Financial analysis shows Los Angeles and Anaheim setting aside most funds to guarantee non-pension benefits

California Common Sense (CACS) released the second of two reports that analyze the impact of rising non-pension retiree benefit costs on California’s state and city budgets. The report, “Our Cities Need Preventive Care Too,” compares California’s 20 largest cities and their various strategies to fund rapidly rising costs for these “Other Post-Employment Benefits” (OPEBs), which mainly consist of health care coverage. It also features detailed examinations of San Francisco, San Jose, and Palo Alto. Monday’s report, “California’s Neglected Promise,” focused on how the State can manage it rising costs as well.

As Baby Boomers have begun to reach their 60’s, we have seen an upswing in the number of retirees accompanied by both longer predicted life spans for those retirees and an overall increase in health costs. In short, more people are earning benefits for longer periods of time at higher costs.

Cities are facing tremendous pressures these days, and they’re hesitant to pre-fund retiree benefits to gain savings that will materialize 10 or 20 years down the road.  CACS is saying that those cities need to think about these promises today. Possible alternatives to fully pre-funding out the gate: phase in pre-funding, select cheaper health plans or increase employee contribution levels. Otherwise, in 20 years, these huge costs are going to hit California’s cities hard. The days of low and stable health care costs are over.

The City analysis included the following findings:

9 pre-funding cities. Los Angeles, San Jose, San Diego, Anaheim, Roseville, Palo Alto, Bakersfield, Burbank, and Santa Clara all pre-fund their future retiree health care benefits to some extent. Los Angeles has set aside the largest portion (59%) of what it has promised retirees, followed by Anaheim, which has set aside (30%) of what it has promised.

11 pay-as-you-go cities. San Francisco, Oakland, Sacramento, Redding, Santa Ana, Long Beach, Glendale, Fresno, Riverside, Pasadena, and Santa Monica have no funds set aside to pay for future retiree health care. If those 11 cities start paying their OPEB contributions as determined by CalPERS and continue to do so annually, they will collectively save an estimated $2.2 billion in payments for benefits earned before 2011.

Benefit costs on the rise. Average benefit costs among these cities have increased an average of 36% between 2008 and 2011. This figure hides substantial variation: while some cities have seen moderate growth over the period of less than 20% (Sacramento, Pasadena), others have seen their benefit costs jump more than 50% in three years (San Jose, Bakersfield).

San Francisco currently has the largest unfunded liability ($4.4 billion). Though it still has no assets set aside to finance its future obligations, the City took initial steps to address this issue in 2008.

San Jose has the largest unfunded liability as a “percentage of covered payroll” (465%). The city is slowly phasing in a full pre-funding plan, but given the scale of its obligations, it should consider altering its benefit structure.

The report reviews a number of ways California’s struggling cities can restructure benefit plans to decrease their long-term liabilities. 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.