LOS ANGELES — California's controller urged public employee unions to negotiate the prefunding of retiree healthcare benefits, as the state's reported unfunded liability hit $74.1 billion.
Left unchanged, the expense is expected to balloon to more than $100 billion by the 2020-21 fiscal year and $300 billion by 2047-48, according to a report from Controller Betty Yee's office.
The state has traditionally paid for the benefits as they came due, rather than setting aside money, but California Gov. Jerry Brown has said that he hopes to change that in negotiations with public employee unions this year.
"California has a duty to ensure it can meet obligations to workers who earned these retirement benefits," Yee said in a statement Tuesday, when the controller's office released its latest report on the state's liabilities for retiree healthcare. "We need to assure through collective bargaining that we set aside money to meet this obligation and keep the state on sound fiscal footing."
The percentage of the general fund devoted to retiree healthcare costs has grown by 1% to 1.6% of the general budget over the past 15 years, according to Yee's report.
This year, such other-post employment benefit liabilities will comprise $1.9 billion of the budget, according to the report.
The total $74.1 billion OPEB liability grew $2.38 billion compared to the prior fiscal year, but the size of the increase was $1.5 billion less than estimated in last year's report, according to Yee's report.
Health care claims did not grow as rapidly as expected, and changes in health care delivery and assumptions about long-term trends helped to lower costs by $1.76 billion. But demographic shifts added more than a quarter billion dollars to the liability, according to the report.
Under standards created by the federal Governmental Accounting Standards Board, state and local governments have been reporting OPEB costs in notes to their financial statements. Starting fiscal year 2017-18 fiscal year, a new GASB standard requires state and local governments to incorporate OPEB costs in financial statements.
Many states, like California, are expected to report substantial unfunded liabilities for retiree health care.
Yee's OPEB report provides estimates of California's obligation for retiree health and dental benefits based on two different funding scenarios.
The current pay-as-you-go policy results in an unfunded liability of $74.1 billion. While the current fiscal year's budget sets aside $1.9 billion to cover actual costs, a true accounting of existing and future costs would have required more than $5 billion, according to Yee.
If the state shifted to fully prefunding future benefits, the unfunded liability for the current fiscal year would have been cut by 35% to $48.4 billion. To take advantage of the hefty reduction in liability from full prefunding, the state would have needed to contribute $3.99 billion in 2015-16, or $2.09 billion more than it budgeted.
Yee said she recognized that a move to prefunding will need to be gradual, but that even incremental steps would meaningfully reduce the state's liability.
Prefunding 10% of the annual cost in excess of pay-as-you-go expenses would increase current annual costs by $250 million, but reduce the total unfunded liability over time by $3.29 billion. Prefunding 50% would cost $970 million more each year but ultimately result in savings of $13.2 billion.
Brown has proposed prefunding the entire liability by fiscal year 2044-45, which would save the state more than $240 billion in unfunded liability.
