LAO

By Ed Mendel
Monday, March 23, 2015

Gov. Brown’s plan to curb the long-ignored debt for state worker retiree health care, now much larger than their unfunded pension debt, may look familiar. It’s similar to the standard state and local government pension reform.

Workers contribute more, most going from zero to 3 percent of pay, and new hires not protected by vested rights get lower benefits, working five years longer to get health coverage capped at what they received on the job.

Last week, the nonpartisan Legislative Analyst’s Office, noting that most of the plan bypasses the Legislature, recommended that lawmakers hold hearings on state worker retiree health care, going back to square one, 1961, when the benefit began.

Times were different then. Workers were at risk of losing health coverage when they retired. The cost might be unaffordable, or the worker might have a health condition causing insurers to deny coverage.

Now state workers are eligible for federal Medicare at age 65. They are expected to stay on the job longer under Brown’s pension reform in 2013, which requires new hires to work four more years to get the same pension formula as previous hires.

And prior to Medicare eligibility, President Obama’s Affordable Care Act can provide low-cost health insurance coverage, pre-existing conditions included, and sometimes with subsidies.

As an alternative to the long-term debt of retiree health care, the state could offer new hires increased pay or contributions to a supplemental fund that could be used for health coverage or other purposes.

“Before California builds a funding model to pay for this benefit (retiree health care) for decades to come, the Legislature should consider whether this benefit should continue to be a part of the state employee compensation package for new hires,” said the analyst’s report prepared by Nick Schroeder and reviewed by Marianne O’Malley.

“If prospective employees do not value this benefit as much as it costs, the state and the new employee might be better off if the state offered future employees an alternative form of compensation.”

The Analyst’s report said there is “some ambiguity” about whether retiree health care, like pensions, is a vested right under state court decisions based on contract law, preventing cuts in the benefit offered at hire unless offset by a comparable new benefit.

If the state requires worker contributions under Brown’s plan, the contractual right to retiree health care could be strengthened, reducing future options for change. Some state workers have begun retiree health care contributions.

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