California Common Sense, which had a hand in a well-regarded pension study published earlier this year, has now turned its attention to the retiree health care, or OPEB, issue. Its new report, "California's Neglected Promise," finds that California state government's unfunded health care liability is smaller than its unfunded pension liability, but growing at a faster rate. Since 1999, annual costs have increased 425% (from $300 million to $1.58 billion in FY11), and in 35 years will "consume the entire state budget." The total OPEB bill is $62 billion, and that's just for state employees. Another report, soon to follow, will document the OPEB problems of California's 20 largest cities. (The State Budget Crisis Task Force estimated that California's total state and local unfunded OPEB liability is, at minimum, $137 billion).
Costs are soaring for reasons one would expect: aging baby boomers, steep medical inflation rates, and rising life expectancy.
What's the solution? Adjust benefits and start pre-funding, with an emphasis on the latter. California Common Sense encourages the state to look into defined contribution health care plans, restricting eligibility, reducing coverage, increasing employee cost sharing, and introducing narrow-network HMOs. But the report elaborates relatively little on these potential changes, partly because California Common Sense is wary of the legality of changing benefits for current employees. In any event, addressing legacy costs through pre-funding cannot be avoided. Pre-funding could save California over $20 billion over the long term. It's also fairer than the current pay-as-you-go approach, because it ensures that "each generation of taxpayers bear[s] the cost of the services it receives."
That's the overview. But, as is always the case with policy reports, the most interesting bits are in details. To wit:
- Beverly Hills addressed its $58 million OPEB problem by buyouts. The city offered current employees the choice to opt out of their defined benefit health care plan in exchange for a one-time payment equivalent to the plan's actuarially-determined value. Part of the payment went into a defined contribution retiree health care plan, and employees could then choose if they wanted the remainder in cash or for it to be deposited into the defined contribution plan. 58% of employees took the option, which cut Beverly Hills' OPEB liability by $13 million in FY11 and will surely reduce future cost growth.
- Retired state government employees in California have rich healthcare benefits. They come in four forms: retirees and dependents get to stay enrolled in their plans when they retire (the implied rate subsidy), the state picks up some of their premium cost, in some cases all of it, the state pays for Medigap insurance, and the state provides dental insurance. According the most recent edition of the Kaiser Foundation's annual "Health Benefits Survey," only 26% of all large (200+ employees) firms nationwide that offer health benefits to their current employees also offer retiree coverage. That's down from 66% in 1988. By contrast, 83% of state and local governments that provide health insurance to current employees also offer retiree health coverage.
- The implied rate subsidy is only 14% of the total cost. Thus, had California provided its retirees with nothing more than the right to stay on their plans, a benefit to which, again, most private sector workers do not have access, the state's OPEB cost would be 86% less than what it is now, $246 million in FY12, instead of $1.7 billion.
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