Paying for retiree health care — at last

The Schwarzenegger administration is proposing a way to begin setting aside money to pay for the health care of retired state employees, a future obligation ignored for decades as estimates of the unfunded liability soared to $48 billion.

But the administration plan that may be formally proposed later this week has a problem.

The money would come from savings made by shifting state employees into lower-cost health plans, which an administration official says may not provide the current “Cadillac” level of care.

“I don’t know if it’s dead on arrival,” said Jim Zamora, a spokesman for SEIU Local 1000, which represents 95,000 state employees, 45 percent of the total. “Based on what we have heard, we are opposed to it. Part of this is we want to know more about it.”

Zamora said the administration needs to explain, among other things, how the proposal would benefit state employees and retirees and be better for the state in the long run.

A commission appointed by the governor, the Public Employee Post-Employment Benefits Commission, reported last January that state and local governments have an unfunded retiree health care obligation of at least $118 billion over the next 30 years.

The bipartisan commission chaired by Gerald Parsky said the state’s share of the total was $48 billion. The commission said it would cost about $1.2 billion a year to meet the state obligation, similar to an earlier estimate by the nonpartisan Legislative Analyst.

Some of the arguments for “prefunding” are that the retirement cost of current public servants should not be passed on to future generations; money set aside now can grow through investments, and the retirement benefits of employees are more secure.

Why would the Schwarzenegger administration, in the middle of a major state budget crisis (an estimated $42 billion shortfall over the next 18 months) address a retiree health care problem that has been ignored for decades?

For one thing, the savings from lower-cost health plans expected to begin next January would be used for the first six months to help close the state budget gap, yielding $132 million.

Desperate budget writers need every nickel now. Savings from the lower-cost health plans would not be set aside for retiree costs until the following fiscal year, when they are expected to total $236 million.

“But we’re proposing in the next year, in 2010-11, to have that savings and hopefully some other savings associated with bargaining, that will help us to start paying for that unfunded liability,” Schwarzenegger’s finance director, Mike Genest, told reporters last week.

It is indeed a start. But setting aside an estimated $236 million in the new fiscal year that begins July 1, 2010, is far short of the $1.2 billion annually that the commission said is needed to cover the unfunded liability for retiree health care costs.

The estimated annual savings of $236 million is about 10 percent of the annual state general fund cost for health care for active and retired employees.

Administration officials say the estimate of 10 percent savings is not just a guess.

“It’s based on a review of other health plans available in the market,” said Lynelle Jolley, a spokeswoman for the state Department of Personnel Administration.

The administration thinks some state employees will want lower-cost health plans because payments would be reduced for employees as well as for the state. A state finance official said employees pay 15 to 20 percent of state health costs.

Currently, a switch to lower-cost health plans requires not only the agreement of public employee unions but also cooperation from the California Public Employees Retirement System.

CalPERS negotiates annual rates charged by the nine health plans offered to state employees. How payment of the rates is split between the state and the employees is part of labor contract negotiations conducted by the Personnel Administration department.

If CalPERS is not willing to seek lower-cost health plans, the administration plans to seek legislation allowing Personnel Administration to negotiate rates with insurers and health plans. But that is not the administration’s preference.

“We want them (CalPERS) to work with us and the unions to develop lower-cost health options,” said Jolley.

Zamora said the SEIU has been unsuccessfully trying to negotiate a new labor contract with Personnel Administration since last May.

“We are not intrigued with the idea of letting them (Personnel Administration) negotiate with insurers to try and get us the best deal on health plans,” he said.

Zamora said Personnel Administration is controlled by the governor, while CalPERS is independent. Others might say that CalPERS has a labor friendly board dominated by union representatives and Democratic elected officials.

A spokeswoman, Pat Macht, said CalPERS had no comment on the administration proposal. She said CalPERS offers employees the option of a lower-cost plan, PERS select.

A proposal to begin funding the state’s future retiree health costs brings back memories for former Assemblyman Dave Elder, D-Long Beach. His legislation created a retiree health fund two decades ago, but state lawmakers never put money in it.

“I took $100 over to start it in 1988,” Elder said, referring to a personal check. “They tore it up and never even deposited it.”

In Elder’s view, the state should have begun shifting eligible retirees to Medicare, the federal health care program, decades ago instead of waiting until several years ago to make the change.

“The savings would have been enough to take care of the unfunded liability,” he said.

The state health care plan for fully eligible retirees is more generous than health plans for active employees. The state pays 100 percent of the health care cost for the retiree and 90 percent of the health care cost for dependents.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Posted 7 Jan 09

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