Los Angeles has the best-funded retiree health care among the nation’s big cities, a new study found, and it’s also paying a big price for a policy praised by many but practiced by only a few.
The city’s rare attempt to set aside money now to pay for retiree health care promised in the future accounts for nearly a quarter of the soaring retirement costs former Mayor Richard Riordan warns are driving the city toward bankruptcy.
Most cities, as well as the state of California, just pay the annual health care bill for their retired workers. Little or no money is set aside to invest and help pay for health care promised current workers when they retire, lowering the total cost in the long run.
It’s what some call “pay-as-you-go,” instead of “prefunding” like a pension. Debt is being deliberately passed on, critics say, unfairly forcing future generations to pay for services enjoyed by the current generation.
The Pew Center on the States issued a study last week of 61 cities, all either over 500,000 or the largest in a state, that found their total shortfall for retiree health care, $118 billion, exceeded their shortfall for pensions, $99 billion.
In total dollars, said the study, what the cities have promised in pensions is three times larger than their promised retiree health care. But pensions were 74 percent funded and retiree health care only 6 percent funded.
Los Angeles retiree health care was 55 percent funded in 2009 (the latest comparable data available) followed by Denver 51 percent, Washington D.C. 49 percent, Louisville 40 percent, Sioux Falls 37 percent and San Antonio 31 percent.
“Far earlier than most, Los Angeles began setting aside money for retiree health insurance in 1987, and the city has been praised by the bond-rating agencies for this practice,” said the study.
The three other large California cities included in the study had retiree health care funding levels far below the Los Angeles level: San Jose 9 percent, San Diego 3 percent and San Francisco less than 1 percent.
Why are billions of dollars in retiree health care debt viewed with much less alarm than billions of dollars in pension debt?
Some think retiree health care, unlike pensions, is a benefit that can be cut for current workers without violating a “vested” right, protected by court decisions under contract law. But the issue is not settled and may depend on local circumstances.
A superior court judge ruled in April 2011 that the retiree health care promised two San Diego policemen is an optional benefit that can be cut. The city later announced a deal negotiated with unions to cut retiree health care, saving $714 million over 25 years.
In an Orange County retiree suit, the state Supreme Court ruled in November 2011 that an “implied” contract for retiree health care can be created if “intent” by elected officials can be shown. A federal court later upheld the county’s retiree health care cut.
Many state and local government employers, only paying annual costs, did not calculate retiree health care debt until after the Governmental Accounting Standards Board adopted a new phased-in reporting policy in 2004.
An estimate of future retiree health care costs is probably a firmer number than estimates of 30-year pension debt, which can vary widely with investment earnings forecasts and actuarial choices for valuing assets and paying off debt.
Pension funds often expect to get two-thirds of their revenue from investment earnings. The three big California state pension funds (CalPERS, CalSTRS and UC Retirement) are forecasting 7.5 percent annual earnings.
Critics say the forecasts are too optimistic and conceal massive debt. Pension funds stand by their forecasts and note that a spurt of double-digit earnings could erase much of the debt.
A non-squishy number is the annual retirement cost. In local government, where personnel is the big budget item, growing retirement bills are crowding funding for other programs, leading to voter-approved pension reform last year in San Diego and San Jose.
Riordan and others in Los Angeles last year pointed to the alarming growth of the city’s retirement costs — doubling in the last seven years to more than 18 percent of the general fund and projected to reach 25 percent in the next four years.
If Los Angeles were not setting aside money to begin paying now for retiree health care promised in the future, the growth in pension costs might still be alarming. But the bite from the general fund would be much smaller.
Actuarial reports show the city contribution for most employees is 20.6 percent of pay for pensions and 5.6 percent of pay for retiree health care. For police and firefighters, the city contribution is 30.5 percent for pensions and 10.8 percent for retiree health care.
Several years after Los Angeles began setting aside money for future retiree health care in 1987, legislation by former Assemblyman Dave Elder, D-Long Beach, created a retiree health care fund for state workers.
But unlike Los Angeles, the Legislature chose not to put money in the fund. Now two decades later state workers have one of the most generous retiree health care plans with one of the biggest debts.
The unfunded obligation for state worker retiree health care over the next 30 years is $62 billion, state Controller John Chiang said last February. His actuarial report said fully paying for present and future retiree health care would cost $4.7 billion a year.
The state continues to pay only the annual premiums for the health care of current retirees. The general fund budget Gov. Brown proposed for the new fiscal year beginning July 1 has $1.5 billion for retiree health care, up from $800 million in fiscal 2004-05.
Brown’s 12-point pension reform plan in 2011 would have added five years to the retiree health care eligibility scale for state workers and changed “the anomaly of retirees paying less for health care premiums than current workers.”
The state pays 80 to 85 percent of health care premiums for current workers and 80 percent for dependents. If retirees have more than 20 years of service, the state pays 100 percent of average premiums and 90 percent for dependents.
A pension reform bill signed by Brown last September, AB 340, covered most of the governor’s 12 points but omitted state worker retiree health care. A Senate floor analysis of the bill gave this explanation:
“Regarding state retiree health care vesting, state employee bargaining units have shown a willingness to bargain over this issue and so the Conference Committee believed it should remain subject to collective bargaining.”
As the new accounting policy that reports retiree health care debt took effect, the California Public Employees Retirement System created a new investment fund for local governments that choose to begin setting aside money for future retiree health care.
About 350 local governments are putting money in the CalPERS California Employers Retirement Benefit Trust Fund, valued this week at a total of $2.5 billion.
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 24 Jan 13
Calpensions 
January 24, 2013 at 12:35 pm
Actually, in regards to the LAUSD, the “city” sets aside no monies for future teacher retiree health benefits nor do the teachers. The “city” funds all these benefits from the current monies provided to the LAUSD for educating students today. This is a totally unfunded liability of $10 billion.
January 24, 2013 at 5:25 pm
In reality, there is waste and abuse of these funds by the third party administrators, when due to their “incompentence”(in Wendy Greuel’s words in the case of Tristar Risk Management) retired disabled LAPD officers are not receiving the proper treatment.
Most of these funds, are poorly supervised by the City and are part of the piñata for the risk management paper shoving industry.
There is an on going investigation of Tristar for causing double payments to a provider, for not answering….
The main objective of this investigation is:” Establishing containtment of the cost of medical practices”.
What ever happenned to officer’s safety for those on the job, and “treatment efficay” for the retired and disabled?
January 24, 2013 at 5:43 pm
I would be shocked if the anomaly cited in the article was truly one. More likely it was more of the same. Older retirees gaming the system directly at the expense of those currently employed and the taxpayers. We’re going to keep chugging along until we fly right off the cliff and then try to figure out what happned, express faux outrage and wonder why this was not handled earlier. Since voters have handed to Dems total control of CA, either they don’t care, can’t be bothered to educate themselves on the issues or the takers so completely outnumber the makers that their voice is irrelevant.
January 25, 2013 at 6:14 am
I agree the State of California is on it’s way to bankruptcy, but why don’t you focus on some of the other issues also. Take a look at how much illegal immigrants cost us. Take a look at the high taxes running businesses, and hard working people out of the state. Take a look at our environmentalists, and see how they can tie up projects for years. Take a look at CARB, they’re putting thousands out of work with they’re new emission laws. I am not against some environmental things, and I’m not against clean air, but you need a happy medium. Don’t put people out of business. If they commit a violation then take the appropriate measures. Just my two cents. By the way my retirement isn’t all that much.
January 26, 2013 at 12:06 am
You are talking from ignorance of facts, Dream On. I am a retiree with a capped insurance benefit provided by my former employer for the ABC medical premium which is secondary to Medicare. The premium at $900/mo is more than ABC charges my employer for insureds under age 65. My out-of pocket is $1341/mo. to cover the difference for my own ABC premium and cover my spouse-dependent for the full cost. The actives receive full coverage of their medical insurance premiums and some coverage for dependents. So stick to facts you know, and stop trying to put your blame game on the backs of the retired.
January 26, 2013 at 4:20 am
SeeSaw-First off get off your high horse and understand that neither the article nor my comment was about YOUR SITUATION or your premium which I don’t give a flying fig about. Understand also that personal stories make a nice backdrop for sob stories but nothing else. The collective load that millions of retirees are placing on the system is the issue. I specifically do place more blame on older retirees because they are the equivalent of the early entrants and eventual benediciaries of a Ponzi scheme which relies on sucking in more participants to the game. You are others like you are the equivalent of the sellers of Amway themed tapes that promise untold riches to the gullible ans suck them into the seller’s network. Most Amway distributors(especially the ones who sell the motivational tape crap) are fully aware of the Ponzi nature of their scheme but they have abandoned their conscience a long time back in the pursuit of riches so they have zero shame in aggressively selling to friends and family and alienating them. Except that you are significantly worse than them because you and your representatives dig deep and shamelessly into our pockets to support your unearned and undeserved pensions. You have been commenting on this and another board for quite some time now so I doubt you are uninformed anout the issues at hand so the only other conclusion I can make is what I make when I encounter otherwise educated white collar professionals trying to get me to join their “independent business”
You have lost your conscience, you are fully aware of the unsustainability of the current structure but since you are an older recipient of the benefits of this current unjust structure your interest lies purely in the scheme to continue for as long as it can. The long term damaging effects of this on the next generation of retirees(such as myself) is of no consequence to you. You lack the objectivity required to take an unbiased view on this and have a genuine interest in solving this.
January 26, 2013 at 5:41 am
Funny thing…when I was a young policeman…it was customary to blame the retired, the ones that were no longer useful, the voiceless and the invisible…
Let’s wait and see what happens 20 or so years from now to our young bucks.
One thing I like to share with you: Fight for your rights now…every inche of the way..because when City Hall can no longer use you…vested rights, contractual obligations, rules and regulations and plain decency means nothing to coorporate styled cities, that are only concerned with what is in the pot now to squander and WASTE AND ABUSE: A good example of this is the supervisor or controller who does not supervise, because she or he has a personal agenda—to vamparized the City as much as possible….
The retired and disabled, become a mass of stubborn and selfish old contribuitors to the system that refused to take their place in the burial grounds, and leave more money for the living, sometimes useless horde of political inclined….It has always been that way, and probably will be more of the same in the future…
And why change a winning formula? if no one is watching, if responsible accountability does not exist simply because no one is supervising or controlling….
Thanks for the patience.
Ed Jimenez 17649.
January 26, 2013 at 4:37 pm
You don’t know me Dream On–you don’t have any idea about my conscience. I was already 72 years old when I retired–don’t think I am going to put too much strain on your system, till I am gone. There is no other way than personal anecdotes to show those who eat your slop that you are way off base on your accusations. Do you even have time to lead your own life–you seem to be spending all your time telling others how to lead their’s. . I can already tell that I have a much better outlook on life than you. You are one sad sack of potatoes! Whine on!
January 26, 2013 at 5:55 pm
SeeSaw, RIGHT ON!!! I was 66 when I retired in December. My God we’re bleeding the system dry. These lunatics don’t have anything better to do. See my post above about the more pressing problems in California
January 28, 2013 at 5:06 pm
In the US we spend the most per capita in the world on health care, and we rank 38th in the world in outcomes…
http://en.wikipedia.org/wiki/World_Health_Organization_ranking_of_health_systems
Recent report on our terrible life expectancy…
http://www.newscientist.com/article/mg21729003.500-life-expectancy-lower-in-us-than-other-rich-countries.html
I really can’t blame the health care mess on LA or post-employment benefits more generally. In the US our health care system is just one big fat loser, a woulda coulda shoulda phony.
January 28, 2013 at 11:50 pm
Here is a real people’s story.
It so happens that even though I am a US citizen, retired disabled former LAPD 17649, I also live in Costa Rica.
There is no way in heck, that Costa Rican’s socialized medical system can rank 37, one step above than the USA’s 38.
This is a nationalized medical system, where people drop dead waiting in long lines, or at home waiting for important medical appointments 1.5 years down the line.
I have read the links spension posted in regards to the credibility of WHO’ ranking.
Seems to me the jury still out on this issue.
January 29, 2013 at 8:56 am
spension Says: “I really can’t blame the health care mess on LA or post-employment benefits more generally. ”
Who’s asking you to blame the unfunded liabilities related to retiree medical benefits on the health care mess? I do NOT see any reason why any city/taxpayers should be paying any retiree medical costs for people that retire in their 50’s, let alone covering their dependents. I don’t even think public safety employees claim they can’t work past 50. They only claim they can’t work those specific jobs. If public employees haven’t saved enough to cover their medical costs prior to receiving medicare then they should continue working.
The entitlement mentality of CA government employees is off the charts.
January 29, 2013 at 4:54 pm
Jimenez… I’d trust WHO in a nanosecond over you. Not that WHO is perfect and right, but they have more credibility than the lobbyist-fueled screeds against the rankings that I’ve seen.
A lot more Americans go to Canada for cheap healthcare than the other way around. Of course some Canadians come here for some procedures, but for day-in day-out medical care, the flow is toward Canada.
Captain… who’s asking you for a screed about 50-year olds. I don’t want then getting post-retirement benefits, either.
But the point is: US healthcare is super expensive and crappy. In the toilet. 100,000 people a year die in the US because doctors (who make $200,000/year) don’t bother to wash their hands. If US healthcare were high quality and inexpensive, there would be no need to fight much over healthcare benefits for anybody.
Instead we all get to pay huge premiums for overweight smokers who survive on fries and soft drinks, and then demand $50,000/year treatment for their diabetes and coronary problems. Way bigger problem than post-retirement benefits.