SACRAMENTO (AP) — California’s unfunded obligation to pay for the health and dental care of retired state government workers grew by 11 percent during the most recent fiscal year to nearly $72 billion, according to a report released Tuesday by the state controller’s office.
In a report he has issued annually since 2007, Controller John Chiang proposed a five-year plan to start pre-funding the benefit, which is rarely offered in the private sector.
Retiree health care is an obligation of state government similar to public employee pensions, a system that also is badly underfunded. Unlike pensions, however, the cost of providing health and dental care to retirees is handled annually on a pay-as-you-go basis. The cost of future pension obligations is partially covered by investment returns on contributions made by workers and the government agencies that employ them.
The controller’s report says California’s budget should allocate more than $5 billion in this fiscal year to fund the current and future costs of retiree health care. Instead, the budget provides just $1.9 billion. Doing nothing about the funding gap will lead to a future financial crisis, Chiang said.
“This is a liability that has grown over decades of poor fiscal planning and a callous willingness to pass along debt to our children’s generation,” he said in the report.
Specifically, the unfunded liability represents the cost of paying for the health benefits earned by retired state workers and current employees when they eventually retire.
The system covers 167,839 retired employees, according to the controller’s office. Their immediate family members also are eligible with some exceptions, including parents, grandparents and children who are married.
Longer life spans are one reason the unfunded cost has soared by $24 billion in just the past eight years, the controller said. The fact that retirees are living longer outweighs the savings that have been realized through changes in the design of health care plans and slower growth in the payouts for medical claims.
An initial goal of pre-funding the benefit is to set aside enough money each year in the state budget to cover the expected health care costs of the current crop of state government workers when they retire.
Money also would be set aside in a trust that would be dedicated solely to future retiree health care benefits, with investment earnings used to reduce the liability.
Gov. Jerry Brown plans to address the issue in the state budget proposal he will release in January, said H.D. Palmer, spokesman for the administration’s finance department. The Democratic governor already has begun making changes to the pension funds covering state workers and teachers, although the fiscal benefits are expected to be decades away.
Palmer said he could not offer specifics on what the governor will propose but said the administration already has negotiated some pre-funding of retiree health care benefits with three public employee unions, including the one representing California Highway Patrol officers.