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By Ed Mendel
Monday, June 2, 2014

A decade ago new accounting rules directed state and local governments to begin calculating and reporting debt owed for health care promised retirees, which for state workers turned out to be more than the debt owed for pensions.

In a new step to expose hidden debt, the Governmental Accounting Standards Board last week proposed that retiree health care debt or “unfunded liability” be reported on the face of government financial statements, not buried inside.

The board chairman, David Vaudt, said in a news release retiree health care is “a very significant liability for many state and local governments, one that is magnified because relatively few governments have set aside any assets to pay for those benefits.”

Most government retiree health care is pay-as-you go, covering part or all of annual insurance premiums. No money is set aside, as in a pension, to invest and yield earnings, lowering long-term costs and cutting debt passed to future generations.

State Controller John Chiang, who in 2007 issued the first estimate of state worker retiree health care debt, said in a new report last March the unfunded liability for pay-as-you-go state worker retiree health care is $64.6 billion.

In contrast, the unfunded liability for state worker pensions is $49.9 billion as of last June 30, a CalPERS valuation said in April. State worker pensions have a low funding level, 66.1 percent of the projected assets needed for full funding.

State worker retiree health care is unusually generous. A 12-point pension reform plan issued by Gov. Brown in 2011 mentioned “the anomaly of retirees paying less for health care premiums than current employees.”

The state pays 100 percent of the premium of the retiree (the average of several large plans) and 90 percent of dependent premiums. For active workers, the state usually pays 80 or 85 percent of the worker premium and 80 percent of dependent premiums.

The governor mentioned retiree health care at a news conference last month while proposing a revised state budget plan that includes a long-term funding solution for the troubled California State Teachers Retirement System.

“Now this doesn’t handle it all,” Brown said. “We still have retiree health. We have the judge’s retirement system. We have got lots of other stuff here, and we will handle it. But this (CalSTRS plan) is taking a big bite out of our long-term obligation.”

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