Dr. Michael Shires on California's $72 Billion in Unfunded Liability for Retiree Health Benefits | The Sacramento Bee | Pepperdine University | School of Public Policy

Dr. Michael Shires on California's $72 Billion in Unfunded Liability for Retiree Health Benefits | The Sacramento Bee

December 17, 2014  | 2 min read

Brown aims at retiree care costs

By Jon Ortiz, jortiz@sacbee.com, 12/17/2014 6:52 PM, The Sacramento Bee

It’s official: Gov. Jerry Brown’s January budget proposal will include a plan to reduce the nearly $72 billion in unfunded promises the state has made to pay retiree health benefits.

Now how to pay it? Answer: Money in the rainy day fund that voters approved just last month, Proposition 2.

At least next year. The legislative analyst says at least $1.8 billion in the fund next year could be used to pay down those amassed obligations because they fall within the definition of debt.

It’s a volatile funding source, however, that “will not provide this much money every year” because its revenue rises and falls with capital gains taxes.

The legislative analyst’s assessment plays off Controller John Chiang’s report Tuesday showing long-term state-retiree health care obligations grew 10 percent from mid-2012 to mid-2013 to $71.8 billion over 30 years.

The state pays for retirees’ health care as the bills come due instead of setting aside money to offset costs as it does for pensions. The bills nearly quadrupled from $458 million in 2001-02 to $1.78 billion this year, according to state figures. Meanwhile, active state employees’ medical costs increased at half that pace, from $1.19 billion to $2.79 billion.

Chiang suggests an aggressive five-year plan to pay down some of that unfunded liability, but the price tag would eventually require a doubling of what the state pays now – $8,000 per year per state worker.

Shortly after Chiang issued his report, Department of Finance spokesman H.D. Palmer announced Brown’s budget will feature a plan to cut into those daunting unfunded obligations.

It wasn’t a surprise, since Brown has said that retiree health benefits are on his cost-cutting agenda. The governor has also bargained contracts with unions representing doctors, dentists and heavy machinery operators that included a small employee contribution into a retiree-benefits fund. Highway Patrol officers bargained a similar deal with former Republican Gov. Arnold Schwarzenegger and currently pay 3.9 percent of their pay into a retiree benefits fund which the state matches, Department of Human Resources spokeswoman Pat McConahay said.

While Proposition 2 could give Brown some short-term wiggle room, a permanent solution will likely involve bargaining with labor.

Mike Shires, a Pepperdine University budget expert, predicted that the governor “will come up with a long-term strategy to mitigate at least some of that exposure,” as he did with public pensions in 2013 and this year’s plan to restore the teachers’ retirement system to health.

That could include more money from employers and employees, downgraded retiree benefits, more service time to qualify for them or some combination of all that.

And a dollar spent on retiree health is a dollar not spent on raises or programs. How will Brown handle those ticklish politics?