Retirees’ medical and dental bills take a $51.8 Billion bite in California

SACRAMENTO
February 9, 2010 11:24am
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•  Cash-strapped state must find the money

•  ‘We cannot ignore the promise that we made’


California is going to have to pay a $51.8 billion bill for health and dental benefits for state retirees, says state Controller John Chiang in a report to the Legislature Tuesday.

“Even as we try to claw our way out of the recession and provide needed cash to the state’s coffers, we cannot ignore the promise that we made to pay health and dental benefits for current state employees and retirees,” says Mr. Chiang.

“As I have since 2007, I urge lawmakers to reduce the impact on future generations by putting additional dollars into the annual payments so that we can invest those funds, grow that money and tackle our obligation in a responsible manner,” he says.

The unfunded obligation as of June 30, 2009, grew $3.6 billion from the $48.2 billion obligation identified in the prior year. However, the 2008 figure was lower than expected primarily because the California Public Employees’ Retirement System (CalPERS) used surplus funds to reduce that year’s increase in health care premium costs rates for the CalPERS self-funded plan.

Unlike state pensions, which are covered by pre-funding and investment returns, California pays for retiree health benefits on a “pay-as-you-go” basis as the costs come due each year.

According to Mr. Chiang, the latest actuarial report estimated California’s obligation for retiree health and dental benefits, also referred to as Other Postemployment Benefits (OPEB), based on two different funding scenarios:

• The current pay-as-you-go policy results in an actuarial unfunded obligation of $51.8 billion, which represents the total present value of future retiree health benefits earned as of June 30, 2009, by current state retirees and employees. Based on this unfunded obligation, California has an annual OPEB cost of $3.9 billion for 2009-2010 – or the amount the state would need to pay toward funding these benefits. In the 2009-2010 Budget Act, the state only provided $1.3 billion for retirees’ health and dental benefits.

• A full-funding policy results in an actuarial unfunded obligation of $33.4 billion. The amount is lower than the actuarial unfunded obligation under the pay-as-you-go policy because the costs of future benefits are fully pre-funded. Pre-funding permits the state to earn investment income on the amounts set aside to fund future benefits. That investment income can be used to help offset the costs. The state would need to contribute $2.8 billion in 2009-10 to fully fund its obligation. Fully funding retiree healthcare benefits increases cash contributions by 115 percent over the budgeted amount.

Mr. Chiang says that even partially funding the obligation would cut the actuarial unfunded obligation to $41.1 billion, assuming the state paid $2.1 billion of the $3.3 billion needed to meet the obligation for 2009-2010.

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