Public Retiree Health Benefits: The New Looming Fiscal Crisis
A looming fiscal threat that has passed under the radar for decades has been thrust into the spotlight this week.
California State Controller John Chiang on Tuesday released
a report showing a $71.8 billion unfunded liability for
providing health and dental benefits for current and future state
retirees (known as Other Post-Employment Benefits, or OPEBs).
Since 2007 alone, the debt associated with this liability has
increased by $24 billion. According to Chiang, “The price tag
associated with providing health care to retired state workers
has quietly grown to rival or even eclipse the funding gap
associated with public pensions.”
While pensions for state employees are pre-funded, allowing a decrease in liabilities from returns on investments, OPEBs are currently funded on a “pay-as-you-go” state system – this means that no money has been set aside to cover those future benefits. While a decrease in health care claims and recent design changes in health systems would normally slow the growth of the unfunded OPEBs liability, new mortality assumptions show that retirees are living longer, thus canceling out any benefits received from changes in the health care sector.
Chiang is proposing a five-year implementation plan beginning in fiscal year 2015-16 to fully pre-fund the normal cost of health and dental benefits. Thus, by fiscal year 2019-20, the unfunded, long-term liability would be reduced by $19.5 billion. This would require a state contribution of $3.7 billion in 2014-15
Not to be left out of the action, the Legislative Analyst’s Office (LAO) yesterday released its own article that lauded paying for costs as they accrue as a basic tenet of sound public finance, and touted the availability of taxes set aside by recently passed Proposition 2 as key funding source for the pay down of the OPEBs liability. Proposition 2 (the Rainy Day Budget Stabilization Fund Act of 2014) requires the state to spend a minimum of 0.75 percent of General Fund revenues each year for the next 15 years on certain state debts, including OPEBs liability, certain debts to schools and local agencies, and special fund loans. As of November 2014, the LAO notes that 0.75 percent of General Fund revenues is about $800 million. This number does not include higher-than-average capital gains revenues, which, under Proposition 2, must also be spent on the aforementioned debts. Accordingly, LAO predicts a possible $2 billion to be available for prefunding retiree health benefits in fiscal year 2015-16.
It is unclear how Governor Brown will approach the grave fiscal outlook on liabilities associated with OPEBs, however, it can be assumed that he has something in the works for 2015 as illustrated by his historical commitment to reducing the state’s fiscal debt.
Questions? Contact Faith Conley at 916-650-8117.