Money not set aside for retiree health benefits

By Christopher Cadelago7:06 p.m.Jan. 14, 2013

SACRAMENTO — Gov. Jerry Brown last week said he had closed a state budget gap for the first time in years and was making huge strides toward knocking down the “wall of debt” that keeps California from moving forward.

But in laying out his timeline for repaying some $23.5 billion, Brown did not factor in a looming liability — tens of billions more owed for retirement health care benefits promised to state workers.

Sacramento leaders have failed to set aside money to cover $62 billion in projected costs for retiree health care. Some veteran state workers have been promised the full state-funded contribution toward their health plans for the rest of their lives. That typically covers most, if not all, of their premiums. Many newer employees must pay a share of their costs.

“Even that $62 billion is just a percentage of what the total liability is,” said Assemblyman Brian Jones, R-Santee. “Until we get an answer on what the total liability is, we can’t begin to address the problem.”

The coming tab for retired workers tops $181 billion over the next three decades: $62.1 billion for retiree health, $64.5 billion for teacher pensions, $38.5 billion for employee pensions, $12.8 billion for University of California employee pensions and $3.3 billion for judges’ pensions, according to the governor’s office. Government reports and academic studies have pegged the state’s unfunded liabilities as being much higher.

Finance officials said it was prudent to exclude those costs from the state’s so-called “wall of debt” because they amount to long-term obligations similar to a home mortgage.

“It’s the same reason you pay off your mortgage over 30 years instead of one month,” said H.D. Palmer, a spokesman for Brown’s Department of Finance.

On the longer-term obligations, the state has not begun to save toward obligations for future retirees as some cities such as San Diego have begun to do.

Last year, the governor proposed to chip away at the health care benefit by limiting state worker eligibility, but he was rebuffed by Democratic lawmakers.

In unveiling his proposed $97.7 billion budget last week, the governor focused on shorter term aspects of the “wall of debt,” reducing it from nearly $28 billion to $4.3 billion by the end of 2016-17.

The remainder is to include unpaid costs to local governments, schools and colleges for state mandates as well as deferred payments to health care providers.

Brown said he would endeavor to avoid the borrow and spend, boom and bust cycles that have long plagued the state.

“Paying down debt is a form of reserve because if you don’t have these debts, then when things go bad, you can borrow some of that money back in the same way,” Brown said. “So, by paying down the debt, we’ve put ourselves in a stronger position when things go bad, as they inevitably do.”

Assembly Republican Leader Connie Conway said the state is not out of the woods even in addressing the short-debt it aims to eliminate.

“The governor’s budget doesn’t fully address the ‘wall of debt’ that has accumulated due to the state borrowing its way out of past deficits,” said Conway, of Tulare, adding that she hopes fellow lawmakers doesn’t repeat past mistakes of using short-term revenue to cover ongoing programs.

“Instead, we should use the voter-approved revenues from Prop. 30 as Californians were promised — to protect our classrooms and to pay down debt.”

Before 1985, state employees needed only to be on the payroll for five years and vested in the state retirement system to qualify for the full health care plan for life. That was later bumped up to 10 years. Then, those hired after Jan. 1, 1989, received half of their contribution by the state to the health plan after 10 years and the full contribution after 20 years.

“As health costs started to go up, it became more difficult for employees to be vested in the health retirement,” said Bruce Blanning, executive director of the Professional Engineers in California Government, which represents 13,000 state-employed engineers and related professionals.

“Over the years, the plan has been downgraded in its coverage: The co-payments are higher,” he added. “It’s not the same as it used to be. Employees over time have absorbed more of the costs.”

The state’s reluctance to tackle down-the-road expenses contrasts with steps taken at the local level to rein in analogous costs.

In San Diego, city leaders and labor unions two years ago brokered an agreement estimated to shave $330 million from a $1.1 billion shortage in money needed to pay lifetime health care for retired city workers. The cash flow savings to taxpayers is expected to exceed $714 million over 25 years, officials said.

Then-Mayor Jerry Sanders characterized the agreement as the “largest cost-saving measure ever implemented by the city” for taxpayers. The plan provided that for the first time city employees would contribute to their retiree health care costs, easing the financial risk for taxpayers.

“This settlement isn’t just a big step,” Sanders said at the time. “It’s a quantum leap.”

Debt for retiree health care had long been a fiscal albatross for the city following then-Mayor Pete Wilson’s promise of lifetime health benefits to all city workers in exchange for employees allowing the city to opt out of Social Security. But the city never put aside money for the long-term costs and a deficit grew over the next three-plus decades.

Frank De Clercq, head of the firefighters union, noted employees could have litigated the issue. But, he said, that would have ended up costing taxpayers via potential cuts to vital city services.

“It had been underfunded for so many years because the politicians chose to spend the money elsewhere for doing other pet projects,” he said.

Under the deal, veteran workers remained eligible for a benefit of $8,880 a year upon retirement, but have to pay $1,200 annually while employed to keep it. The deals are structured differently for newer hires.