By Ed Mendel
Monday, November 28, 2011

A state Supreme Court ruling last week could make it more difficult for state and local governments to cut spending on health care for their retired employees, one of the fastest-growing costs.

In a widely watched Orange County case, the court said when local elected officials approve a health care benefit for retirees, a lifetime right to the benefit can be created even if the ordinance or resolution does not specifically say so.

The court unanimously said the approval can create an “implied” vested right, fully protected by contract law, if it can be shown that was clearly the “intent” of the action by the elected officials.

The League of California Cities and the California State Association of Counties filed briefs in support of Orange County’s contention that a county and its employees cannot form an implied contract.

The court said the local government groups “raise legitimate concerns” that retiree health insurance benefits, unlike pensions, are usually not funded in advance during working years and that costs have “skyrocketed in recent years.”

But the court said it was dealing not with a policy issue but a legal question posed by a federal appeals court:

“Whether, as a matter of California law, a California county and its employees can form an implied contract that confers vested rights to health benefits on retired county employees.”

The decision written by Justice Marvin Baxter that “a vested right to health benefits for retired county employees can be implied under certain circumstances from a county ordinance or resolution” could have a broad impact.

A lawyer for Sonoma County retirees told the San Francisco Chronicle last week that the decision should revive a lawsuit over a five-year reduction in county contributions to retiree health care insurance premiums.

In a discussion of whether retired state workers could be required to pay part of the cost of their health care, the nonpartisan Legislative Analyst said in a 2008 budget analysis that some experts believe the payments are guaranteed by the constitution.

“To our knowledge, however, the ability of the state to reduce the percentage of premiums it pays for retirees has never been addressed by a court,” the analyst said.

The cost of providing retiree health care was a long-ignored government debt, often not even calculated. But in 2004 the Governmental Accounting Standards Board said the retiree health care “unfunded liability” should be reported.

Now some think keeping promises to pay retiree health care costs could be a long-term financial problem that ranks with soaring pension costs.

In 2007 state Controller John Chiang made the first estimate of the cost of providing retiree health care for current state workers and retirees — $50 billion over the next 30 years. He has since increased the estimate to $60 billion.

A 2008 report by a governor’s post-employment benefits commission estimated that the total state and local government debt for retiree health care was $118 billion over the next three decades.

A 2009 report by the U.S. Governmental Accountability Office on retiree health benefits predicted that state and local government budget problems in the decades ahead will “largely be driven” by total health care costs.

Unlike pensions, which are usually a fixed cost with some adjustment for inflation, retiree health care can be an open-ended promise to pay for services, whatever the cost.

Again unlike pensions, retiree health care is usually “pay as you go.“ Most government employers are not setting aside money to invest, presumably paying for much if not all of the retiree health care promised current workers in the future.

The California Public Employees Retirement System began offering local government employers a way to prefund retiree health care in 2007. By last June the program had 306 employers with $1.85 billion invested to cover 212,000 persons.

The state has chosen to let future generations pay for the retiree health care of current workers. Two decades ago legislation by former Assemblyman Dave Elder, D-Long Beach, created a retiree health fund for state workers, but it received no money.

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