Los Angeles Unified School District has $15 billion in unfunded retiree health care obligations, amounting to over $30,000 per student, according to a new actuarial report commissioned by the district and obtained by Reason. The cost of servicing this large “Other Post-Employment Benefit’ or OPEB liability significantly reduces funds available for instruction in the nation’s second-largest school district.
Compared to the previous biennial report, unfunded liabilities increased $1.4 billion, but the increase is attributable to an accounting change rather than policies or demographic conditions. The latest report was prepared according to a new Governmental Accounting Standard Board pronouncement – GASB 75 – which requires that future retiree healthcare benefit payments be discounted at a lower rate of interest. Actuaries used a discount rate of 4.70 percent for their July 1, 2015 valuation, but used a rate of only 3.60 percent in the current analysis.
The rate change offsets some actuarial improvements since the prior report. Among these were lower-than-expected medical cost inflation and favorable demographic experience. Although this latter impact is not explained in the report, it could reflect some employees staying on the job longer than previously expected.
Aside from changing the way unfunded OPEB liabilities are calculated, GASB is also changing the way school districts and other public agencies report these debts. Starting with the current fiscal year, LAUSD will show the full unfunded OPEB liability on its balance sheet. Under the new reporting standards, LAUSD’s Statement of Net Position will reflect about $7 billion more in OPEB debt, greatly worsening its Net Position – which is already well into the red.
While the uglier balance sheet may ward off municipal bond investors in the future, unfunded OPEB liabilities are impacting the classroom today. In California as in most other states, school districts receive state funding based on overall student attendance, irrespective of their retiree health costs.
As I previously reported in the Orange County Register, LAUSD’s OPEB costs per student are much higher than several other large California school districts. For the 2016 school year, LAUSD paid $525 per student for OPEBs compared to $81 at Irvine Unified, $29 at San Diego Unified and $0 at Oakland Unified, which does not subsidize retiree health insurance coverage at all.
LAUSD’s high OPEB cost burden is partially a function of declining enrollment. As the student population decreases, less state funding is available to spread across the system’s 38,000 retirees – most of whom served a larger student body. But a bigger driver of the gap between LAUSD and many other large districts is the level of benefits.
Whereas many districts only offer fixed premium subsidies or end benefits once retirees become Medicare eligible, LAUSD offers full medical, dental and vision coverage to all eligible retirees and their spouses. Costs for an individual beneficiary range up to about $20,000 annually.
LAUSD has made some reforms to its retiree healthcare benefits in the past, most notably stiffening eligibility requirements for new employees over the years. While a full-time employee starting before 1984 could earn retiree medical benefits after just five years of service, those hired after 2009 must work at least 25 years – thirty for those wishing to retire at age 55.
But the benefits for full career employees have remained generous and are becoming much more expensive as health care costs grow. The actuarial report projects that retiree health benefit payments will rise from $306 million in the 2018 school year to $656 million in 2028.
Progressive Californians might hope that LAUSD’s retiree healthcare cost issue will be resolved by healthcare reforms at higher levels of government. If, for example, the federal Medicare eligibility age were lowered to 55, LAUSD’s retiree healthcare costs would drop precipitously. They would be eliminated entirely if California implements a state-level single payer plan like that proposed in SB 562. But given the political climate in DC and the budget-busting impact of single-payer on state finances (even ultraliberal Vermont gave up on the idea), the magic bullet that would slay LAUSD’s OPEB cost burden does not seem to be readily available. And while we wait, LAUSD students will continue to see a large chunk of their state funding diverted to legacy costs.
Stay in Touch with Our Pension Experts
Reason Foundation’s Pension Integrity Project has helped policymakers in states like Arizona, Colorado, Michigan, and Montana implement substantive pension reforms. Our monthly newsletter highlights the latest actuarial analysis and policy insights from our team.