Cost of public retiree health care soars in Calif.
SACRAMENTO, Calif. As Stockton contemplates a bankruptcy filing, cities, counties and school districts throughout California are grappling with the same issue that has led the delta port city to the brink of insolvency - soaring costs for retiree health care.
San Francisco, which once allowed its public employees to qualify for full retiree medical benefits after working just five years, is projected to pay $153 million in retiree health care costs this year, about 5 percent of the city's general fund.
The Ventura County city of Thousand Oaks capped its contributions for retiree health care at $435 a month but still faces a $12.6 million unfunded liability for the perk, an amount equal to about 18 percent of the city's general fund budget.
The Los Angeles Unified School District, the nation's second largest school district, promises 100 percent lifetime health benefits to retirees, their spouses and dependents. It now faces $10.3 billion in long-term unfunded liabilities for the benefit, 1 1/2 times the district's annual budget.
And at the state level, retiree health care costs have ballooned from $560 million annually a decade ago to a projected $1.7 billion in the coming fiscal year, almost 2 percent of general fund spending.
The benefits' costs are expected to double for the state and local governments over the next 10 years.
"The problem with (retiree medical benefits) is that these promises were made back when insurance for medical cost $200 a month, and those costs have now quintupled. And nobody even put away a nickel," said Girard Miller, a public finance consultant based in Southern California who has testified about retirement funding before state panels.
The looming crisis in providing health care for government retirees is similar to the one involving public employee pensions. The difference is that the state, counties, cities and other entities have been pre-funding pension obligations, even though the benefits promised in most cases far outstrip the pool of money available to pay them.
Retiree health care has largely been handled on a pay-as-you-go basis, meaning the state and municipalities pay whatever bills come due each year. In each case, taxpayers are on the hook for tens of billions of dollars in unfunded obligations.
Both types of retirement benefits - guaranteed pensions for life and family health care coverage after retirement - are increasingly rare in the private sector.
In 2007, the year the recession began, Credit Suisse estimated that states and local governments nationwide were carrying $1.5 trillion in unfunded liabilities for retiree health care costs.
It's hard to know exactly how much California cities, counties and school districts owe. Governments have had to report their long-term liabilities since 2008 under changes made by the Governmental Accounting Standards Board, but the state controller's office says it tracks only the state government's obligations. It does not track the patchwork of retiree health benefits provided by local governments.
The only comprehensive survey of the benefits was completed in 2008 by the California Public Employee Post-Employment Benefits Commission, a panel convened by former Gov. Arnold Schwarzenegger as the new reporting standard was taking effect.
The commission estimated that the state, cities, counties, school districts and other governmental entities in California faced at least $118 billion in unfunded liabilities for retiree medical benefits - about twice the amount taxpayers owed on public pensions at the time. Today, the unfunded liability for California's two main public pension funds is about $150 billion.
"I don't think people recognized how much exposure there was for government on this front, and also the fact that none or very little of this was pre-funded," said Anne Sheehan, who served as executive director of the Schwarzenegger commission.
Stockton City Manager Bob Deis said the city of 290,000 had not set aside any money to pay for lifetime health care coverage for its workers. His office estimates the city will spend $9 million of Stockton's $165 million general fund to cover health insurance for about 11,000 city retirees. That's compared to $8 million the city will spend on health care for more than 12,000 current workers.
Deis, who inherited the contracts when he took the job in 2010, wants them renegotiated as part of a required mediation process that is taking place as the city tries to avoid bankruptcy. If Stockton files for Chapter 9 protection, its public employees might look to the eastern San Francisco Bay area city of Vallejo for an example of what it could mean for them.
Vallejo provided full health care coverage to its retirees but reduced that to a monthly stipend of $300 after it filed for bankruptcy in 2008. Retired city workers say they were blindsided.
"If I had thought this was even a possibility for the last 26 years, maybe I would have been pre-planning some kind of health care strategy," said former fire chief Vincent Sarullo.
Sarullo, 57, has an annual pension of $135,902 and counts himself among the luckier ones who have been able to absorb the expense. Some public employees, like Sarullo, are not eligible for Medicare or Social Security.
While many government workers can look forward to receiving medical, dental and vision benefits after they retire, such benefits are rapidly disappearing from the private sector.
In 1988, 66 percent of all companies with 200 or more workers offering health benefits to active workers also offered retiree health benefits, according to a 2011 Kaiser Health Foundation survey of employers. That dropped to 26 percent by 2011.
The opposite is true for California governments. According to the survey by the post-employment benefits commission, 86 percent of cities, 91 percent of counties and 89 percent of school districts offer retiree health benefits.
Many government workers can collect their full pensions before age 65, the eligible age for Medicare. Some governments provide retirees health care coverage as a bridge to Medicare. Once the employee is eligible, the retiree benefit becomes secondary to help them fill any Medicare coverage gaps.
A few local governments have begun to make changes. Thousand Oaks was the first city to contract with the state pension system to prefund retiree health care and has capped monthly benefits at $435.
Until a few years ago, employees could work for San Francisco for five years, leave and start claiming full retiree health care benefits once they turned 55. Under Proposition B in 2009, voters changed the rule so new workers have to contribute to a trust fund and must work 20 years to qualify for full benefits.
The city still faces a $4.4 billion long-term liability.
Most state workers have to work 20 years to qualify for full retiree health benefits, but tens of thousands of employees of the California State University system, the courts and Legislature have to work only five years to qualify.
As part of his retirement-reform package, Gov. Jerry Brown wants all new state and local government employees to work 25 years before qualifying for full retiree health care coverage.
"We didn't get into the mess overnight and we're not going to get out of it overnight," Brown said. "I'm doing my best to push it."