California’s Public Retiree Health Care Liabilities

California’s Public Retiree Health Care Liabilities

Although we have no time for Governor Schwarzenegger’s California Health Deforminator Model ABX1 1, we’re sure glad he struck a commission to get a handle on the state’s public sector retiree health benefits.

You know all that talk about how retiree health benefits are sinking the Big 3 Detroit automakers, with their fat union contracts? Didn’t you ever wonder why we haven’t heard similar stories about public agencies, which negotiate with even more powerful unions?

The answer is worse than you think: government agencies did not have to account for these liabilities, like Ford, GM, and Chrysler did.

Remarkable? Well, the good folks at the Government Accounting Standards Board (GASB) decided to do something about it a few years ago. Public employers already have to account for pension benefits, and those are whoppers, so you know that retiree health benefits will give taxpayers sticker-shock, too.

GASB published its rule about accounting for these liabilities, GASB 45, in 2004, but it gave the public sector some time to get on board. Indeed, the smallest agencies have until 2010 to comply with GASB 45.

You won’t be surprised to learn that some juridictions were less than enthusiatic about recognizing these liabilities, so governor Schwarzenegger established the Public Employee Post-Employment Benefits Commission in December 2006, with a mandate to survey every public sector employer in the state (excluding federal agencies) in order to figure out how much they owe for retiree health benefits and what they are planning to do about it.

The Commission reported yesterday, and it’s a painful read. To put things in perspective, California’s public sector pension liability was $579.5 billion in 2006 – but it’s 89 percent funded, so there’s only $63.5 billion more that has to be thrown into the pot.

Reported retiree health liabilities are $115 billion, and 78 percent of the public sector employers don’t pre-fund at all. Even worse, 22 percent of cities did not respond to the survey, nor 54 percent of school districts, nor 46 percent of community colleges, nor a whopping 82 percent of special districts (like the Golden Gate Bridge, Highway, & Transportation District).

OK, these AWOL agencies tended to be smaller ones: the bigger ones disclosed pretty fully, and some of them appear to be getting a good grip on the situation. Indeed, the City of Los Angeles began pre-funding its retiree health benefits way back in 1987 – but it is the exception.

This is a big problem: CALPERS, which provides retiree benefits for many state and county employees, is the third largest purchaser of health care in the nation – after the federal government and General Motors.

The Commission’s report contains a number of “case studies” describing positive steps that some jurisdictions are taking, among them are 403(h) accounts, which are tax-free accounts that employers fund in order to reimburse retirees’ health costs, and a Voluntary Employees’ Beneficiary Association set up by the municipalities of Foster City, Galt, and Emeryville, which does essentially the same thing. (You may have heard the term VEBA with respect to Chrysler, because one of the key changes Cerberus made when it bought the carmaker from Daimler was to establish a VEBA to crystalize it’s retiree health liabilities).

But there’s a long way to go: for the state alone (not subsidiary jurisdictions) it would have taken a $2.5 billion contribution in 2007, a $2.56 billion contribution in 2008, $2.62 billion in 2009, etc., to fund its retiree health liabilities by 2036 to the same degree it’s already funded pension liabilities.

The clock is ticking. It’s time to stop hiding these numbers from taxpayers, and for every agency in the state to answer the Commission’s report responsibly.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.