Friday, February 23, 2007

By Jackie Cohen

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SAN FRANCISCO — The California Public Employees’ Retirement System is creating a trust fund to help ensure government employers can pay the future costs of their retirees’ health care benefits.

“This plan strengthens the security of retirees’ benefits and will help stabilize and reduce future costs for taxpayers,” state Treasurer Bill Lockyer said in a prepared statement.

Lockyer’s announcement only concerned starting the trust fund. However, funding the trust presents a greater challenge, according to Standard & Poor’s analyst Parry Young.

Funding for the trust would come from local government agencies throughout the state, which will all have to submit actuarial reports on their unfunded liabilities to participate in the CalPERS program.

Until now, the state has handled these benefits on a pay-as-you-go basis, doubling its budget for other post-employment benefits from $576 million in fiscal 2003 to $1.02 billion in the current cycle. California’s unfunded OPEB liabilities range from $40 billion to $70 billion, according to the state Legislative Analyst’s Office.

“It’s up to the state to decide how much to contribute to the trust,” said Edward Fong, manager of public affairs for CalPERS. “Local government agencies could make large contributions or smaller ones, but there’s no fixed percentage of employee pay like there is for the pension plan.”

Fong said CalPERS would accept contributions from member agencies and invest the money on their behalf.

Participants could raise the money for their share of the OPEB funding through bond issuance, even though the state itself won’t likely issue such debt any time soon, said Tom Dresslar, a spokesman for the state treasurer’s office.

“If the state were to issue bonds for OPEBs, what would the security be?” said David Hitchcock, an analyst for Standard & Poor’s. “If a local government agency were going to issue an OPEB bond, it would be wise of them to get some kind of validation judgment first.”

Hitchcock said some local employers may be able to eliminate unfunded OPEB liabilities simply by renegotiating with employees when employment contracts come up for renewal. In other words, the local agencies could phase out the retiree health benefits over time.

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