Retiree health: Tiny agency tackles the big one

One of California’s newest government agencies has just nine employees and a life span of 20 years.

But the Alameda County Transportation Improvement Authority wants to do its small part to avoid adding to a big problem.

The health care that state and local governments in California have promised to provide for their employees when they retire is expected to cost $118 billion over the next 30 years. No money has been set aside to pay for it.

A governor’s commission made the first estimate of the unfunded liability last year. The commission said money should be set aside to “prefund” future health care, just like pensions that have investment funds expected to pay most of their future costs.

The small Alameda agency told the state Senate retirement committee last week that it has $917,000 in a retiree health care trust fund, with an estimated future obligation of $557,000.

“We are over-funded by about $360,000,“ said Anees Azad, the ACTIA finance manager. He said the contribution to the fund was made before Medicare Part D cut prescription drug costs in 2006.

The agency administers a half-cent sales tax, approved by Alameda County voters in 2002 to improve transportation. It’s expected to produce about $3 billion before expiring 13 years from now in 2022.

Does an agency with a 20-year life span, a decade or two shorter than the career of the average worker, need to provide retiree health care, a benefit that is not common in the private sector?

ACTIA officials said Alameda County voters have renewed the sales tax in the past. But more importantly, they said, retiree health benefits are needed to recruit employees and remain competitive with other government agencies.

It’s the conventional wisdom. The chairman of the governor’s commission said that retiree health benefits are “just as important as pensions” and are often part of “deferred compensation packages” used to attract qualified people to government service.

“The importance of these benefits in the eyes of workers and retirees cannot be overstated,” the chairman, Gerald Parsky, said in the final report of the Public Employee Post-Employment Benefits Commission.

The Alameda County agency is sponsoring a bill, AB 524 by Assemblywoman Mary Hayashi, D-Hayward, that would lengthen the time needed for its employees to become eligible (“vest” as it is called) for retiree health coverage.

“Currently, the employees of ACTIA would have to work at the agency for a day and they are fully vested in the retirement benefits,” Hayashi told the committee. “This legislation would require that the employees must work at least five years before they are fully vested in this program.”

Hayashi said the bill, which was approved by the committee, is “fiscally responsible.“ She said the measure will not cost the state any money and “will actually save money for ACTIA.”

By law, the agency’s administrative staff costs cannot exceed 1% of the net revenue from the half-cent sales tax, Measure B. Total administrative costs are limited to 4.5% of net revenues.

The small agency contracts with the California Public Employees Retirement System (CalPERS) to provide health benefits for employees and retirees under the Public Employees Medical and Hospital Care Act (PEMHCA).

The Alameda agency officials said the law only gives them two options: Fully vesting in retiree health care on the first day of work, or partially vesting after 10 years and becoming fully vested after 20 years.

“The first one is fiscally not responsible for this agency,” Zack Wasserman, the ACTIA general counsel, told the committee. “The second one is not sensible as a recruiting tool, even though we are a sunset agency and we are almost half way through it.”

Most employees of state government in California are under the plan that pays 50 percent of retiree health care costs after 10 years of service and 100 percent of retiree health care after 20 years, with 5 percent added for each year between 10 and 20 years.

Under the Hayashi bill, an ACTIA employee would vest after five years, becoming eligible to receive half the cost of health care after retirement. The payment increases 5 percent per additional year worked, reaching full coverage after 15 years.

Wasserman said all four of the employees hired since 2004 agreed to contracts that will switch them to the new vesting system, if the legislation is approved. He said two former ACTIA employees have retired and are drawing health benefits.

The 11-member ACTIA board approved the longer eligibility period in 2004 as a new rule, Government Accounting Standards Board statement 45, began to require agencies to calculate and report their unfunded liability for retiree health care.

“That really triggered the thing,” Wasserman said of the new accounting rule. “This really came from staff. Vesting as soon as you are hired doesn’t make sense.”

The new rule required the state to begin reporting its unfunded liability for retiree health care last fiscal year. The state employee share of the estimated $118 billion state and local government unfunded liability is $48 billion.

State Auditor Elaine Howell warned in a report in April that the growing debt for retiree health care could threaten the state’s credit rating, already the lowest of any state, and presumably make borrowing even more expensive.

The state paid $1.25 billion for retiree health care last fiscal year and is expected to pay $1.36 billion in the current fiscal year that ends this month. But the money only pays for health care during the year. No money is set aside to pay for the 30-year $48 billion unfunded liability.

Howell said the new rule requires the state to report the shortfall in annual payments needed to begin prefunding retiree health. The shortfall was $2.34 billion last year, increasing to $4.71 billion this fiscal year.

“At that rate of growth, the OPEB (retiree health and dental) liability reported by the state could likely begin to overshadow other liabilities in the state’s financial statements and affect the state’s credit rating,” said Howell.

Gov. Arnold Schwarzenegger’s revised budget plan last month included a proposal to reduce retiree health care costs — require that new state employees work at least 25 years before becoming eligible for free lifetime health care. But the proposal has not been embraced by the Democratic-controlled Legislature.

If Alameda County voters do not extend the transportation sales tax after 2022, Wasserman said the small agency’s retiree health care trust fund would be turned over to the CalPERS-administered PEMHCA.

Is there a risk of an unfunded liability?

The trust fund investments could be hit by another stock market crash. Unlike pensions, with their fixed monthly payments adjusted for inflation, retiree health care costs are difficult to predict, varying with the cost of health care itself.

For example, the universal health coverage sought by President Obama could have a major impact on health care costs, one way or the other.

“I’m not sure anybody can tell you there is no risk at all,” Wasserman said. “For a set of reasons there is a very, very small chance of risk here. The fund currently is significantly over-funded.”

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 29 Jun 09

5 Responses to “Retiree health: Tiny agency tackles the big one”

  1. P. Mayor Says:

    Thanks for your article. Please do more fact-checking, though. The state contribution towards retiree health care premiums is established based on the lowest-price basic health plan. Then, if fully vested, the retiree is entitled to the 100% of the state contribution (which is not necessarily 100% of the premium). If the cost of the plan exceeds the cost of the state contribution, the retiree pays the difference. The same process is followed for up to two dependents but the State contribution amount drops to 90%. Retirees age 65 and older are required to join Medicare. The state contribution to these costs is also limited.

    To state (as you do here, and many others have stated before you) that the state covers “100 percent of retiree health care” is inflammatory and factually inaccurate.


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