Pension Reform

By Ed Mendel
December 22, 2014

The debt or “unfunded liability” state Controller John Chiang reported last week for state worker retiree health care, $72 billion, is larger than the unfunded liability for state worker pensions reported by CalPERS in April, $50 billion.

It’s a legislative legacy, a debt for state worker services received by one generation that lawmakers decided to let the next generations inherit.

More than two decades ago legislation created a pension-like investment fund in the state treasurer’s office to help pay for state worker retiree health care. But lawmakers never put money in the retiree health care fund.

Former Assemblyman Dave Elder, D-Long Beach, the author of the legislation (AB 1104 in 1991) said he tried to make a small payment of his own to the fund to publicize the inaction, hoping to create some political momentum.

Another action in 1991 led to what Gov. Brown, in a 12-point pension reform plan three years ago, called the “anomaly of retirees paying less for health care premiums than current employees.”

A cost-cutting move by the administration of former Gov. Pete Wilson began requiring active state workers to pay some of the cost of their health care. No change was made in the payment for health care promised when they retired.

State worker retiree health care still pays 100 percent of the premium of the fully vested retiree (the average cost of several of the largest health plans) and 90 percent of the premium for dependents.

For the health care of active workers, the state usually pays 80 or 85 percent of the premium for the worker, depending on labor contract bargaining, and 80 percent of the premium for dependents.

Brown’s 12-point plan also called for more enforcement of shifting some of the health care costs for eligible retirees to Medicare, the federal health insurance program for persons age 65 and older.

“Contrary to current practice, rules requiring all retirees to look to Medicare to the fullest extent possible when they become eligible will be fully enforced,” said the governor’s plan.

Now Brown, after a pension reform in 2012 and a teachers’ retirement system funding plan last year, is moving on to the state worker retiree health care debt, which the controller estimated has grown $7 billion since a report last March.

“And without action, it will continue to grow by billions of dollars,” a spokesman for Brown’s finance department, H.D. Palmer, said in a statement issued as the controller issued the new report.

“That’s why the governor will put forward a plan to address this unfunded liability — and sustain health benefits for retirees for the long term — when he submits his budget to the Legislature next month,” Palmer said.

Under the 12-point pension reform plan Brown issued in October 2011, state workers would have to work five more years to become eligible for state-paid health care after retirement.

Ten years of service is required to become eligible for retiree health care, which begins at 50 percent coverage and gradually increases to 100 percent after 20 years of service. Brown’s plan pushed the thresholds back to 15 years and 25 years.

But the pension reform eventually approved by the Legislature (AB 340 in 2012) did not include retiree health care. An Assembly analysis of the bill said retiree health care was dropped because unions “have shown a willingness to bargain” the issue.

The Highway Patrol, giving up pay raises for several years, contributes 3.9 percent of pay to the retiree health care investment fund with a state match of 2 percent of pay, said Pat McConahay, Human Resources spokeswoman.

Physicians, dentists and podiatrists (bargaining unit 12) and craft and maintenance (bargaining unit 16) contribute 0.5 percent of pay with no state match to the retiree health care investment fund.

Like California, most states have contributed little or nothing to an investment fund to help pay for the retiree health care they have promised their employees, varying widely in generosity and duration.

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