When it comes to the rise in retiree benefit costs throughout California, many people tend to focus on unfunded public employee pension plans. But they often don’t realize that non-pension benefits account for a growing portion of the state’s unfunded retiree benefit obligations.
Indeed, the state’s officially reported unfunded liability for all retiree benefits is a staggering $181.2 billion. Of this total, the state’s non-pension unfunded liability stands at $63.9 billion, more than a third. And retiree healthcare accounts for the vast majority of these “other post-employment benefits” (OPEBs).
Last week California Common Sense (CACS) released a report analyzing California’s policy options for managing rising retiree healthcare benefit costs while securing the benefits for state employees.
California pays retirees’ health benefits on a “pay-as-you-go” basis, rather than setting aside funds to secure future benefits. These out-of-pocket costs have risen 45% (from $1.3 billion to $1.8 billion) over the last half-decade, outpacing overall state spending growth.
State spending grew by only 3%. State spending on Health and Human Services grew by 18%, and state spending on K-12 Education and Higher Education (UC and CSU) declined by 12% and 37%, respectively.
Annual costs have increased because baby boomers have begun to retire en masse, their lifespans are longer, and health costs in general are rising nationwide. Simply put, the state must pay for more retirees for longer periods of time at a higher cost.
CACS found that because higher retiree health costs are set to continue rising, California’s task now is to determine how it will manage those higher costs within the context of its budget.
Californians have already witnessed the potential impact of rising retiree healthcare costs on budgets. The pressure they exerted on Stockton and Vallejo’s pre-bankruptcy operating budgets led the cities to other budget areas. And as part of its bankruptcy plan, Stockton eliminated its retiree health benefits altogether.
But because the costs are manageable right now, the state has options for reform. None of the options are painless, but they would enable the state to reduce the pain it will feel:
1. Paying for benefits on a “prefunding” rather than “pay-as-you-go” basis would secure benefits by ensuring that the state has the funding available to pay for future benefits. Though prefunding results in long-term savings, it would require higher annual costs in the early years.
2. Other options such as capping benefit levels, increasing qualifying retirement ages and service years, and switching to defined contribution plans would likely result in a net loss of benefits for a given employee. However, any changes would not impact benefits employees have already earned.
3. The state could offer to “buy out” employees: offer them a lump-sum cash payment in exchange for them giving up their benefits.
No option must be a stand-alone reform. The key is that any reforms must be feasible to implement, affordable, competitive, and sustainable in the long term.
CACS analysts will testify on the issue before the Senate Public Employment and Retirement Committee today.
Autumn Carter is the Executive Director of California Common Sense.