Along with soaring pension liabilities, California faces sharply higher costs for the health care promises it has made to retired state workers. A new report by the state comptroller's office estimates that California faces a $59.9 billion bill for health care benefits of current workers when they retire, and that the liability has grown by more than $8 billion in the last year alone.
The report notes that California does not pre-fund its health care benefits obligations by setting aside money now that can be invested for the long-term. Instead, it finances health care benefits for retired workers on a pay-as-you-go basis, which means the state takes money out of the current budget to finance insurance premiums for those already retired. In recent years, the state's pension fund, CalPERS, has helped pay off the retiree bill using surplus funds, but these have dried up, increasing the state's burden. The comptroller estimates that this year's bill for health care for retirees is $4.2 billion, which is in addition to payments the state must make to fund employee pensions.
The report notes that California does not pre-fund its health care benefits obligations by setting aside money now that can be invested for the long-term. Instead, it finances health care benefits for retired workers on a pay-as-you-go basis, which means the state takes money out of the current budget to finance insurance premiums for those already retired. In recent years, the state's pension fund, CalPERS, has helped pay off the retiree bill using surplus funds, but these have dried up, increasing the state's burden. The comptroller estimates that this year's bill for health care for retirees is $4.2 billion, which is in addition to payments the state must make to fund employee pensions.
The comptroller's office is now recommending that California start setting aside money to pre-fund health care benefits to reduce the future bill. Doing so could cut the state's long-term payments to just $38.5 billion because the money contributed now could be invested and produce returns over the years. To fully fund these long-term commitments would require contributing $2.9 billion annually right now. That will certainly prove a challenge given that the state already faces a $25 billion budget deficit and is having trouble paying its current bills.
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