LOS ANGELES — California's cost for retiree health and dental benefits has grown to $76.68 billion, according to a report from State Controller Betty Yee.
The liability represents the present-day cost to provide retiree healthcare benefits earned as of June 30, 2016 for more than 800,000 state employees once workers retire from civil service and for those who have already retired.
"One of the greatest fiscal challenges facing California is the mounting cost of providing health care benefits to public sector workers," Yee said in Wednesday's statement.
State costs have quadrupled since 2001 when retiree healthcare costs made up $458 million of the annual budget as compared to $1.92 billion this year, the report said.
Gov. Jerry Brown asked unions to agree to make contributions to retiree health costs during contract negotiations. The contract approved last week by members of SEIU 1000, state government's biggest union, would phase in payroll deductions for retiree health care over several years. Contract negotiations also have included extending the period to qualify for retiree health benefits and reducing the employer subsidy for retiree health coverage.
"Through collective bargaining, there is positive progress towards the long-term security and sustainability of retiree health benefits," Yee said. "Barring drastic cuts into other public spending, these changes will not happen overnight but, in time, our long-term liabilities will be paid down."
Even these incremental steps can meaningfully reduce the state's liability, said Yee, but she also provided estimates based on the state shifting to fully prefunding future benefits, rather than the current pay-as-you go system that would drastically reduce the liability. The state would still have to pony up substantially more than what it currently budgets for retiree healthcare.
Brown wants to move towards a prefunding approach to health benefits more like that used for public employee pension funds.
The current pay-as-you-go policy results in a liability of $76.68 billion. While the governor's proposed budget sets aside $1.92 billion to cover actual costs, a true accounting of existing and future costs would have required $5.77 billion, according to Yee's report.
Prefunding just 10% of the annual service cost, in excess of pay-as-you-go expenses, would increase current annual costs by $260 million but reduce the total unfunded liability over time by $3.37 billion, the report said. Prefunding 50% would cost $990 million more each year but ultimately result in savings of $13.52 billion on the unfunded liability.
If the state shifted to fully prefunding future benefits, the report said, the liability for the current fiscal year would have been cut by 34% to $50.29 billion. To take advantage of the significant reduction in liability from fully prefunding, the state would have needed to contribute $4.11 billion in FY 2016-17, or $2.19 billion more than it budgeted.
According to the report, total liability grew $2.49 billion compared to the prior fiscal year, but the size of the increase was $1.45 billion less than estimated in last year's report. Health care claims did not grow as rapidly as expected, and changes in health care delivery helped to lower costs by $3.78 billion. But demographic shifts and changes in assumptions about long-term health trends added $2.33 billion to the liability.
Under standards created by the Governmental Accounting Standards Board, state and local governments have been reporting the costs of retiree health care and other post-employment benefits, known as OPEB, in notes to their financial statements. Starting in fiscal 2017-18, a new GASB standard requires state and local governments to report OPEB liabilities and expenses in their financial statements.
