California facing huge tab in medical benefits promised to retirees

State facing huge tab in promises to retirees
By Gilbert Chan - gchan@sacbee.com
SacBee.com, December 19, 2007

The state of California is not funding a mountainous $48 billion tab for medical benefits promised to future government retirees, a bill that ranked as the second largest in the nation last year.

The escalating liability, which accounting rules now require listing on the balance sheet, would hurt the state's debt rating and consequently raise the cost of borrowing if it goes unaddressed. Equally as important, since tax revenues are not expected to cover it, taxpayers will be forced to sacrifice services or sell bonds at ever-higher interest rates to accommodate the obligation.

"That $48 billion is quite a lot. The substantial annual increases (to fund the benefits) the states are facing … is really stunning," said Katherine Barrett, co-author of a ground-breaking report, released Tuesday, from the nonprofit Pew Charitable Trusts' Center on the States.

For years, most state and local governments have paid only the annual cost for retiree health care. But this pay-as-you-go practice hasn't kept up with surging health-care prices and a growing number of baby boomers entering retirement.

At the same time, the Government Accounting Standards Board is requiring public agencies to account for the future cost of health care and other benefits such as dental and vision along with traditional pensions for more than 24 million retired and active public employees in the United States.

Nationwide, 97 percent of the $381 billion in non-pension, post-retirement benefits promised to state government workers over the next three decades are unfunded. Eleven states have a price tag exceeding $10 billion. Pew, which funds research of civic and public policy issues, is the first to examine retirement benefits promised by every state.

The findings come as Gov. Arnold Schwarzenegger's Public Employee Post-Employment Benefits Commission prepares to release in two weeks its final recommendations dealing with pension liabilities.

The commission expects to recommend that the state and more local governments start saving for future retiree health-care benefits. Currently, only a handful of local governments such as the Elk Grove Unified School District have done so.

This spring, the California Public Employees' Retirement System rolled out a retiree health benefits trust in which local governments can invest. So far, 19 of roughly 1,100 employers in the system have contributed $19.6 million.

CalPERS anticipates the trust growing in the first year to 40 to 50 employers and $250 million. A new law will allow public employers outside CalPERS to also use the fund. Nationally, 13 states have set up such funds.

Pre-funding for these benefits won't come easy, especially for lawmakers struggling with lean budgets. Next year, California anticipates a $14 billon deficit.

Overall, states have set aside about $2 trillion to meet obligations for pensions, medical care and other retirement benefits, but they still have a $731 billion shortfall.

Although California is lagging on its liability for retiree health care, the state's pension obligation was 87 percent funded in 2005, ranking the state as a top performer in the United States, the Pew study said. Experts consider an 80 percent funding threshold as healthy for pensions. Twenty states fall below this benchmark.

CalPERS officials say the pension was fully funded at the end of this past fiscal year. In contrast, the California State Teachers' Retirement System reported a long-term shortfall of $19.6 billion in 2006. It had enough money to pay for 87 percent of pension funds in the coming decades.

Critics have assailed rising pensions costs, calling them a drag on government budgets. They point to pension cuts in the private sector.

Former Assemblyman Keith Richman, R-Northridge, had proposed a ballot initiative to offer a less generous pension to future local and state government workers.

"A lot of states have a buy now, pay later (position). Too many states are falling short of their annual bill," said Barrett, the Pew report's co-author. "States have been shocked into action."

Like other states, California ranks below par in tackling the retiree health-care issue. Only Arizona, North Dakota, Ohio, Oregon, Utah and Wisconsin are on track to meet their entire obligations over the next 30 years. In fact, Ohio already has saved $11.1 billion.

More and more, lawmakers are taking a hard look at retiree health benefits, experts say. Some states are considering raising the retirement age, boosting medical co-payments or raising employee and employer contributions.

None has proposed radical overhauls, said Ron Snell of the National Conference of State Legislatures. "They are holding the line on benefits. It's rare that a state makes a sharp change."

Allen Goodman, a health economist at Wayne State University in Detroit, said states and cities could feel pressure to scale back future benefits.

"Everybody is scrambling for dollars. It's going to be a tough go," Goodman said. "The people currently working are going to have to accept smaller promises."
(Click image to enlarge)

Gilbert Chan 916-321-1045