Prefunding retiree health care: Is this the year?

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 https://calpensions.com/ Posted 29 Apr 13

12 Responses to “Prefunding retiree health care: Is this the year?”

  1. spension Says:

    Beall hits the nail on the head. The whole health care industry in the US is one big welfare system for the private sector. We have the most expensive healthcare in the world and pay 2X the prices for healthcare that is twice as bad as advanced, civilized nations.

  2. Tough Love Says:

    As a Taxpayer, reading this make me want to puke. Private Sector taxpayers rarely get ANY retiree healthcare subsidies from their employers. With Public Sector workers earning no less in cash pay than their Private Sector counterparts, there is simply no justification WHATSOEVER for ANY taxpayer-subsidized retiree healthcare for Public Sector workers.

  3. SeeSaw Says:

    The issue is the cost of healthcare, not a comparison of who gets subsidies and who doesn’t. Private sector unions provide health care coverage to the members. When my spouse had to work non-union he received zilch in benefits, until the last years of his career, when he was hired into supervision–then he got health coverage. In retirement he gets none, and thanks to my public pension, the medical insurance bill is paid–I suppose you would prefer that it be paid by Medicaid, instead. The moral to the story is as always: “Live Better–Work Union”. It doesn’t matter whether or not we are talking about the public sector or the private sector–collective bargaining is what usually results in healthcare subsidies, and enables a middle class to exist. Stop trying to stamp out the middle class, TL!

  4. Tough Love Says:

    Seesaw, No, actually I’d prefer that you received the SAME pension and heathcare subsidy (which would be none) as does your Private Sector counterpart … and if you didn’t save sufficiently FROM YOU OWN NET PAY (instead of having the Taxpayers pockets to steal from) to pay for these things, then you would have to do without or request assistance … just like Private Sector workers must.

  5. SeeSaw Says:

    For being someone who thinks you are so smart, you aren’t, TL. Where do you think the private sector worker gets his/her net pay–of course not, from the customers who are spending the dollars earned from their public jobs! And, what makes you so sure that my public sector job paid more in cash than what my private sector counterpart earned? What makes you think there was a private sector counterpart for my job?

  6. spension Says:

    The puke-inspiring problem is the cost+ contracting in the health care sector, where cost includes >$500,000/year salaries for private sector low level managers in the health care system, and >$1,000,000 salaries for high level managers there. As a taxpayer, I’m incensed that excessive compensation like that, way, way worse than the already excessive compensation in the public sector, gets paid for even by the most efficient medical reimbursement system, which is Medicare.

    Great. Our taxes pay for million-dollar/year salaries for suits who mainly figure out how to get even more tax money for their yachts and homes in Aspen.

    My father worked exclusively in the private sector, as a mid-level manager. I remember well, about 1970, when suddenly he started getting health benefits (for our family) for the first time in his career. He worked until his terminal illness, and his company provided health care covered him for the 6 months between his last work day and his death. But back then, the private sector did this because the health benefits were not ridiculously expensive.

    What has really happened is the excessive costs in the health care business caused the private sector to pull back the retiree benefit. And in the public sector, where bleeding hearts are more common, the benefits have not yet been pulled back. But they will be, for sure. They are not vested benefits. It is just a matter of time.

    But if the health care business were not run just like the railroads and utilities were run a hundred years ago in California (and my grandfather had stories about that era) we wouldn’t be having this absurd problem.

  7. Tough Love Says:

    Quoting Seesaw …” Where do you think the private sector worker gets his/her net pay–of course not, from the customers who are spending the dollars earned from their public jobs!”

    Seesaw, You are truly delusional !

  8. Tough Love Says:

    Quoting Spension …”where cost includes >$500,000/year salaries for private sector low level managers in the health care system”

    Really? Please identify a few.

    Off your meds today ?

  9. SeeSaw Says:

    And, you are truly hateful! Accusing public employees of stealing taxpayers money! Make sure you don’t back out of your driveway–wait for your mythic fairy to whisk you wherever you are going.

  10. SeeSaw Says:

    If a city with under a population of less than 200,000 can pay its CM $450,000/yr., it would not be impossible in the health care system.

  11. spension Says:

    Tough Love wrote “Really? Please identify a few.

    Off your meds today ?”

    All discussed in `Bitter Pill’ which I’ve referenced

    http://www.time.com/time/magazine/article/0,9171,2136864,00.html

    Of course you, Tough Love, rarely if ever back up the gross exaggerations you post regularly. For example your claims that private pensions are 1/4 to 1/2 of public… the Fix Pensions First studies debunk you there. Similarly the claim that private sector salaries are on average lower than those in the public sector, debunked multiple times.

    http://www.fixpensionsfirst.com/docs/Full_Report.pdf

    You regularly compare apples and oranges, like, say, a private sector middle manager in a local insurance agent with a California Highway Patrolman. Sure, the CHP get excessive benefits these days, but I’ve not seen one who gets >$100 million in post-employement benefits:

    http://origin.library.constantcontact.com/download/get/file/1102561686275-69/GMI_GoldenParachutes_012012.pdf

    Did you notice #3 on that list of amazing private sector benefits? William D. McGuire of United Health, with a $286,000,000 retirement plan.

    Mostly on the taxpayer’s back, BTW, from Medicare, Medicaid, and other forms of taxpayer subsidies.

    The meds you take blind you to the excesses of the private sector, Tough Love. You rarely comment on them. Most likely they pay you to post here and ignore their antics and fraud.

  12. Captain Says:

    “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.””

    Anytime I hear a labor union rep claim any issue “needs to be addressed at the bargainging table” I understand full well that the unions know they “OWN” the bargaining table negotiations, which is exactly why we’re in the current untenable position.

    Furthermore, anytime I hear a politician claim (local or state level) “that this is something that should be done at the bargaining table” I understand fully that they are bought by the public employee unions. Most of the time these comments are coming from Democrats, which is why I no longer support the democratic party.

    I’m a proud independent that can no longer support the Democratic party that I’ve voted for 20 years. While not opposed to the core democratic principals, or democrats in general, the California Democratic Party has become the lobbying arm of the Public Employee Unions. Those unions are destroying our state.

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