Calif. retiree health care time bomb is ticking

Aug. 3, 2012

By Dave Roberts

When discussing California’s exorbitant benefits for state government employees that are threatening to bankrupt the state, much of the focus has been on pensions. And rightly so, with estimates of the unfunded pension liability exceeding $500 billion. But there’s another benefit time bomb ticking away, threatening to blow out the budget in the coming decades: retiree health care.

Health care is by far the largest component in the category known as Other Post-Employment Benefits, which currently has a $62 billion unfunded liability, according to a study released this week by California Common Sense. The numbers are sobering:

* The cost of benefits for current government retirees has doubled every five years since 1999, on average, increasing from $300 million to $1.58 billion annually.

* The number of retirees receiving medical benefits has increased 11.7 percent since 2008, to 154,500, representing the leading edge of the Baby Boomer generation.

* Life expectancy at age 65 has increased by two years, from 17.2 years in 1990 to 19.2 years in 2009.

* Health insurance premiums have risen 153 percent in California since 2002 — more than five times the inflation rate, according to the latest California Employer Health Benefits Survey.

* Current-year OPEB costs will consume the entire state budget within 35 years.

“In short, more people are earning benefits for longer periods of time at higher prices,” said CACS Research Director Mike Polyako in a press release. “Together, these factors are driving growing concern about how the state will pay for these benefits in the future. The state of California currently pays for retiree health benefits out of its operational budget on a ‘pay-as-you-go’ basis. Historically, that year-to-year approach was manageable. But as the number of retirees and health costs continue to rise, the state will need to find a more sustainable strategy. ‘Pre-funding’ the retiree benefits, or setting aside funding for them today as employees earn them, will attenuate the strain on its budget in the long term.”

Pay-as-you-go

Pay-as-you-go can also be referred to as Wimpy budgeting, from the Popeye cartoon: “I’ll gladly pay you Tuesday for a hamburger today.” The state is not paying the full cost of the retiree health care liability, which is actually $4.74 billion annually, according to a report issued by the state controller.

“The difference — $3.2 billion — is just as much of a cost as the reported expense,” wrote CACS Board Member David Crane in a Bloomberg op-ed. Crane is a Democrat and well-known expert on California budgeting. “But since it wasn’t paid in cash, it becomes an unfinanced liability that will demand payment from future budgets.”

While it would be painful during the state’s ongoing current budget crisis to contribute the additional $3.2 billion each year, it actually would save taxpayers $21 billion in the long run, according to the CACS report.

“A single year of inaction will potentially cost almost $1.7 billion in missed investment savings over 15 years, or over $300,000 per day,” the CACS press release states. “Pre-funding is dictated by the simple idea that the costs of a benefit (such as pensions) should be recognized as they are earned. It also discourages irresponsible political behavior that defers costs to future generations that may not be able to bear them. Finally, pre-funding accumulates secure assets towards paying future costs and supplements them with investment profits.”

The idea of pre-funding retiree health care is not new. In 2006, the Legislative Analyst’s Office issued a report, “Retiree Health Care: A Growing Cost For Government,” which warned, “The costs of providing health care to retired state employees and their dependents — now approaching $1 billion per year — are increasing significantly. Many other public employers (including the University of California, school districts, cities, and counties) face similar pressures. We find that the current method of funding these benefits defers payment of these costs to future generations. Retiree health liabilities soon will be quantified under new accounting standards, but state government liabilities are likely in the range of $40 billion to $70 billion — and perhaps more.”

Starting small

Like many government programs, retiree health care started small. It began in 1961 with the state paying $5 each month per employee, which back then covered most of the costs of a retiree health plan, according to the LAO. Total costs were $4.8 million, representing less than 0.3 percent of the General Fund budget.

For the past 51 years the state has been shifting to future taxpayers the true cost of the liability.

“[T]he pay-as-you-go approach to retiree health care conflicts with a basic principle of public finance — expenses should be paid for in the year they are incurred,” the LAO report states. “This principle requires decision makers to be accountable — through current budgetary spending — for the costs of whatever future benefits may be promised.”

Although this message has largely fallen on state officials’ deaf ears, there have been some pockets of fiscal responsibility. In 2001, the California Public Employees Retirement System set up the California Employer’s Retiree Benefit Trust Fund. It currently manages $2.1 billion in prefunded retiree health care costs and other post-employment benefits for 338 cities, counties and special districts in the state, according to CalPERS spokesman Brad Pacheco. Three state unions — representing highway patrol officers; craft and maintenance employees; and physicians, dentists and podiatrists — have also consented to pre-fund OPEBs.

“We agree that pre-funding for retiree health obligations is smart for employers to consider,” Pacheco said.

The problem is that the contributions are inadequate to meet the obligations for most of those governmental entities that are participating — and many are not participating at all. The CHP trust’s total balance as of a year ago was only $6.5 million, equating to a 0.02 percent funding ratio, according to the report. The contribution rate for the other two unions, which began in July, is just 0.5 percent of payroll.

Most California cities are just as bad, if not worse off. San Francisco has a $4.4 billion OPEB liability, which is zero percent funded, according to CACS. San Jose’s $2.1 billion liability and San Diego’s $1.2 billion liability are both only 9 percent funded. Oakland’s $520 million liability is zero percent funded. Surprisingly, Los Angeles, which has a $6 billion liability, has managed to provide 59 percent funding.

Cumulatively, California and its 20 largest cities have amassed $78 billion in OPEB obligations, but have only set aside $4 billion to pay for them, according to CACS. The total unfunded retiree health care liability for all of California’s governmental entities was more than $118 billion in early 2008, according to the LAO, and is much higher now.

Bankruptcy

One of the ways out of this bind, at least temporarily, is to declare bankruptcy. Last week, a federal bankruptcy judge gave the OK for Stockton to eliminate retiree health care while it’s going through bankruptcy proceedings. Retired Stockton employees had sued in an attempt to stop the cuts.

The last point in Brown’s 12-Point Pension Reform Plan addresses retiree health care. It calls for requiring new state employees to work for 15 years before the state pays a portion of their retiree health care premiums, and to work 25 years before being eligible for the maximum state contribution. Currently maximum coverage kicks in at 20 years. Brown also wants to end the situation in which retirees are paying less for health care premiums than working employees and wherein they aren’t moving to Medicare coverage.

The LAO gave a thumbs up to Brown’s retiree health reforms: “Combined with other proposals in the Governor’s package, which would encourage employees to retire later, this change could dramatically reduce long-term state retiree health costs below what they otherwise would be under current law. Moreover, by reducing retiree health subsidies to future workers in retirement, this change may encourage some workers to retire a bit later, thereby reinforcing other proposals in the Governor’s package.”

The LAO notes, however, that Brown does not address pre-funding retiree health care at either the state or local level.

“Addressing this problem is very difficult when budgets are tight,” the LAO acknowledges, but adds that it’s vital that it be done. “Assuming continuation of the current system of defined retiree health benefits (where governments promise a specific type of subsidy to health benefit costs for public employees in retirement), both the state and local governments should transition gradually over time to requiring employer and/or employee contributions to cover the costs of these future benefits. [T]he Legislature may wish to consider additional steps to require governments to properly fund their defined retiree health benefit systems. Such steps surely would need to be gradual, given the increased near-term budgetary costs they would impose on governments currently coping with significant fiscal challenges.”

Failure to get a handle on runaway retirement benefits will lead to further erosion in state services. But don’t hold your breath waiting for Democratic state leaders to do the right thing by ending Wimpy budgeting and standing up to the all-powerful government unions.

28 comments

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  1. Ted Steele, Janitor
    Ted Steele, Janitor 3 August, 2012, 08:45

    This is why we need the affordable care act. And– Repub’s don’t get it— result: The President will be reelected because the people are tired of being screwed.

    Discuss-

    Reply this comment
  2. Ulysses Uhaul
    Ulysses Uhaul 3 August, 2012, 09:10

    Teddy. I got your back!

    Reply this comment
  3. Pete Mayhew
    Pete Mayhew 3 August, 2012, 10:04

    I don’t disagree with the overall sentiment, Ted, but retirees already have an affordable care act. It’s called Medicare. Sure, it’s got its own set of problems, but why states and municipalities don’t get these retiree healthcare costs off their books is amazing to me.

    Reply this comment
  4. Ted Steele, Janitor
    Ted Steele, Janitor 3 August, 2012, 10:04

    U Haul—your comments are always on target and focused on the best good for the most people. Who can argue with that at the country club?

    USA USA USA

    Reply this comment
  5. us citizen
    us citizen 3 August, 2012, 10:16

    Obamacare is a disgrace:

    It increases taxes on families earning over $250,000. In 2013, the employee portion of the Medicare payroll tax will increase from 1.45 percent to 2.35 percent for families earning $250,000 or more and individuals earning $200,000 or more. The income threshold is not indexed for inflation, so more and more middle-income families will be hit by the tax hike as time goes on.

    It adds a new tax to investment income. The increased payroll tax rate is also applied to high-earners’ investment income for the first time beginning in 2013. It will hit capital gains, dividends, rents, and royalties, discouraging investment and harming economic growth.

    It puts new limitations on those with HSAs and FSAs. Starting in 2012, Obamacare restricts the products that consumers may purchase with a Health Savings Account (HSA) or Flexible Savings Account (FSA)—such as over-the-counter medications—and increases the penalty for such non-qualified uses of HSAs. It also limits the amount taxpayers may deposit into an FSA to $2,500 a year in 2013.

    It adds a new tax on those who purchase medical devices. In 2013, a 2.3 percent excise tax will be applied to medical devices, causing a $28.5 billion tax hike on medical device manufacturers. The industry will pay for this tax by reducing jobs and passing additional costs on to consumers.

    It penalizes marriage. Obamacare creates new taxpayer-funded subsidies for the low and middle classes to purchase health coverage, but the structure of the subsidies allows two individuals to claim more in subsidies alone than if married. This discriminates against married couples and discourages marriage at almost all age and income levels.

    It violates religious liberty. The Department of Health and Human Services included the full range of contraceptives, including abortion-inducing drugs, among the women-specific preventive services that Obamacare requires insurers to include with no cost-sharing. This mandate violates Americans’ conscience rights and religious liberty. Its narrow exemption for religious employers will force many who find these products morally objectionable—including religious charities, hospitals, and schools—to pay for them.

    It puts Medicare decisions in the hands of an unelected board. The Independent Payment Advisory Board, a board of 15 unelected officials, will have the power to cut Medicare spending without congressional approval. These unaccountable government appointees will be able to restrict seniors’ access to providers, treatments, and services.

    It puts a premium tax on health insurers. Obamacare adds a premium tax on health insurers that offer full coverage beginning in 2014. On average, the tax is expected to increase premiums by 1.9 percent to 2.3 percent in 2014 and between 2.8 percent and 3.7 percent by 2023. Combined with the other provisions in Obamacare, this tax will have a huge impact on the cost of premiums.

    It creates a new unsustainable entitlement program. On top of Social Security, Medicare, and Medicaid, Obamacare created a new long-term care entitlement called the CLASS program. It is actuarially unsound, unworkable, and unsustainable. As a result, the Administration has already put its implementation “on hold.”

    It puts over half of all Americans on a government program. Because of Obamacare’s huge expansion of Medicaid and creation of taxpayer-funded subsidies to purchase health coverage, more than half of all Americans will be dependent on a government health care program (Medicare, Medicaid, or the government exchanges) by the end of this decade.

    It is specifically stated that this bill will not apply to members of Congress. and Senate. Members are already exempt,and have a well-funded private plan that covers their needs.

    The bill will provide insurance to all non-U.S. residents, even if they are here illegally.

    The government will have real-time access to an individual’s bank account and will have the authority to make electronic fund transfers from those accounts.

    Page 65/section 164:
    The plan will be subsidized (by the government) for all union members, union retirees and for community organizations (such as the Association of Community Organizations for Reform Now – ACORN).

    Cancer hospital will ration care according to the patient’s age.

    The government mandates advance-care planning consultations. Those on Social Security will be required to attend an “end-of-life planning” seminar every five years. (Death counseling..)

    The government will specify which doctors can write an end-of-life order.

    The government will impose a prohibition on hospital expansion

    Reply this comment
  6. Rex The Wonder Dog!
    Rex The Wonder Dog! 3 August, 2012, 10:17

    Uhaul you have Teddy, but not his back 😉

    Reply this comment
  7. stevefromsacto
    stevefromsacto 3 August, 2012, 11:54

    Geez, UScitizen, you did a great job of cutting and pasting the Republican Party talking points. But they are absolutely ridiculous,

    One example: “the plan will be subsidized (by the government) for all union members, union retirees and for community organizations (such as the Association of Community Organizations for Reform Now – ACORN).”

    The plan will cover ALL Americans. And much as you dislike unions and community activists (except of course for right-wing activists like the Tea Party and Westboro Baptist Church), union members and community activists are American citizens, just like the rest of us.

    Another absurdity: “it increases taxes on families earning more than $250,000 a year.”

    This talking point has nothing to do with Obamacare. It concerns the President’s proposal to keep tax breaks for middle-class Americans while ending the tax break for those making over $250K. And of course, by refusing to support this proposal, the Republicans will insure a tax increase for middle-income Americans next year.

    Reply this comment
  8. us citizen
    us citizen 3 August, 2012, 12:46

    First Im an independent. And those points are in the tax bill. Go look it up.

    Second, The Tea Party is a combo of DEms, Repubs AND Independents. People who want a SMALLER govt. and less spending. They are not right wing although the media would like you to believe that.

    Three the Westboro Bap church is a bunch of horrid people who need to mind their own business and leave others alone. Talk about bad manners.

    Hmm why did a lot of the unions ask for an expemption from BOcare?

    Tell me why, just because you make over $250,000 you need to pay more? Do you actually drive more, use more resources, breath more air? No, the govt wants to punish you for “making it” in this society. Why on earth would anyone want to become richer so they can pay more taxes, now days? Why do 49% pay no taxes, meaning beyond what is taken out of their pay check and actually get money back? Do the rich use “things” the govt pays for such as police, firemen, military, more than others. Do their houses burn down more? Just through that in.

    The $250,000 if you read it, has no indexed inflation…….meaning in the future it is very possible to be making that and still not be wealthy. Heck a house in CA can take up a large portion of your salary and that does not mean you are rich, or you may have a small company and all that money can go out to employees. Taxing the rich is futile. They do not make enough over and aboard to make up for any part of the deficit. This basically is taking out a separate group of people and taxing them more just because. Lets say brown eyed people owe more just because.

    The problem with the govt is they SPEND TOO MUCH MONEY. Period.

    And WE should not have to keep paying for it and WE should not be forced into a health care program that will end up like SS, amtrack, the post office and all the other broken things the govt tries to do without much success.

    So when you flood the market with a bunch of people who actually dont want health care, and have to pay for it, how is that right? They have to so that the rest of the people will have health care. They are making someone pay for someone else. This is socialism.

    Reply this comment
  9. Ulysses Uhaul
    Ulysses Uhaul 3 August, 2012, 14:19

    The poodle is especially nippy today!

    Reply this comment
  10. Rex The Wonder Dog!
    Rex The Wonder Dog! 3 August, 2012, 22:46

    Rotti is kicking butt and taking names, 1% at a time 🙂

    Reply this comment
  11. Ulysses Uhaul
    Ulysses Uhaul 4 August, 2012, 08:46

    Your newly assigned assistant to the assistant physicians assistant is in the last day of eight days of med training in Madagascar!

    Can’t be more affordable. Eh?

    Reply this comment
  12. The Rt Rev Ted Steele
    The Rt Rev Ted Steele 4 August, 2012, 14:25

    LOL U Haul!

    The 1% don’t need the commoners doc’s—– they have the best!

    Let the 99% eat cake!

    Reply this comment
  13. The Rt Rev Ted Steele
    The Rt Rev Ted Steele 4 August, 2012, 14:26

    Oh…and I sure don’t miss the Beezyboob ™

    o my

    Reply this comment
  14. Ulysses Uhaul
    Ulysses Uhaul 4 August, 2012, 16:19

    This month Kiplinger magazine tells you how to hire botique doctors…..specialized prompt care….designed for hedge funders, marrauding globalists and generic legislators, judges and code enforcers in Adelanto!

    RAGWUS too????

    Reply this comment
  15. Rex The Wonder Dog!
    Rex The Wonder Dog! 5 August, 2012, 01:38

    Rotti magazine, home of the champions

    Reply this comment
  16. eatingdogfood
    eatingdogfood 6 August, 2012, 08:50

    Bankruptcy; is the ONLY way out of this Mess, caused by the Democrats and their Union Bosses. Can someone Spell GREED ???

    Reply this comment
  17. TheBeachBum
    TheBeachBum 6 August, 2012, 09:14

    Brown’s ‘plan’ was a scam. A diversionary tactic. It was proposed, but not intended for implementation. He knew all along that his fellow dems would never bring it to the table.

    Reply this comment
  18. SeeSaw
    SeeSaw 6 August, 2012, 11:44

    The Governor’s plan was a proposal only–not meant for adoption, intact. The Legislature’s joint-conference committee on pension reform, has been vetting and working on alternatives to some items in that proposal, since it was first, aired. The Hybrid won’t work. The pension experts working with the committee have developed a better plan. It was presented to the Governor a month ago. He did not like it. Watch the Legislature–a pension reform Bill will be put forth, for a vote, before the end of August. The Republicans will most likely block it, because it won’t be draconian enough for them.

    Reply this comment
  19. SeeSaw
    SeeSaw 6 August, 2012, 12:10

    EDF, bankruptcy is not a way out of any mess–it is a way to create a bigger mess. How do you spell, “NAIVE”?

    Reply this comment
  20. Rex The Wonder Dog!
    Rex The Wonder Dog! 6 August, 2012, 15:02

    Bankruptcy will disolve any and ALL contracts, including vested pension contracts. Ask the HS educated cops and FF’s in central Falls RI who took 55% pension cuts seesaw 🙂

    Reply this comment
  21. SkippingDog
    SkippingDog 6 August, 2012, 15:04

    Nice to see you being just as goofy as ever, Rex. You a funny little man.

    Reply this comment
  22. Rex The Wonder Dog!
    Rex The Wonder Dog! 6 August, 2012, 15:18

    Not as funny as the guy getting sued 🙂

    Reply this comment
  23. Rex The Wonder Dog!
    Rex The Wonder Dog! 6 August, 2012, 15:28

    BAM!!!!!!!!!!!!!!!!!!!!!!

    “C. Falls slashes dozens of pensions by 55%; one gets cut $41K
    September 2nd, 2011 at 2:30 pm by Ted Nesi under Nesi’s Notes
    City retirees hear about the pension cuts July 19
    Central Falls slashed one in three of its retirees’ pension checks by more than half this month, with the majority of the city’s former public-safety workers set to lose tens of thousands of dollars a year.”

    “Receiver Robert Flanders reduced 48 of the city’s 141 police and fire pensions by 50% or more, with all but three of those cut 55% from their original amount, according to financial records obtained by WPRI.com.”

    I love it when GED cops come on here and try to con everyone with falsehoods, only to get shot full of holes with the truth!

    55% BABY!!!!!!!!!!!!!!!!!!!!!!!!!!

    Reply this comment
  24. Farmer Ted
    Farmer Ted 6 August, 2012, 16:18

    Steve,
    Re: #7 and us Citizen retort to you in #8…as the kids would say, “POWNAGE!!”
    Try again, slick.

    Reply this comment
  25. Paddy
    Paddy 6 August, 2012, 17:53

    The healthcare system we have in the US is unsustainable no matter who administers it. Say good bye to all high priced surgery’s etc. A high order system requires high order maintenance and we do not have the assets to maintain it. Social Security, Medicaid and Medicare were never funded and never will be. (They are more than 50% of the federal budget) These are Ponzi schemes. Get used to it people. Best thing to do is manage your health the best you can, Eat properly,If you have space grow a garden, Watch your weight, get some exercise every day.

    Reply this comment
  26. SkippingDog
    SkippingDog 6 August, 2012, 22:47

    Oh come on, Rex. For a guy who went to law school and couldn’t pass the bar exam, went to a police academy and couldn’t get hired by any law enforcement agency and went to some third-rate teacher training program and can’t get hired by any school system you sure are bitter these days.

    Why is that?

    Reply this comment
  27. ToughEnough
    ToughEnough 9 August, 2012, 20:52

    I say its time we (citizens) Embargo Our Tax and Investment dollars until there is real reform. Why send money to local, state, or federal government and Wall Steet. Until real reform and actions that actually benefit the common good – keep all your payroll taxes, real estate taxes, 401k, small business taxes… Will probably cost ‘ya a little but the dividends would just keep rolling in.

    Reply this comment
  28. getaqgrip
    getaqgrip 28 October, 2013, 18:45

    What a post!! I guess you don’t have private health insurance – poor thing. Why pick on state union workers who pay taxes, are law abiding citizens, etc. Why is it NOT mentioned in this politically correct forum the BILLIONS of dollars illegal immigrants cost the state and nobody says or does a thing about it. As I speak there are thousands more being born and made just to suck up all the freebies this welfare state welcomes. Why do you think we have such a massive prison system? GET REAL and stop picking on the working man!!

    Reply this comment

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