Archive for April, 2013

Prefunding retiree health care: Is this the year?

April 29, 2013

With pensions presumably shored up by Gov. Brown’s reform and a CalPERS rate hike, will the problem-solving trend spread to what is, by some measures, an even bigger retirement debt: health care promised state workers?

It was no surprise last week when a Democratic-controlled Senate committee rejected a Republican’s proposal to begin setting aside money to pay for retiree health care promised new state workers, putting a small dent in a $64 billion 30-year debt.

Labor lobbyists told the committee they do not oppose “prefunding” retiree health care that is now “pay as you go.” This year $1.8 billion is budgeted for annual costs with no money added to invest and yield earnings to reduce long-term costs.

The labor unions said the funding of retiree health care is a pay issue, possibly affecting the total amount available for salaries, and therefore should be addressed through collective bargaining.

Randall Cheek of Service Employees International Union, Local 1000, the largest state worker union, went a step further:

“I agree with the other union representatives that this is something that should be done at the bargaining table,“ said Cheek. “We are at the bargaining table right now trying to negotiate a new contract, and I am sure that will come up.”

An Assembly floor analysis of Brown’s pension reform last year, AB 340, mentioned the “willingness” of unions to bargain while explaining why two of the 12 points in the governor’s original reform plan were not in the bill.

“The governor chose to drop the CalPERS board issue (adding independent members with financial expertise) and, on the health care vesting issue, state employee bargaining units have shown a willingness to bargain over this and so the Conference Committee believed it should remain subject to collective bargaining,” said the analysis.

Brown’s press office declined to comment last week on whether the administration, facing major battles over school funding and other issues, will put long-ignored state worker retiree health care on the bargaining table this year.

The governor’s proposal in the 12-point plan was modest. New hires would work 15 years, instead of 10 years, to be eligible for partial retiree health care coverage and 25 years, instead of 20 years, to move all the way up the steps to full coverage.

The current plan can cover the full cost of health care insurance for a retiree and 90 percent for dependents. The governor proposed “changing the anomaly” in which active workers pay about 15 percent of their health care insurance and retirees can pay nothing.

“Contrary to current practices, rules requiring all retirees to look to Medicare to the fullest extent possible when they become eligible will be full enforced,” said the governor’s proposal.

Most current state workers can retire at age 55 or, if in a safety plan like police and firefighters, at age 50. Federal Medicare coverage does not begin for most persons until age 65.

Arguably, the generous state worker retiree health care plan encourages the early retirement that the governor’s AB 340 plan for new hires delays by extending retirement ages to help control pension costs.

“The state’s retiree health care premium costs have increased by more than 60 percent in the last five years and will almost double over 10 years,” the governor’s 12-point proposal said in October 2011. “This approach has to change.”

The state owes $64 billion over the next 30 years for retiree health care promised current state workers, state Controller John Chiang said in an updated estimate in February.

“To take advantage of the tremendous cost savings resulting from fully prefunding, the State would need to contribute $3.51 billion in 2012-13, or $1.70 billion more than the State currently has budgeted,” Chiang said in a news release.

Growing state retiree health care costs are now roughly comparable with pension costs.

The $1.8 billion budgeted for state worker retiree health care this year, nearly all from the general fund, is approaching the $2.3 billion state general fund payment to CalPERS for pensions, $3.8 billion total when special funds are included.

The $64 billion debt or “unfunded liability” for state worker retiree health care is more than a $57 billion unfunded liability for state and local pensions reported by the California Public Employees Retirement System in its latest annual financial report (p. 128).

The pension unfunded liability is a floating number that can go up or down with changes in several factors: investment earnings, the way assets are valued and whether debt is expected to be paid off in 30 years or refinanced annually.

For example, on the same page of its financial report CalPERS shows a $57 billion unfunded liability using actuarial value assets and an $87 billion unfunded liability using market value assets.

The estimated $64 billion debt for state worker retiree health care is probably firmer than the CalPERS debt estimates. But how health care costs will change in the next three decades cannot be predicted with precision.

Switching to pension-like prefunding is easier said than done. A bill by former Assemblyman Dave Elder, D-Long Beach, created a state worker retiree health care fund two decades ago, but no money was put into it.

Many government employers did not even calculate the future cost of retiree health care promised current workers. That changed in 2004 when the Governmental Accounting Standards Board said retiree health care debt should be reported.

CalPERS created a retiree health care fund in 2007 that had $2.7 billion worth of investments last week from about 350 local governments, which unlike the state have begun prefunding.

The No. 1 recommendation of the Governor’s Public Employee Post-Employment Benefits Commission in 2008 was that retiree health care should be prefunded, followed by the No. 3 recommendation specifically mentioning the state:

“The State of California shall establish prefunding as both a policy and budget priority, develop and make public a prefunding plan, and begin prefunding its OPEB liabilities (non-pension or Other Post Employment Benefits).”

Some think retiree health care lacks the legal guarantee given pensions under a series of court rulings. And in the Vallejo and Stockton bankruptcies, the cities chose to cut retiree health care rather than pensions.

The chairman of the Senate retirement committee, Jim Beall, D-San Jose, mentioned another issue, containing rising health care costs, as the panel rejected SB 774 by Sen. Mimi Walters, R-Laguna Niguel.

Beall said when Santa Clara County began prefunding retiree health care, getting a better bond rating, health insurers began “dramatic increases in rates” that eroded long-term savings.

“Controlling the overall health care cost is so important,” he said. “It’s the bigger issue in my opinion.”

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 Apr 13

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