CA Accountability Group Suggests Pre-funding Retiree Health Care

February 17, 2006 ( - California's Legislative Analyst's Office (LAO) has issued a report on the state's retiree health care funding crisis, suggesting pre-funding as an answer.

According to the report the cost of providing health care to retired state employees and their dependents is approaching $1 billion annually. The current “pay-as-you-go” method shifts the costs of benefits to future taxpayers. The report says that, under the new GASB 45 accounting rule, government retiree health liabilities are likely to be in the range of $40 billion to $70 billion.

The LAO points out that pre-funding is the method of funding used by the state’s pension plans and is required by the state Legislature. It says that pre-funding retiree health care liabilities would help the state in the following ways:

  • More economical over time – Over the long term, investment earnings would supplement state and any employee or retiree contributions for retiree health costs. This would allow the state to pay for a given level of benefits with fewer budgetary resources and retire unfunded liabilities.
  • Helps secure benefits expected by employees – The pool of assets pre-funding would create would help strengthen the state’s ability to provide benefits public employees expect to receive over the long term.
  • Contributes to higher bond ratings – Bond rating agencies, whose evaluations help determine the interest rates paid on state debt, monitor the funding status of retiree health programs. Unfunded liabilities are considered debt and can hurt the state’s rating.

The LAO’s rough guess of the state’s cost for full pre-funding under GASB 45 is in the range of $6 billion annually. That amount would cover the future costs of today’s employees, plus pay off the state’s unfunded liability over 30 years. Obviously this amount would be a burden on the state, so the LAO recommends partial pre-funding.

“Recognizing the state’s current fiscal condition, we recommend that the state ramp up to an increased level of contributions over a period of several years. The near-term target should be the state’s normal cost level under GASB 45 – the amount estimated to cover the cost of future retiree health benefits earned each year by current employees. This amount might be in the range of about $1 billion above what the state spends under the current pay-as-you-go approach. Funding a minimum of the normal cost each year would help reduce the burden of future taxpayers to pay for benefits earned today,” the report said.

The discussion is an important one not just for the Golden State, but for human resources officials nationally because California often experiences benefit trends before other states. Thats why officials around the country tend to watch California closely in anticipation of what could be happening in their state in the future.

The LAO report is here .