A state Supreme Court ruling last week could make it more difficult for state and local governments to cut spending on health care for their retired employees, one of the fastest-growing costs.
In a widely watched Orange County case, the court said when local elected officials approve a health care benefit for retirees, a lifetime right to the benefit can be created even if the ordinance or resolution does not specifically say so.
The court unanimously said the approval can create an “implied” vested right, fully protected by contract law, if it can be shown that was clearly the “intent” of the action by the elected officials.
The League of California Cities and the California State Association of Counties filed briefs in support of Orange County’s contention that a county and its employees cannot form an implied contract.
The court said the local government groups “raise legitimate concerns” that retiree health insurance benefits, unlike pensions, are usually not funded in advance during working years and that costs have “skyrocketed in recent years.”
But the court said it was dealing not with a policy issue but a legal question posed by a federal appeals court:
“Whether, as a matter of California law, a California county and its employees can form an implied contract that confers vested rights to health benefits on retired county employees.”
The decision written by Justice Marvin Baxter that “a vested right to health benefits for retired county employees can be implied under certain circumstances from a county ordinance or resolution” could have a broad impact.
A lawyer for Sonoma County retirees told the San Francisco Chronicle last week that the decision should revive a lawsuit over a five-year reduction in county contributions to retiree health care insurance premiums.
In a discussion of whether retired state workers could be required to pay part of the cost of their health care, the nonpartisan Legislative Analyst said in a 2008 budget analysis that some experts believe the payments are guaranteed by the constitution.
“To our knowledge, however, the ability of the state to reduce the percentage of premiums it pays for retirees has never been addressed by a court,” the analyst said.
The cost of providing retiree health care was a long-ignored government debt, often not even calculated. But in 2004 the Governmental Accounting Standards Board said the retiree health care “unfunded liability” should be reported.
Now some think keeping promises to pay retiree health care costs could be a long-term financial problem that ranks with soaring pension costs.
In 2007 state Controller John Chiang made the first estimate of the cost of providing retiree health care for current state workers and retirees — $50 billion over the next 30 years. He has since increased the estimate to $60 billion.
A 2008 report by a governor’s post-employment benefits commission estimated that the total state and local government debt for retiree health care was $118 billion over the next three decades.
A 2009 report by the U.S. Governmental Accountability Office on retiree health benefits predicted that state and local government budget problems in the decades ahead will “largely be driven” by total health care costs.
Unlike pensions, which are usually a fixed cost with some adjustment for inflation, retiree health care can be an open-ended promise to pay for services, whatever the cost.
Again unlike pensions, retiree health care is usually “pay as you go.“ Most government employers are not setting aside money to invest, presumably paying for much if not all of the retiree health care promised current workers in the future.
The California Public Employees Retirement System began offering local government employers a way to prefund retiree health care in 2007. By last June the program had 306 employers with $1.85 billion invested to cover 212,000 persons.
The state has chosen to let future generations pay for the retiree health care of current workers. Two decades ago legislation by former Assemblyman Dave Elder, D-Long Beach, created a retiree health fund for state workers, but it received no money.
Few employers in the private sector provide retiree health care. And some government employees, notably more than half of all teachers, do not receive retiree health care.
Retiree health plans often cover the worker and dependents. Many government employees can retire at age 50 or 55, usually taking a reduced pension if they are not police or firefighters.
When retirees become eligible for Medicare at age 65, the federal plan is expected to begin covering part of the cost. Some think state and local governments could do more to shift costs to Medicare, which also has major long-term funding problems.
A 12-point pension reform plan issued by Gov. Brown last month said: “Contrary to current practice, rules requiring all retirees to look to Medicare to the fullest extent possible when they become eligible will be fully enforced.”
Some retiree health plans are generous. The administration of former Gov. Arnold Schwarzenegger said active state workers pay 15 percent of their health care costs, while retired state workers can have the full cost of their health care paid by the state.
Brown’s reform plan would “change the anomaly of retirees paying less for health care premiums than current employees.” The state general fund is expected to pay $1.5 billion for retiree health care this year, up 60 percent in five years.
To cut costs, Orange County in 2007 ended a pooling of active and retired health premiums begun in 1985. The pooled rate had lowered the premium paid by retirees, who on average are older and more expensive to insure.
A retiree group filed a suit in federal court to block the split on behalf of 4,600 county retirees. Some said the county expected the average premium paid by retirees or their families to increase $3,000 a year, a figure disputed by the county’s lawyer.
The retirees said bargaining agreements approved by county supervisors did not specify the duration of the pool. They contended that long-standing practice and county statements in a booklet for employees created an “implied” contractual right.
The county said the annual motions and resolutions approved by the board of supervisors during the two decades of the pool only set health insurance premiums for a single year.
A federal district court agreed with the county and dismissed the retiree lawsuit, holding that a county cannot under state law be liable for something not explicitly authorized by a resolution approved by the supervisors.
After the retirees appealed, the U.S. 9th Circuit Court of Appeals asked the state Supreme Court for a ruling on whether, under California law, a county can form an implied contract that creates a vested right to retiree health care.
In ruling that an implied contract can be formed, the Supreme Court said that a court should “proceed cautiously” when deciding whether a contract has been implied by the actions of officials.
“The requirement of a ‘clear showing’ that legislation was intended to create the asserted contractual obligation (ruling cited) should ensure that neither the governing body nor the public will be blindsided by unexpected obligations,” the court said.
The Orange County case goes back to the federal appeals court, which some lawyers reportedly think may ask a trial court to decide whether the circumstances created an implied contract.
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 28 Nov 11