Your money: CalPERS may run health benefits fund
Motivated by a change in accounting rules, city and county government leaders are pressing CalPERS to set up a fund in which their agencies would annually invest tens of millions of new dollars to cover future health benefits for retirees.
Coupled with about $205 billion in pension assets managed by CalPERS, the new program would give the nation's largest public fund even more clout on Wall Street and financial markets worldwide, experts say.
The move comes as states and local governments across the country in the next two years start complying with accounting rules that now require officials to book the long-term cost of employee health retirement benefits on their balance sheets and disclose how much is needed each year to fund the entire obligation.
While officials are not compelled to set aside money to pay down the debt, experts anticipate many governments will start socking away some funds, often turning to giant pension systems such as CalPERS to invest the money, because carrying such a large liability wouldn't look good to their credit rating agencies.
Currently, only a few agencies have put up extra funds to cover future benefits, whose costs have surged because of medical inflation and an aging population. Locally, for example, the city of West Sacramento has earmarked $2 million, and the Elk Grove Unified School District has about $30 million in a special trust.
Other government agencies are just beginning to assess their liabilities and map out a payment strategy. Many are exploring joint government arrangements and pooling investment dollars to cut costs and generate above-average returns.
In recent months, two California school organizations have rolled out actuarial consulting and trust programs. A month ago, the California State Teachers' Retirement System launched a task force to help school districts navigate through the complex accounting rules.
Now, CalPERS is sponsoring legislation to allow any public agency, from large counties to small fire districts, to invest money in a plan administered by the fund.
"There is definitely potential for this to have a sizable amount of money," said Geoffrey Kischuk, president of Total Compensation Systems Inc., a Southern California actuarial consulting firm.
CalPERS trustees are weighing the issue and considering options ranging from providing actuarial consulting to creating a dedicated retiree health benefits investment fund.
Increasingly, public agencies have urged CalPERS officials to set up a full-service program.
Advocates say it would be a natural fit for CalPERS, which administers pension benefits for the state and 1,142 public agencies, including 29 counties and 304 cities. It also is the nation's third-largest purchaser of health care, buying more than $4 billion in coverage a year for 1.2 million state and local government workers.
"Public agencies were very interested in us doing it for them. They don't have the staff or expertise. It's going to be an issue for the state," said trustee George Diehr.
The task, Kischuk said, won't be easy even for CalPERS.
"This will be very different from what they are doing now. There is a fair amount of hand-holding working with any agency to bring them up to speed to what this is all about," he said.
CalPERS, Kischuk said, would have to set up its own actuarial consulting unit and recruit new employees with expertise in the retiree health benefits field. "The job of actuary at CalPERS would fundamentally change."
Still, Kischuk and others say the giant fund may be best suited to build a program and generate high rates of investment returns.
"For a number of districts, it would be a lot more convenient for them to have (CalPERS) as an option," said Neil McCormick, executive director of the California Special Districts Association. There are about 2,500 special districts in the state.
An estimated 74 percent of states and 57 percent of local governments offer health benefits to retirees, making them subject to the new accounting standards, according to the Government Finance Officers Association. But less than 10 percent have put money aside to cover the rising costs in the future.
The state of Ohio is one of a few governments that have built up a sizable fund. With current state employees contributing 4 percent of their salary, the Ohio Public Employees Retirement System has amassed about $12 billion in a retiree health trust.
During the 1950s and '60s, governments could afford to take care of the health insurance bill on a pay-as-you-go basis and not save for the future. The annual expenses were minimal, amounting to less than 1 percent of payroll.
But in the past two decades, the financial burden has become more taxing on government budgets because of surging medical inflation, an aging population and more workers entering retirement. Retiree health now costs about 5 percent to 10 percent of payroll.
Some experts said the long-term tab could run as high as $1.3 trillion nationwide and approach $100 billion in California. The Legislative Analyst's Office predicts the unfunded liability will be $40 billion to $70 billion for the state of California.
Firm numbers are hard to come by. Most government fiscal officers, especially at small and medium-sized entities, are still studying the issue and haven't hired actuaries to evaluate their financial liability.
Experts anticipate most governments will start setting some money aside to reduce the liability and protect their credit standing with bond rating agencies, thereby keeping the cost of borrowing down.
"Most districts are really struggling over how they set aside money to do this," said Steven Kinsella, president of the Gavilan Community College District in Gilroy. "Once that money goes in there (a trust), it can only be used for health benefits."
Kinsella heads a retiree health benefit joint powers authority established eight months ago by the Community College League of California.
Twenty of the state's 72 college districts have enrolled in the program, which helps officials comply with the accounting standards and sets up an investment pool. Officials estimate community college districts face a $2.5 billion unfunded liability.
The California School Boards Association has established a similar program for elementary and high school districts, although it is available to other public agencies. So far, three of the more than 1,000 districts in the state have made commitments to the program.
"We knew a lot of districts were going to struggle how to comply," said Suzi Rader, the association's director of district and financial services. "We've been meeting with over 100 districts in the last six months. Our goal was, we could set up one (program) so districts wouldn't have to foot the entire costs."
CalPERS may follow suit soon.
The California State Association of Counties and League of California Cities are lobbying for the CalPERS bill, Senate Bill 1729 by Sen. Nell Soto, D-Pomona. The measure is scheduled for an Aug. 9 hearing in the Assembly Appropriations Committee.
"We have urged CalPERS to open up a program that would be available to all public agencies. They would set something up that will comply with federal and state laws and be low cost," said Steve Keil, lobbyist for the counties association.
"This is cutting-edge stuff," said Keil, who fears that small agencies could end up selecting a flawed program without assistance from CalPERS.
About the writer:
- The Bee's Gilbert Chan can be reached at (916) 321-1045 or gchan@sacbee.com.
posted by Kathie Bracy at 5:01 PM
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