Gov. Jerry Brown has taken the high road on retirement benefits reform. His 2012 Public Employee Pension Retirement Act brought some sanity to benefit formulas, he stabilized CalSTRS’ funding, and he has pushed CalPERS to establish more conservative funding strategies.
But when it comes to health care for retired public employees, the governor’s good intentions are impeding sound policy. Instead of trying to preserve this expensive and unnecessary perk, he should phase it out.
“Taxpayers are compensating former workers with benefits in lieu of wages for work they did decades ago.”
In January, Controller Betty Yee pegged the state’s unfunded liability for other post-employment benefits (OPEB) at $74.1 billion. That’s how much it will cost to allow workers to stay on their health plans after they retire until they’re eligible for Medicare, subsidize their premiums, and then provide them with supplemental benefits after Medicare kicks in. The benefit’s value can exceed $16,000 in the case of married couples and $20,000 in the case of retirees with children.
In corporate America, few workers expect their former employers to maintain any responsibility for their health coverage in retirement. Only 12.8 percent of private companies in California that provide health insurance continue coverage for retirees. But businesses in the state are having little trouble attracting and retaining good workers.
California’s annual OPEB bill is around $2 billion, which, paid for out of general revenues, funds retirees’ premiums. Taxpayers are compensating former workers with benefits in lieu of wages for work they did decades ago.
Gov. Brown wants to address that generational inequity by prefunding OPEB-like pensions. Through negotiations with state unions, he hopes to secure employer and employee contributions to a fund that will then invest those revenues. Stock market returns will reduce the burden on both employees and taxpayers. Over 50 years, savings are projected to run $240 billion statewide.
But that will create greater state budget volatility. Gov. Brown describes OPEB costs as “one of the fastest growing areas of the state budget,” but so are state pension costs, thanks to the impact of two stock market collapses within the last 15 years.
State workers’ pension costs have increased from 4.2 percent of salary in 2001 to 25.1 percent today. And this over a period in which benefits, independent of salary growth, have actually declined thanks to pension reform.
A 2015 report by the Legislative Analyst’s Office questioned the rationale for offering OPEB, noting that, for many new hires, higher salaries might prove a much stronger enticement than health insurance subsidies in their retirement years.
Offsetting OPEB reductions with modest wage increases would be a good deal for taxpayers. Increasing take-home pay would be a more transparent way to compensate public employees, rather the current practice of backloading so much compensation into hard-to-value health and retirement benefits.
“Offsetting OPEB reductions with modest wage increases would be a good deal for taxpayers. Increasing take-home pay would be a more transparent way to compensate public employees...”
Los Angeles has been prefunding retiree health benefits for members of the Los Angeles City Employees’ Retirement System since 1987. The results are overly generous benefits — the annual subsidy can reach almost $19,000 — and volatile costs.
After losing over $400 million during the recent financial crisis, L.A. increased its OPEB contributions by 21 percent between 2009 and 2012, a series of extremely lean years when governments had far more pressing needs than unfunded health care liabilities.
L.A.’s experience demonstrates that prefunded retiree health benefits are as hard to manage as pensions. Under prefunding, California state government can expect to be struggling with OPEB costs 30 years from now.
Preserving OPEB is the wrong way to go. To attract and retain a qualified workforce, California can provide state employees with better salaries, health insurance during their years of service and some form of cash retirement benefits. It does not need to provide them with health insurance in retirement as well.
This piece originally appeared in The San Diego Union-Tribune
This piece originally appeared in The San Diego Union-Tribune