The unfunded obligation as of June 30, 2012, grew $1.70 billion from the $62.14 billion obligation identified as of June 30 2011. Based on this unfunded obligation, California should pay $4.92 billion in 2012-13 to pay for present and future retiree health benefits. According to a statement from California State Controller John Chiang, in the 2012-13 Budget Act, the state provided $1.81 billion to only cover current retirees’ health and dental benefits.
If the state shifted to fully prefunding the costs of future benefits, the unfunded actuarial accrued liability would be cut by more than $21.75 billion, to $42.09 billion. Under a full prefunding approach, the state would set aside money in a separate trust solely for future retirement health care benefits. The investment income generated by the trust would be used to reduce the costs to the state, and its employees, of paying for future benefits. To take advantage of the tremendous cost savings resulting from fully prefunding, the state would need to contribute $3.51 billion in 2012-13, or $1.70 billion more than the state currently has budgeted.
Controller Chiang noted that even incremental steps toward prefunding the obligation would significantly reduce the state’s liability. For example, if the state prefunded just 10% of its obligation, it would only need to pay $170 million more than its current pay-as-you-go contribution. However, that additional payment would shave $2.74 billion off of the state’s unfunded liability. Prefunding 25% of its obligations would cost the state $420 million more than the pay-as-you-go contribution but would reduce the total unfunded liability by $6.63 billion.
“The current pay-as-we-go model of funding retiree health benefits is short-sighted and a recipe for undermining the fiscal health of future generations of Californians,” Chiang said. “However, today’s challenge won’t necessarily become tomorrow’s crisis if policymakers can muster the fiscal discipline to invest now so that we can pay tens of billions of dollars less later.”The report is here.