Prepaying $48 billion state retiree health debt

California Highway Patrol labor union negotiators have taken a first step toward prefunding one of the state’s big debts — an estimated $48 billion owed for providing health care for retired state workers over the next 30 years.

If CHP members vote to approve the agreement, the nonpartisan Legislative Analyst estimates that the diversion of 1 to 3 percent of expected CHP pay and a state match beginning in 2012 could yield roughly $15 million to $40 million a year.

That would only put a small dent in the big debt. But the agreement between the Schwarzenegger administration and the CHP negotiators, the first of its kind, was praised by the analyst.

“We commend both parties for this important step to try to put state employee benefits and their costs on a sounder long-term financial footing,“ Legislative Analyst Mac Taylor said in a Sept. 2 letter to the Legislature.

A governor’s commission reported last year that about 22 percent of the local government agencies in California have begun prefunding at least some of their retiree health care, a common benefit for government employees.

A survey by the commission produced the first estimate of the combined state and local government “unfunded liability” for retiree health care over the next three decades: $118 billion.

Health coverage in retirement became a routine part of state and local government employment benefits decades ago, long before soaring costs made health care one of the fastest-growing parts of the economy.

The growing government debt for retiree health care got limited public attention until 2004, when the Governmental Accounting Standards Board directed agencies to begin reporting their unfunded liability for retiree health care.

Most government agencies use pay-as-you-go funding for retiree health care. The governor’s commission recommended that retiree health care be prefunded, just like pensions.

Money for prefunding can be invested, producing earnings that help cover future costs. For example, the giant California Public Employees Retirement Association has been getting about 75 percent of its revenue from investment earnings.

Prefunding also reduces what some call the “intergenerational” transfer of debt. The services provided by government workers are paid for at the time they are delivered, not by later generations who do not directly receive the services.

The state currently pays $1.36 billion a year for the health care of its retirees, the equivalent of 7.6 percent of payroll. The analyst said that prefunding the 30-year $48 billion unfunded liability would cost an additional $1.32 billion a year.

Odd as it may seem, the state pays on average about 85 percent of the health care costs of an active worker. But the state pays 100 percent of the health care cost for retirees and 90 percent of health care costs for their families.

An apparent reason for the difference is that retiree health benefits are spelled out in a law that does not change, while health benefits for active workers can be bargained during negotiations for labor contracts.

At any rate, for retirees the state pays 100 percent of the weighted average health premium for single enrollees in the four largest CalPERS health plans and 90 percent of the average for family members.

Gov. Arnold Schwarzenegger’s proposal last June to cut retirement benefits for new state hires, opposed by Democratic legislators, would have reduced their retiree health benefits to the amount given active workers, about 85 percent of the premium.

The governor’s plan also would have delayed fully vesting new state hires in lifetime health care benefits until 25 years of service, up from current retiree health benefits that begin with 50 percent after 10 years and increase to 100 percent at 20 years.

The administration estimated that the two proposals would save $68 billion during the next three decades, well above the current $48 billion unfunded liability. But the proposals got little support in the Legislature.

Another Schwarzenegger proposal in January met the same fate. He wanted to shift state worker health care from the control of CalPERS to lower-cost plans, saving an estimated $236 million a year that could prefund retiree health care.

What may become the first step toward prefunding state retiree health care costs resulted from the CHP’s unusual situation.

The thin beige line of the Highway Patrol, for public security and perhaps contractual reasons, is not subject to the budget-driven furloughs (three days per month) that amount to a 14 percent pay cut for most state workers.

Moreover, the CHP officers, along with judges, are among the few state employees that get automatic annual pay adjustments. The CHP pay is linked to the pay received by officers in five large local law enforcement agencies.

As the state made deep budget cuts this year, and faces projections of big deficits in the future, the CHP was entitled under law to a 0.5 percent salary increase last July, which it has not yet received.

The agreement between the CHP negotiators and the administration would divert the 0.5 percent salary increase to begin prefunding retiree health care. In January, the CHP officers would receive a 0.5 percent pay cut, also diverted to retiree health care.

When pay is adjusted again next July under the current CHP contract, any pay increase up to a maximum of 2 percent also would be permanently diverted to the retiree health trust fund.

The analyst said that 1 percent of CHP officer pay, including supervisors, is about $6.3 million, nearly all of which comes from a special motor vehicle account rather than the red ink-ridden state general fund.

So the maximum CHP contribution to the retiree health fund, if a raise of at least 2 percent is due next July, would be about $19 million a year. But the analyst thinks that the raise is likely to be less than 2 percent.

When the state begins matching the CHP contribution in 2012, the analyst estimates, the total combined annual payment into the retiree health fund could range from under $15 million up to $40 million.

It’s a good beginning. But less than the $52 million annual contribution that the analyst estimates is needed to cover the unfunded liability for CHP officer retiree health care over the next 30 years.

The proposal to begin prefunding retiree health care came from the California Association of Highway Patrolmen, said Lynelle Jolley, spokeswoman for the Schwarzenegger administration’s Department of Personnel Administration.

“Neither party thought that raises were a good idea at this time,” she said.

Is the prefunding of retiree health care on the table as the administration, amid disputes over furloughs and layoffs, faces negotiations with other state worker bargaining units?

“We have had some private conversations, and they are certainly aware of the need to start prefunding,” said Jolley. “But it’s not a good time now.”

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 10 Sep 09

3 Responses to “Prepaying $48 billion state retiree health debt”

  1. BIll Says:

    To put things in perspective you ought to show how much CHP officers make on average. Then add in their other benefits for a picture of total compensation. The taxpaying citizens need to know these things. Unfortunately most are very ignorant and would be astonished to see the numbers.

  2. Really Says:

    Quoting …”Gov. Arnold Schwarzenegger’s proposal last June to cut retirement benefits for new state hires, opposed by Democratic legislators, would have reduced their retiree health benefits to the amount given active workers, about 85 percent of the premium.”

    Is seems amazing that the legislature won’t even approve retirees paying 15% of their healthcare costs when this cost is 100% funded by taxpayers, 90% of whom (those being the Private Sector workers) almost universally get ZERO subsidized retiree healthcare.

    When are we going to wise up and stop the Civil Servant Pension & Benefits raid on the taxpayers’ pockets ?

  3. BIll Says:

    Really,

    Please don’t use civil servants any more to describe these people. Civil Masters would be a better term. It really is Orwellian what is going on. Welcome to the Prol class.

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