California Faces $47.9 Billion in Retiree Health Care Costs

California faces an unfunded liability of $47.9 billion over the next 30 years to fund health care benefits for current and future state retirees, according to a report released Monday by State Controller John Chiang (D), the Sacramento Bee reports.

However, Chiang said that the future obligation could be reduced to $31.3 billion and that the state could meet all benefit payments to retirees if the state begins setting aside $2.6 billion annually in an investment trust.

Chiang added that if the state takes no action, taxpayers would have to contribute $3.6 billion annually to cover the cost of public retirees' health care benefits (Chan, Sacramento Bee, 5/8).

New federal accounting rules require California and other public agencies to disclose unfunded health care and pension liabilities for current and future retirees. Most agencies, including the state, fund retiree costs on a pay-as-you-go basis and do not consider future liabilities.

The rule change prompted Gov. Arnold Schwarzenegger (R) in December 2006 to sign an executive order to create the 12-member Public Employee Post-Employment Benefits Commission. The governor and Democratic legislative leaders appointed the panelists, including union leaders, investment firm advisers, economics professors and law enforcement representatives.

The commission by Jan. 1, 2008, will offer proposals to the governor and Legislature (California Healthline, 3/12).

The state Legislative Analyst's Office last year issued a preliminary estimate of up to $70 billion for the state's long-term liability for retiree health benefits.

Chiang said the liability "is not a crisis today," adding, "We need not panic or rush to judgment."

Former Assembly member Keith Richman, director of the California Foundation for Fiscal Responsibility, said, "Even if it's $48 billion, which is probably too low of an estimate, it's still a huge number." Richman said Chiang underestimated the rate of long-term health care inflation, adding that the actual liability could be closer to $100 billion.

Richman is expected to introduce a ballot measure that would overhaul the state's retiree health benefits and pension system (Sheppard, Los Angeles Daily News, 5/8).

Statewide, school districts, community colleges and local governments could face more than $90 billion in retiree health care costs, according to estimates by Keenan & Associates, a benefits consulting firm (Sacramento Bee, 5/8).

"State leaders will pretend they had no idea the problem (of California's unfunded liability) was this severe and will thank Chiang for enlightening them," a San Diego Union-Tribune editorial states. "But it has been an open secret for years that the tab would be severe," according to the editorial.

The state "should start prefunding" the future cost of retiree benefits now, a task that can be initiated while the committee appointed by the governor and legislative leaders develops its proposals, the editorial states. "But this can't happen until Schwarzenegger starts tending to the most basic task of governance -- producing a responsible budget -- and stops spending so much time on showier topics," the editorial states (San Diego Union-Tribune, 5/8).

Chiang's report is available on his Web site. Note: You must have Adobe Acrobat Reader to access the report.