California’s public employers are on the hook for $200 billion in retiree health benefits

Article 16, Section 1 of the State Constitution is pretty clear. It states that “the legislature shall not, in any manner create any debt or debts, liability or liabilities, which shall, singly or in the aggregate with any previous debts or liabilities, exceed the sum of three hundred thousand dollars” without a vote of the people.
Our reading of that line includes “creeping debt.” When the state of California instituted health insurance for its employees in the 1960s, it was a $5 a month enterprise. As employees retired, the insurance was continued. At the general rate of inflation, that payment was $40 a month per retiree at this point in time.
Few would be adding up the “liabilities” the state, and the 8,000 other public agencies in California, have incurred by promising health benefits to their retirees at $40 a month. However, health insurance for retired public employees currently reaches up to the $1300 a month range, most all of it paid for by the public employer. The total “liability” for public employees in California is well over $200 billion. A simple calculation shows that it exceeds the $300,000 limitation of the state Constitution.
High and constantly rising costs. So, that’s the first aspect of the health-insurance-in-retirement-for-public-employees problem: extremely high and rising costs. The state recently calculated the 20-year value of retirement benefits for each employee at $493,851! That’s a far cry from $5 a month over 20 years, which, after inflation, would have cost the state $1200 total!
Benefit-earnout procedure is quirky and very unusual. The second characteristic of the problem is how the benefit is earned by public employees. For the most part, it is an all-or-nothing benefit. Either you have the five years of service in San Francisco, or the 10 years of service in the Elk Grove Unified School District, or you don’t. And when you do, you don’t have a partial benefit–you have a full benefit. If you worked for 10 years (any 10 years) for the EGUSD as a clerk, cafeteria worker, teacher or administrator, you qualify for 100 percent fully paid health insurance for life. If you worked nine years, you don’t.
Think about that for a minute before moving on, as this is a critical point. When the state or local government provides a pension, you earn a little of that pension every year, usually 2 to 3 percent of your salary. When you retire after 10 years, you receive 20 percent of your final salary; after 20 years, 40 percent of your final salary; and so forth. In essence, you earn a little bit as you go. If you leave, you leave with proportionately less.
However, for the health-insurance-in-retirement benefit, a benefit almost equal in financial value to a pension, it is an all or nothing affair! That is very unusual and it makes the next characteristic all the more interesting.
Eight-thousand public agencies, 8,000 different methods of calculating eligibility. That’s right, the benefit has “creeped” up on us, and every single public agency has granted the benefit, worth nearly $1 million to employees.
Initially, the benefit was meant for “retiring” employees. In a classic 1950s economy, a “retiring” government employee worked with the same agency for 35 to 40 years. And these were “consecutive” years. In fact, many of the early restrictions were about the years being consecutive and the employee actually “retiring” at the time they received the benefit.
No one needs to tell you what has happened. First, society changed–no one works 35 to 40 years for the same employer anymore, not even government employees. The average state employee, according to CalPERS retirement records, works only an average of 20 years for the state before retiring. Therefore, the 35 to 40 years became 20 years, then became 10 years, and then, in some cases, became five years. Second, the consecutive-year requirement was meant to restrict the award to longtime employees, which also has been eliminated in most cases. Third, the requirement to actually “retire” at the time the benefit was to be received gradually has been eroded as well. For example, the EGUSD Superintendent, Steven Ladd, received a contract last December that provides the benefit for himself and his wife the moment he leaves the school district–retiring or not retiring!
Each public agency in California has its own unique and quirky method to determine eligibility. There are no agreed to financial standards on which to base any estimates of the financial liability across all public agencies.
Informal Agreements. There is no state standard for providing this $1 million benefit to public employees. Some of the benefits accrue simply because they are in the employee handbook; others through union agreements which are constantly changing; others through local legislation and a few according to state statutes.
You can see the problem here. The 1982 employee handbook upon which a teacher based his decision to work for a particular school district is not likely to be available in 2010 when this employee retires and seeks the benefit. Old documents may not be available for review. Is that important? Probably not when the benefit was potentially worth $1200 ($5/month); however, the benefit is now worth $1 million or more to each beneficiary.
When you have something worth $1 million, given to you informally 25 years ago, you can bet the attorneys will be involved. We’ll even throw in an example of what they will be doing for their clients, each of whom can afford $100,000 in attorneys’ fees. For a $1 million benefit you, too, would sue!
On July 27, 2006, the Elk Grove Unified School District altered its agreement with its unions regarding this benefit. In essence, they extended the “vesting” period from 10 years to 15 years. For example, those employed prior to July 1, 2006 are only required to work 10 years for the benefit; those employed after July 1, 2006 must work 15 years to “vest” or to be slightly more ambiguous “be eligible” for the benefit.
However, if you were employed by the district prior to July 1, 2006, and left for five years in 2010 but came back in 2015, you would be required to work 15 years for the same benefit. The applicable line making this change simply states that “he or she must again meet the entire vesting requirements in place at the time for benefit eligibility.”
The Elk Grove Benefits Trust Board, the board that designed this language, spent 15 minutes at their July 27 meeting assuring themselves that they understood the words they wrote! It was quite an experience to watch these well-meaning board members trying to figure out their own language! Imagine an attorney before a jury persuasively arguing a wrong interpretation of those words!
Legislature is out to lunch. When you have the above fiscal and organizational nightmare visible to the public eye, you would think that there might be scores of bills addressing this issue–trying to resolve what possibly is the greatest fiscal challenge the state has ever faced.
But there are only two bills–one to allow public employees with access to two benefits to be able to choose the better one (AB 2132), and another late entry allowing CalPERS to enter the arena (SB 1729). Eight thousand public agencies, with thousands of different provisions regarding the promises made in thousands of formal and informal agreements–all of which have changed over time; a financial liability exceeding $200 billion, and no funding. We think even CalPERS will demur.
So, let’s go back to paragraph one. “No liability over $300,000 can be incurred without a vote of the people.” Seems like a pretty simple statement that an attorney for a single taxpayer can use to “wand” the problem away. We can probably count on the Legislature to continue with lunch. We suspect, however, that the state’s taxpayer groups will skip dessert and head to the nearest courtroom.
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