When Two Wrongs Make A Right

Preston Doerflinger wrote this op ed piece for the Tulsa World published 2/22/2017, “There’s nothing ‘broken’ about the state’s insurance plan for employees and teachers”.  Mr. Doerflinger is Oklahoma’s Secretary of Finance, Administration and Information Technology, the executive director of the Oklahoma Office of Management and Enterprise Services, which administers HealthChoice, the state’s health insurance plan, and is a member of the Oklahoma State Pension Commission.  His op ed piece is overall “right on” which makes the “Right”.  In it he explains why it makes sense, and is good government, to have a state managed health insurance plan for over 220,000 Oklahomans (per OMES in 2013) rather than submitting them to the private sector health insurance marketplace.

His arguments that HealthChoice doesn’t have to price for profits to shareholders, that it incorporates the private sector in competitive ways, that its administrative costs are much lower than private sector insurance companies, and that it is able to deliver lower cost medical services statewide are all reasons that it is not broken.  By being so large in the Oklahoma health insurance marketplace HealthChoice has economies of scale and a strong negotiating advantage when servicing members and contracting with medical service providers.  It also is not going to game the system in the way that private sector insurers might, focused only on profits, by either serving a healthier group or by lowballing premiums initially to get their foot in the door.

These are similar arguments I’ve been trying to articulate in my recent posts about why moving away from the current Oklahoma Teachers Retirement System (OTRS) defined benefit plan to individualized retirement plans managed by private investment companies is a bad idea.  Because Mr. Doerflinger can influence legislative decisions through his position on the state’s Pension Commission (from its website:  the Commission makes recommendations on administrative and legislative changes which are necessary to improve the performance of the retirement systems) I have taken the liberty of rewriting his arguments below to fit the facts of ill-conceived legislation proposed to “reform” OTRS.  Quite enlightened is his final paragraph—a most forthright and accurate admonishment—which says:   If legislators are really concerned about state employees and teachers, perhaps they should turn their attention to things that are truly broken — the nearly $900 million budget hole and chronically low teacher and state employee salaries — and not create a false problem using bad information for the sole purpose of benefiting a particular insurance company.

Now for Doerflinger’s “Two Wrongs”.  He opens his otherwise correct argument by stating:  First, HealthChoice is a self-funded plan, not state-owned or subsidized. No matter how many times the authors of these bills repeat “state-funded,” that doesn’t make it true.  Self-funded plans do not operate for a profit and employee health-care costs are significantly less. Self-funded means they are supported by member premiums, not tax dollars.

My quick and dirty legal research, and thirteen years of dealing with HealthChoice, lead me to conclude that he is wrong and wrong where underlined.  Title 74, Section 1301 et seq. of the Oklahoma Statutes begins this way:  This act shall be known and may be cited as the “Oklahoma Employees Insurance and Benefits Act”.  It continues to establish the mechanism for funding and managing the health insurance plan that is HealthChoice.  Most of the funding, as I understand it, for state employees and their families to purchase health insurance comes from the appropriations of state revenues to the agencies that employ them for their “flexible benefit allowances”.  So at least indirectly it is state revenue and the cost of the allowances is part of the state’s budget calculations.

For education employees, who greatly outnumber state employees in the plan, their flexible benefit allowance is a legislative line item amount each year from the State’s general revenues and they cannot choose to keep it all.   The allowance is about $570 per month of which a teacher can choose to keep about $70 if she doesn’t take the health insurance; similarly a support employee can keep about $190.  Family coverage for education employees does come entirely out of their gross income, and is grossly expensive.  So it is either untrue or highly misleading to say that HealthChoice is not funded with tax dollars—if it walks and quacks like a duck, then….

After reading “not state-owned” I expected to find that HealthChoice at a minimum was operated as a state trust, like the Oklahoma Teachers Retirement System for which its board of trustees are the “deciders”, or perhaps some special federal tax code driven entity.  Not so as far as I could discern.  It seems that the Oklahoma Employees Insurance and Benefits Board created by the Act cited above is merely advisory.  Subject to the statutory requirements the “decider” appears to be Mr. Doerflinger’s state agency, the Oklahoma Office of Management and Enterprise Services—in other words himself.  The various funds that collect, hold and process the premiums and medical services payments are state funds also.  If it is “not state-owned” then I am clueless who or what the owner is.

Why then does Mr. Doerflinger go to such lengths to argue the inarguable?  Apparently this is symptomatic of the sad state of current Oklahoma policy-makers, that we can’t have a discussion about the appropriate role of government, or about smart uses of government to benefit our state’s citizens and taxpayers, because many legislators, hopefully not most, have convinced themselves that anything government does has got to be inefficient at best and very bad at worst.

Now for a quick transition from state and education employees’ health insurance to teachers’ retirement.  In 1995 the Oklahoma Supreme Court decided Taylor v. State and Educ. Employees Group Ins. Program.  The issue was whether the state could take $39,600,000 from OTRS assets to front end the health insurance reserve fund needed to move teachers and education employees into the state’s health insurance plan.  The Court ruled that the transfer was proper since it both benefitted teachers and was to be fully replaced with newly enacted dedicated revenues for OTRS.  The case is interesting history that connects both state plans.  Now here is my version of Mr. Doerflinger’s op ed piece:

Rep. McDaniel and Sen. Stanislawski have offered misguided bills suggesting Oklahoma’s defined benefit retirement plan for teachers and education employees, is “broken” and needs to be replaced with individualized retirement plans managed by private investment companies.

Nothing could be further from the truth. In fact, the arguments in support of these measures are based on false premises put forward by the Oklahoma Council of Public Affairs and some financial advisors, including members of the state legislature, who would profit greatly from the so-called reforms.

So, let’s clear up a few things.

First, the Oklahoma Teachers Retirement System’s current plan is a self-funded plan with respect to the new retirement commitments made to active members each year.  These new commitments are fully funded by employee and employer contributions each year.  State payments into the plan are not subsidies, but rather payments toward state commitments made long ago that were not properly funded.  No matter how many times the authors of these bills say they are “saving workers’ retirement” that doesn’t make it true.  The OTRS retirement plan does not operate for a profit and teacher retirement costs are significantly less.   Self-funded means the retirement commitments being made each year are supported by teacher contributions and their employers’ match, part of their earned compensation. In years where contributions exceed retirement benefit payments to retirees, the excess funds are added to OTRS assets and invested to be used in future years for retirement payments to retirees. With individualized retirement plans managed by private investment companies much more of the funds become profits and are pocketed as fees by the advisors and investment companies.

Second, there already is private competition among investment management companies in investing the $14 billion in OTRS assets.  Over forty different investment companies are competitively selected to invest OTRS assets.  As required by OTRS board policy its investment committee facilitates a competitive process to select companies based on investment performance, management fees and costs, and compliance with OTRS investment objectives.  According to the latest report of the Oklahoma State Pension Commission OTRS investment performance over one year (11.4%), five years (10.7%) and ten years (6.8%), has been the best of more than 200 public pension plans nationwide reviewed by the Commission’s consultants.  These actual results are virtually impossible for individual employees to match if left to manage their own retirement plans as proposed by McDaniel and Stanislawski.

The process followed by OTRS protects its members and state taxpayers by making sure both receive the benefit of solid investment returns with low administrative and sales costs. What the misguided legislative proposals would do is actually tip the scales in favor of individualized retirement plans managed by private investment companies that would significantly drive up costs, while lowering investment returns, for each new teacher’s retirement plan resulting in lower incomes when they do retire.  Any benefits to new teachers put forth by Rep. McDaniel and Sen. Stanislawski are only possible by taking future revenue needed to fund the state’s past retirement promises to current OTRS members and using it to reward new teachers for choosing the more expensive plan the legislation creates.

Third, the current OTRS plan is in good financial shape and not near “broken.” The new retirement commitments made each year by the plan are easily funded with teachers’ contributions and a part of their employers’ match.  The rest of the funding paid by employers and earmarked from state revenues to OTRS is needed to pay the plan’s unfunded liability, i.e. its debt, to active and retired members for retirement income promises made years ago that were not funded.  This debt is owed by the state regardless of what plan, the current one or a new one, that new teachers may select.  The current plan is on track to be fully funded by the state in about twenty years if current revenue streams are left in place.  The only threat to its long run stability on the horizon is the proposed legislation that would divert millions of dollars needed to honor the state’s promises to current teachers from the current plan into high cost, low performing individual plans for new teachers only.

Perhaps supporters of the misguided proposals should compare administrative costs. OTRS sustains operations on much lower administration costs — 0.032 percent versus 0.044 percent for OPERS individualized deferred compensation plans (similar to what the legislation would establish for new teachers).  Additionally, by basing teachers’ promised retirement income as an earned percentage of their working income, OTRS ensures each retiree will have a standard of living in retirement comparable to the years they served the state’s children.

If legislators are really concerned about state employees and teachers, perhaps they should turn their attention to things that are truly broken — the nearly $900 million budget hole and chronically low teacher and state employee salaries — and not create a false problem using bad information for the sole purpose of benefiting for profit investment companies and advisors.

As always lunch on me for first to ID the location of the photo.