California taxpayers are saddled with unfunded public pension liabilities estimated to be as high as $583 billion, but often overlook that they’re also on the hook for billions more in retiree health care benefits.
In his January 2015 budget proposal, Gov. Jerry Brown acknowledged that unfunded liabilities for retiree health care costs for state employees now stand at $72 billion and will increase to $90 billion if nothing is done.
The tab for taxpayers is higher when factoring in health care benefits for local government retirees. In estimating the costs for both state and local government workers, the nonprofit California Common Sense found an unfunded retiree health care liability of $157.7 billion.
Annual spending from the state’s general fund to pay down this debt has more than quadrupled, from $458 million in 2001 to $1.9 billion this fiscal year, but that is still not enough to meet the costs.
And, with the average Californian’s life expectancy now exceeding 80 years, the cost of health care benefits for public retirees will continue to grow.
So what’s the solution?
Last week, a new Legislative Analyst’s Office report recommended looking into to eliminating retirement health care coverage for workers who haven’t been hired yet. “Before California builds a funding model to pay for this benefit for decades to come, the Legislature should consider whether this [retirement health care] benefit should continue to be a part of the state employee compensation package for new hires,” the report said. “If prospective employees do not value this benefit as much as it costs, the state and the new employee might be better off if the state offered future employees an alternative form of compensation.”
That change, combined with Gov. Brown’s plan to require government employees to pay more toward their own retirement health benefits would be a very good start. Gov. Brown has proposed that state employees pay an equal share toward their own retirement health care benefits. Right now, the state subsidizes a large share of health care premiums, providing a contribution equal to 100 percent of the average premium costs of the highest enrolled plans, and employees don’t pay anything towards their own retirement health care benefits.
If public workers aren’t willing to negotiate on this issue, they may end up losing the benefits altogether. Last week’s Legislative Analyst’s report raised questions about Gov. Brown’s proposal, but also noted that there “arguably is some ambiguity regarding the extent to which retiree health benefits are an obligation protected under state and federal contract law.”
In other words, the state may not be obligated to pay for the health care benefits that state workers believe have been promised to them. Instead of potentially watching the state wipe the plans out entirely, the unions would be smarter to negotiate a deal that gets their workers paying a fair share.
Gov. Brown’s 2012 pension reforms didn’t go far enough, and neither does this plan. But Brown deserves credit for raising the issue. If California does not address its retirement health care costs and require employees to pay more into the health care system, taxpayers and workers may both be in a world of hurt.
Lance Christensen is director of the pension reform project at Reason Foundation. This article originally appeared in the Orange County Register.
Pro-bono Consulting for Policymakers
Reason Foundation's Pension Integrity Project has helped policymakers across the country implement comprehensive public pension reform.
Sign up below to schedule an initial consultation with our team of independent actuaries and pension reform experts.