LOS ANGELES - California State Controller John Chiang on Thursday proposed a plan to change the way the state funds its retiree health benefits in order to reduce its $64.6 billion liability.

Under Chiang's plan, the state would fully pre-fund the costs of retiree benefits in the same year as they are earned by active employees, instead of continuing with its current policy of paying for benefits on a "pay-as-you-go" basis.

"While it is not reasonable to expect that a liability that has been built-up over many decades can be erased in a year, we have to resolve ourselves to meaningful progress," Chiang said in a statement. "Let that first step be a commitment that any liabilities created by one generation of Californians be fully paid by that generation and not transferred to their children."

Under the state's current funding policy, the controller estimates that California should pay more than $5 billion in 2013-14, but the state's budget act only provided $1.8 billion to cover costs.

If the state shifted to a pre-funding plan, the state would only need to contribute $3.6 billion in 2013-14, or $1.8 billion more than the state currently has budgeted.

Under Chiang's approach, money would be set aside in a separate trust solely for future retiree healthcare benefits. The investment income generated by the trust would be used to reduce future costs.

Chiang said at the end of his five-year implementation plan, retiree medical and dental costs earned annually by its active workforce (often referred to as "normal costs") would be fully pre-funded, reducing the unfunded liability by $17.7 billion.

The controller proposed his plan along with a report that pegged the state's total unfunded retiree health care liability at $64.6 billion, as of June 30, 2013.

That obligation grew $730 million from the $63.8 billion obligation identified as of June 30, 2012.

On a positive note, that liability grew $2.7 billion less than expected due to fewer healthcare claims, lower-than-expected healthcare inflation, and the adoption of strategies by the California Public Employees' Retirement System to lower costs, according to the controller's office.

"Although the growth was far less than projected, the state invites unnecessary risk with every day it allows to pass without a fiscally-disciplined plan for how to manage this growing liability," Chiang said. "While most are focused on unfunded pension obligations, this is a sleeper problem that can become the next big fiscal threat if we continue to do nothing."

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