State faces rising costs for retiree health care

SACRAMENTO — Gov. Jerry Brown plans to tackle the state’s unfunded retiree health costs in his budget proposal next month in hopes of reducing a fast-growing obligation that ballooned by $7 billion in just the past year, a spokesman for his finance department said.

California has promised $72 billion more in health and dental benefits to current and retired state workers than the state has set aside, a liability that grew 11 percent from 2013, according to a recent report by the state controller’s office.

The new estimate prompted outgoing Controller John Chiang to call on lawmakers to eliminate the “pay as you go model” where the state pays only the cost of providing coverage to retired

workers instead of allocating funds for benefits that current public employees will get when they retire. Chiang likened the state’s system to continually paying the minimum amount on a credit card as the balance and interest soar.

Passing on debt

Chiang said that approach is unsustainable, and passes on significant debt to future generations.

“This could get really large unless we start taking action,” Chiang said.

Department of Finance spokesman H.D. Palmer said he could not discuss specifics of how Brown plans to address retiree health costs until the state budget proposal is released in early January. Some have speculated that Brown may turn to the recently passed Proposition 2, which sets aside money to reduce the state’s debt.

Reducing retirement liabilities has been on Brown’s agenda lately, with the governor signing legislation two years ago that increased the retirement age and required employees to pay at least half of their pension costs.

In June, Brown and lawmakers approved a spending plan that stabilizes the teachers’ retirement fund by making up an estimated shortfall of $74 billion over the next three decades. The nonpartisan Legislative Analysts Office recommended in May that retiree health costs be a priority after shoring up the teachers’ pension system.

“When you have a liability that has grown this significantly, there is a lot of work to do to make these benefits sustainable not only on a fiscal basis, but for state retirees over the long haul,” Palmer said.

Living longer

Increased life expectancy accounted for much of the increase in retiree health costs in the controller’s report. New mortality assumptions have increased the life expectancy by two years for men and 1.8 years for women.

Chiang, who was elected state treasurer in November, said the state remains “dan- gerously complacent about the liability,” and “if we continue to do nothing, we will be sowing the seeds of a future crisis.”

There are 168,000 retired state workers receiving varying levels of health benefits, depending on their years of service and when they became vested.

During the current fiscal year, the state set aside $1.9 billion to cover retirees’ health benefits. If the benefits earned by current employees are included, the cost would be more than $5 billion, the controller said.

Chiang said nearly doubling what the state has set aside for retiree health benefits would cut the unfunded liability by 35 percent, or $25 billion, by allowing investment income to reduce future costs, similar to the pension system, where two-thirds of all payouts are covered by investment returns.

Chiang said he recommends a five-year plan where the state begins chipping away at the debt by funding the cost of health benefits earned by current employees each year. Under Chiang’s plan, the state would increase payments by $250 million in 2015-16 and increasing those payments annually to $1.7 billion by 2019-20.

“This is a liability that has grown over decades of poor fiscal planning and a callous willingness to pass along debt to our children's generation,” Chiang said. “While it can't be erased overnight, we have to resolve ourselves to meaningful progress.”