Pensions, Sure, But Let’s Not Forget Health Care Costs

Joel Fox
Editor and Co-Publisher of Fox and Hounds Daily

With pension reform having a top place in the discussion of fiscal reforms that the state government must make to bring about balanced budgets, the cost of health care for public employees is often lost in the discussion. It shouldn’t be. Health care is another cost for both state and local government that is growing faster than other parts of the budget.

California Common Sense dragged the health care costs issue into the spotlight yesterday by releasing the first of two reports. The first report analyzes the state’s non-pension Post-Employment Benefits, a rather bureaucratic way to say mostly health care costs. The report notes that more people are receiving benefits over a longer period of time at a higher cost adding to health care’s potential budget-busting danger.

The analysis calls for “pre-funding” retiree benefits to make them more manageable.

According the California Common Sense release, the analysis included the following findings:

Rising annual costs to the State. The State has seen the cost of benefits for current retirees double every five years since 1999, on average. Annual benefit payments have increased from $0.30 billion to $1.58 billion. At this rate, current-year Post-Employment Benefit costs will consume the entire state budget within 35 years.

Pre-funding saves an estimated $21 billion. If the State starts paying its full contribution as determined by CalPERS this year and continues to do so annually, it will save an estimated $21 billion in paying for benefits earned as of 2011.  A single year of inaction will potentially cost almost $1.70 billion in missed investment savings over 15 years, or over $300,000 per day.

More retirees and more to come. The number of retirees receiving medical benefits has increased 11.7% since 2008, from 138,300 to 154,500. This is an early phase of the upswing in retirements by the Baby Boomer generation.

The report reviews a number of ways the State can restructure benefit plans to decrease its long-term liability.  However, these changes should be accompanied with some pre-funding strategy.  Pre-funding is dictated by the simple idea that the costs of a benefit (such as pensions) should be recognized as they are earned.  It also discourages irresponsible political behavior that defers costs to future generations that may not be able to bear them. Finally, pre-funding accumulates secure assets towards paying future costs and supplements them with investment profits.

The full report can be found on California Common Sense’s website.

A second analysis scheduled for release later this week focuses on California’s 20 largest cities.

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