California Officials Work To Estimate Future Cost of Retiree Health Benefits; Early Estimate Finds $40B
State officials have begun work to estimate the future cost of providing health and dental benefits to retired state employees in an effort to comply with accounting regulations issued last year, the San Diego Union-Tribune reports.
Under the regulations, state and local governments must estimate and publicly report their unfunded liabilities for retiree health care coverage beginning in 2008. Currently, the state does not have a system to reserve money that could be invested for future retirees' health coverage. The rule does not require the state to set aside money for such costs.
The Controller's Office, the Department of Finance and CalPERS plan to produce within three years an actuarial estimate of the state's liability for retiree health benefits, according to Russ Lopez, a spokesperson for Controller Steve Westly (D).
Mercer Human Resource Consulting recommended that states multiply by 50 their current expenditure for retiree health care costs to estimate the future cost of such benefits. Using that methodology, California's estimated liability is about $40 billion. Retiree benefits costs increased from $409 million in 2001 to about $796 million in 2005.
Lopez said that "all options" would be considered when the controller's office, the finance department and the employee pension system begin working to meet the new accounting standards. He added, "We don't have any numbers to share with you at this point."
According to the nonpartisan Legislative Analyst, making an annual payment now that covers current debt and future liabilities for 30 years would add about 8% to the budget of Los Angeles Unified School District. A similar change would add $7 billion to Gov. Arnold Schwarzenegger's (R) proposed $88.5 billion state general fund budget for fiscal year 2005-2006.
A report released by Standard & Poor's in December 2004 stated that a net annual increase in retiree health obligations "would be a negative rating factor" on state credit ratings "just as an increasing net pension obligation would be."
California was upgraded from "near junk-bond status" in 2004 but still has a credit rating that ranks below most states, according to the Union-Tribune.
"Because the state will need to report a benefit liability in its June 30, 2008, financial statements, the earliest estimate of California's liability is critical for policy discussions on a funding plan for post-retirement health benefits," Vincent Brown, Westly's chief operating officer, said in an April 25 letter to CalPERS chief actuary (Mendel, San Diego Union-Tribune, 5/20).