scores of the plans HMOs scurrying from the market.

Under the strategy heading of alternative funding sources, we were able to relieve the employers' expense burden in some years by negotiating pension asset transfers. We felt this was a responsible, if short term, solution. For many years the investments of the pension funds at our major employers had been earning income at rates far exceeding the increase in pension plan liabilities. Thus, employers were able to pay for retiree health costs in a year without incurring an expense. For example, AT&T implemented its first asset transfer in 1991. The pension plan was $1.75 billion overfunded. To cover 1990 health benefits for retirees covered by the plan, AT&T transfered $245 million to the 401(h) retiree health account established within the plan.

However, the attractiveness of this funding option changes with the economic situation. This year in bargaining with AT&T and Cincinnati Bell the companies resisted transferring any funds out of the pension plans. They complained mightily of the rising cost of retiree health care and expressed great concern about labor costs in general. But they were unwilling to transfer assets because the pension funds play another important role for corporations than merely funding benefits. Another FASB accounting standard allows companies to include investment gains by their pension funds in their operating earnings. Thus, a company's bottom line can look much rosier than it really is. The two companies we negotiated with this year were concerned that transferring funds out of the pension fund would reduce their operating earnings and could negatively impact earnings per share. This would happen for two reasons. First, the actual transfer would reduce the amount of pension assets. But also, under the 401(h) transfer rules, all plan participants must be vested at the time of the transfer. At both of these companies we have negotiated cash balance accounts. Vesting participants with less than five years of service could add an immediate and substantial liability in the form of lump sum payouts. Particularly in situations where management is anticipating downsizing in response to workforce reductions due to economic conditions.

Just to let you where we ended our negotiations, at AT&T we settled an 18 month labor contract which included the establishment of a new retiree benefit, a health care spending account. It is hoped that this new spending account will offset any cost sharing retirees may be required to pay when and if the costs exceed the company contribution caps during that short period. In the interim , we have a joint committee at Cincinnati Bell and we agreed to continue talks for one year in order to come up with acceptable options for funding and design of retiree health benefits. In other words, in this round of bargaining, we agreed we couldn't find a solution.

We have been asked to make some recommendations for legislative action that would help both the union and the employers meet their goals of continuing to assure our retirees access to necessary care through cost effective, employer sponsored health benefits.

Of course, CWA has long supported the concept of a national health insurance plan that would assure all of us, regardless of age, access to all medically necessary health care. And frankly, we believe that current health cost trends will persuade more and more people, organizations and employers to call for some comprehensive legislative action to assure universal coverage.

In the meantime, we are supportive of measures that encourage responsible employers like the ones with which we negotiate, who currently offer health coverage for both their employees and retirees to continue to do so. It is inequitable and shortsighted to penalize employers who have been responsible and not ask employers who have failed to provide such benefits to make a contribution to the goal of expanded access to necessary health care benefits.

Perhaps the most immediate relief could be gained from implementation of a new Medicare prescription drug benefit. Not only will it achieve the essential goal of increasing access to necessary medication for retirees on Medicare, the new benefit would also provide employers who currently offer prescription drug coverage some cost relief. If designed effectively, a Medicare drug benefit could slow the rising cost of retiree coverage, reducing the pressure to cut benefits. However, funding the drug benefit amount by cuts in Medicare provider reimbursements is robbing Peter to pay Paul.



LOAD-DATE: May 22, 2002