Troy Senik notes below a new report which determines that California's debt is much larger than previously thought. The analysis includes a look at rising state debt from not properly funding retirement promises to workers. Many readers have become familiar with the way in which politicians have used defined benefit pensions to promise workers retirement perks but not adequately fund them right now. The same process is taking place with promises of health care for life for government workers, because the temptation to underfund these is just as powerful. California illustrates the problem.
A promise to pay a retiree's health care coverage is essentially a kind of defined benefit plan, in which government pledges to cover a certain percentage of the cost of health insurance regardless of how much money it has actually set aside for this benefit. As the State Budget Task Force's recent report on California explains, right now workers covered in California by this retirement benefit are earning credits that should be financed to the tune of $4.7 billion a year, if California is going to have enough money to pay off this obligation over the years.But instead of pre-funding the benefit, California has chosen to pay for it on a pay-as-you-go basis, taking the cash for the health insurance premiums of retirees right out of its annual budget. Right now that's only costing the state $1.7 billion annually because of the limited number of retirees who qualify for the benefit. But over time more and more workers will qualify, and those workers will live on average decades in retirement, swelling the rolls of those whom California must provide health coverage for.
Eventually, California will be paying more out of its annual budget to finance health costs for retirees than what it costs to pre-fund these benefits for current workers For California, that time won't come, the budget task force notes, for another 20-to-25 years (see chart below). But by the time it comes, California will owe approximately another $150 billion in health benefits it hasn't bothered to fund, on top of the $60 billion in unfunded health care insurance liabilities the state already has accrued.
This is not a situation that engenders any urgency for reform for obvious reasons. Why make the kinds of decision that will either result in cutting benefits for workers, which would anger them, or raising taxes to finance the benefit now, when you can just leave it to the next generation of elected official to dig the state out of the mess? Needless to say, California's recently passed pension reform legislation, which doesn't fully address the state's pension debt, does nothing to begin solving California's growing retirement health care obligations either.
All together, states have funded just 8 percent of their health care promises to workers. California is in worse shape because it's funded just 1 percent. But more importantly, this liability is growing so quickly that it may soon eclipse pension debt, according to the Pew Center for the States chart above.
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