While rising pension obligations for public employees have caught the public's attention, health care obligations for retirees represent another fast- growing cost that neither the state nor local governments have adequately prepared for.
Last week, Controller John Chiang released a new actuarial report that pegged the unfunded liability for state retiree health costs over the next 30 years at nearly $60 billion.
Unlike pensions, the state has not set aside money that it then invests to help pay for retiree health care obligations. So the government pays the full cost every year on a pay-as-you-go basis, $1.4 billion in the current fiscal year, up about 18 percent from last year. And it's projected to jump another 12 percent next year.
Retiree health care costs are rising by double-digit percentages annually because state workers are retiring earlier and living longer, and the cost of health care is rising steeply.
To reduce liability, Chiang has recommended that the state begin prefunding its health care in the same way it prefunds retirements. In that way, investment returns will help absorb some of the cost.
Given the huge budget gap, the state won't be paying more from the depleted general fund to prefund its health care obligation any time soon. It has negotiated new labor contracts in which workers, California Highway Patrol most notably so far, have agreed to contribute more to fund their retiree health care account.
As workers have been asked to contribute more to fund their retirements generally, they should be asked to pay more to finance the state's very generous retiree health plans as well.
Over the long run, the state needs to do more to reduce its retiree health care liability. Preventive programs launched by federal health care reform could result in a healthier society, bringing down some medical costs. But the state may need to do more, including raising the retirement age for new hires. The later someone retires, the less that person ultimately draws from the state for retiree health.
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