Report on CA Retiree Health Care Shows Benefits of Prefunding

February 25, 2009 ( - California State Controller John Chiang unveiled a new actuarial report that shows California faces a $48.2 billion bill to pay for retired state employees' health and dental benefits.

California currently pays for state retiree health benefits on a “pay-as-you-go” basis, meaning the costs are paid as they come due each year, according to an announcement on the report by the California Public Employees Retirement System (CalPERS). The actuarial report shows how California’s annual obligation for retiree health and dental benefits would be lowered by pre-funding.

Projected employer contributions initially are the lowest under the pay-as-you-go scenario, but if contributions in excess of those costs are made, investment income can be used to finance benefit costs and bring down the employer costs, CalPERS pointed out in the announcement. After approximately 14 years, the state’s contributions under full-funding are expected to be less than its contributions under the pay-as-you-go scenario.

Under the current pay-as-you-go policy, the actuarial unfunded obligation of $48.2 billion translates to an “annual required contribution” of $3.72 billion for 2008-2009 – the amount the state would need to pay to fund these benefits, according to the actuarial report. In the 2008-09 Budget Act, the state only provided $1.36 billion for the health benefits, CalPERS said in the announcement.

A full-funding policy results in an actuarial unfunded obligation of $31.2 billion. The state would need to contribute $2.68 billion in 2008-2009 to fully fund its obligation under the full-funding policy.

The report showed that even partially funding the obligation would cut the actuarial unfunded obligation to $38.3 billion, assuming the state paid $2.02 billion of the $3.09 billion needed to meet the obligation for 2008-2009.

Projecting the three scenarios out over 10 years shows the actuarial unfunded obligation would grow from $48 billion to $71 billion in 2017-2018 under a pay-as-you-go scenario. Full funding would increase the unfunded obligation from $31 billion to $48 billion. Partial funding would increase the unfunded obligation from $38 billion to $58 billion.

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. While GASB does not require states to fully fund its obligations, all three credit rating agencies have urged states to at least have a plan in place for funding to avoid any future downgrades, CalPERS said.

The $48.2 billion California state retiree health care obligation, is $340 million more than the projected $47.8 billion obligation identified in the Controller's first actuarial report, released in May 2007. However, the first actuarial report expected this year's obligation would rise to $50.4 billion.

That expected growth was avoided primarily by CalPERS' use of surplus funds to reduce the increase in health care premium costs rates for the CalPERS self-funded plan, the system said in a press release. Chiang cautioned that the state cannot depend on similar surpluses in the future.

Chiang noted that CalPERS, the nation's largest public pension fund and the nation's third largest purchaser of health care benefits, is addressing the growth of health care costs by improving pharmacy management with incentives to use generic drugs, working with PERS plan partners to develop lower cost options, and promoting strategies for plan members to stay well and make smart choices about their health care.

Chiang, a member of CalPERS governing board, said he will continue to urge CalPERS to implement strategies for keeping members healthy and reducing long-term costs through preventative health programs.

The actuarial report can be found on .