CA Controller Urges Pre-Funding of OPEB Obligations

March 14, 2011 ( – California State Controller John Chiang unveiled a new actuarial report that shows California faces a $59.9 billion bill to pay for health and dental benefits for state retirees over the next 30 years.

According to the report, if the State shifted to fully pre-funding the costs of future benefits, the actuarial unfunded obligation would be cut by more than $21 billion to $38.5 billion. Chiang urged the State to follow the lead of several bargaining units that are starting to pre-fund their obligations.  

A press release said the unfunded obligation as of June 30, 2010, grew $8.1 billion from the $51.8 billion obligation identified in the prior year. Less than half of the increase was simply due to another year of costs, payments and interest, while the bulk of the increase was due to a change in the California Public Employees’ Retirement System’s (CalPERS) pension-benefit assumptions based on their latest 10-year study. That study found employees are retiring earlier, retirees are living longer, and actual premiums increased more than previously projected by the actuary.  

The latest actuarial report estimates that based on California’s current pay-as-you go system, the State has an annual Other Post-Employment Benefit (OPEB) cost of $4.2 billion for 2010-11 – or the amount the State would need to pay to cover these benefits. In the 2010-11 Budget Act, the State only provided $1.4 billion for retirees’ health and dental benefits.

Under a full pre-funding approach, the State would set aside money in a separate trust solely for future retirement health care benefits, and the investment income generated by that trust would be used to reduce the costs of paying for future benefits. The State would need to contribute $2.9 billion in 2010-11 to fully fund its obligation for this year.

According to the press release, a separate analysis performed at the request of the Controller shows that even incremental steps toward pre-funding the obligation would significantly reduce the State’s liability. For example, if the State pre-funded just 10% of its obligation, it would only need to pay $130.3 million more than its current pay-as-you-go contribution, but that additional payment would shave $2.7 billion off of the State’s unfunded liability. 

Chiang also suggested the State take steps to contain health care costs by promoting prevention and wellness, and innovations in health care delivery. He also recommends switching from the traditional fees-for-services payment model to one that pays providers based on performance and outcomes. 

In 2004, the Governmental Accounting Standards Board Statement 45 (GASB 45) required states and local governments to publicly disclose the future costs of paying for post-employment benefits other than pensions for current state retirees and employees.