Pensions

Ed Mendel
April 11, 2016

Gov. Brown’s plan to reduce state worker retiree health care costs got only a small nod in a tentative CSU faculty contract agreement last week. But three unions have agreed to begin paying down one of the state’s fastest-growing costs and largest debts.

Part of the plan Brown proposed last year hit a wall of opposition in the Legislature. An optional low-cost health plan would have taken less from the paycheck, but more from the pocket before insurance begins paying medical expenses.

The new state budget Brown proposed in January still expects major long-term savings from the retireee health care plan requiring state workers to begin paying some of the cost while on the job, work longer to become eligible, and pay higher premiums after retiring.

“Even though the private sector is eliminating these types of benefits, the state can preserve retiree health benefits for career workers,” said the governor’s Finance department budget summary.

How fast are costs growing?

The state paid $458 million in 2001 (0.6 percent of the general fund) for state worker retiree health care and is expected to pay $2 billion (1.7 percent of the general fund) next fiscal year — up 80 percent in just the last decade. (see Finance chart below)

The debt or “unfunded liability” for retiree health care promised state workers has grown to $74.1 billion, state controller Betty Yee reported in January — much larger than the unfunded liability reported by CalPERS for state worker pensions, $43.3 billion.

As the budget summary noted, employer paid retiree health care is rare in the private sector. And in what Brown has called an “anomaly,” the state pays a larger share of retiree health care costs for retirees than for active workers.

The state usually pays 100 percent of the health care insurance premium for retirees and 90 percent of the premium for dependents. For active workers, the state pays 80 to 85 percent of the premium and for their dependents 80 percent, depending on bargaining.

State workers, who can retire as early as age 50 though few do, are expected to switch to federal Medicare when they become eligible at age 65. A state supplement continues to cover costs not paid by Medicare.

Brown’s plan, meanwhile, could take decades to cut costs. But without action, said the budget summary, the state worker retiree health care debt could grow to $100 billion in five years and to $300 billion in three decades.

The big change puts money into a pension-like investment fund to yield earnings that can help pay retiree health care in the future. CalPERS expects its investment fund, valued at $288 billion last week, to pay two-thirds of future pension costs.

The state has only been paying annual retiree health care premiums, setting no money aside to “prefund” or pay for the retiree health care earned by active workers each year.

This “pay-as-you-go” policy forces future generations to help pay for the cost of current workers. By passing on the debt, lawmakers have more money to spend on other programs.

In the early 1990s, legislation by former Assemblyman Dave Elder, D-Long Beach, created an investment fund for state worker retiree health care. But lawmakers chose not to put money into the fund.

Brown’s plan, as in his previous pension reform, calls for the state and its current employees to pay equal shares of the “normal cost,” a contribution to the investment fund to cover the estimated cost of the retiree health care earned during a year.

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