Budget Officials Get a Second Surge of Unexpected Money

May 27, 2011

It almost sounds too good to be true: state budget officials, who already saw revenues surge by nearly $400 million over the past month, now say anticipated savings in retired worker health care costs have grown by some $100 million in the same period.

And though Comptroller Kevin P. Lembo said his office was somewhat conservative in assessing the account that it controls, he added that a number of factors made the $117.4 million savings--equal to nearly 20 percent of the entire annual allocation--difficult to predict before now.

"As soon as you start to see a positive development you can't just jump up and say, 'We have some extra money here. What do you want to do with it?'" said Lembo, who inherited the retiree health care account in mid-fiscal year when he began his first term as comptroller on Jan. 5. "Since then I've looked at this on a regular basis, but there were a lot of factors."

One is that state government converted its health insurance coverage, both for active and retired workers, to a self-insured program. Lembo said he believes the previous legislature and former Gov. M. Jodi Rell's administration may have underestimated the savings in shifting from paying private insurance companies to manage the fiscal risk, particularly involving the older, generally sicker retired population

Lembo said the reduced spending also results from higher-than-expected federal cost-sharing for prescription drug coverage and increased patient use of generic pharmaceuticals.

But the single-largest and most volatile factor, Lembo said, simply involves a retiree population that has been healthier than in most years. A 2009 retirement incentive program that coaxed 3,800 senior state workers to retire at an earlier age than they might have otherwise could have contributed to that.

Though Lembo didn't provide specific numbers Thursday, he said the lower utilization totals means officials have to be cautious in deciding what this year's savings means for the upcoming fiscal year, which begins July 1.

"I think we can responsibly amend the projected need for the new fiscal year," Lembo said, adding his office is preparing new cost estimates for the legislature and administration. "But we have to be careful not to short the account based on one year's experience."

The $117 million in retiree health savings is what is referred to as a budget "lapse"--anticipated spending reductions that aren't directly tied to specific budget cuts. The current year budget included $304 million in lapses; those anticipated savings have grown to $419 million as of the latest estimate.

For the first several months of the past fiscal year, the Executive Branch's chief budget agency, the Office of Policy and Management--using figures provided by the comptroller's office--projected no savings in the retiree health care account. It was not until December that OPM projected $1.8 million in reduced spending, a figure that gradually grew to $16.9 million in April before skyrocketing this month.

Malloy's budget director, OPM Secretary Benjamin Barnes, said he also believes a "significant portion" of that $117 million savings also should be projected for the upcoming fiscal year, though he declined to speculate on just how much on Thursday.

"This is the first time state government has been operating a self-insured program," Barnes said, noting the transition typically creates a one-time savings as the state is relieved of payments to private insurance companies for a few month before patient claims for benefits start to come in. "That can affect the numbers. I can appreciate the comptroller's office not feeling certain about (the savings) until they have enough information."