Governor’s budget omits $380 million state-employee retiree-health-care item

The governor calls it a “responsible, common-sense” budget. The legislative analyst suggests that the budget “contains a significant number of downside risks and is based on a number of optimistic assumptions.” Dan Walters of the Sacramento Bee uses the words “budget trickery.” With that line up, the truth can be anywhere, can’t it?

Every year I analyze the state budget looking at a couple of items. First, the number of new state jobs proposed. When a Republican governor gives his State of the State speech, you never hear the number but you can count on a Republican administration growing government. This year, the net increase in new state jobs again exceeds 5,000. In next week’s column, we’ll let you know specifically where these opportunities are.

The second item I analyze is Budget Item 9650, Health and Dental Benefits for Annuitants. State-employee unions are great negotiators and this is one of the most valuable benefits of state employment–fully paid health and dental insurance in retirement for life. When an employee works for the state, the state pays up to 85 percent of the monthly premium. When they retire, the state pays 100 percent of the monthly premium (90 percent for dependents).

There is no cap on the premium. The budget always indicates that state health insurance for employees began in 1962 as a $5 per month item. At a normal rate of inflation, the state would be paying $40 a month at this time. However, state purchasing practices being what they are, the state will be paying close to $869 a month per retiree this year.

Every year, this item grows at a rate of almost 40 percent, taking into account more state retirees and higher premiums. However, in this year’s proposed budget, Item 9650 for Health and Dental Benefits for Annuitants doesn’t grow at all.

What the Growth Should Be. The budget item totaled $364 million in 2000-01; $436 million in 2001-02; $504 million in 2002-2003; $696 million in 2003-04; $796 million in 2004-05; $887 million in 2005-2006; and $1.109 million in 2006-07. The proposed spending in fiscal year 2007-08 is $1.109 million (with a slight variation due to a still disputed $38 million Medicare Part D reimbursement to the state).

During the same period of time, state retirees eligible for benefits have increased from 110,132 in 2000-01 to 137,583 in 2006-07–a 25 percent increase, or about 4 percent per year. Many state employees retire before being eligible for Medicare at age 65 and the state pays the full rate. However, the Kaiser Medicare rate paid by the state has increased over 295 percent in the last seven years–that’s an annual rate of nearly 42 percent. In 2000, the state’s family Kaiser Medicare rate was $294 a month. The 2007 rate is $869 a month. In the
same seven years, the Kaiser non-Medicare rate increased only 195 percent.

This year’s Medicare rate increases are substantial–up nearly 32 percent from last year and you might expect the same 4 percent increase in retirees.

Therefore, the budget for this line item would be set to increase substantially.
A back of the envelope calculation would quickly yield a more realistic number.

Each annuitant received $9,180 in benefits last year. The price went up 32 percent and the amount this year would total $12,117 per annuitant. That totals $1.344 million. Add the 4 percent increase in the number of qualifying annuitants and you would have a total of $1.398 million–nearly $380 million higher than included in the governor’s budget proposal.

I don’t know what the governor had in mind, but the administration’s rhetoric suggests we have a “retirement crisis,” with average state retirements over 10,000 per year, up from 6,000 per year earlier in the decade. Additionally, the record shows that CalPERS’ ability to control health costs decreases every year, particularly in the retiree-health-insurance arena. High retirements and high health-care-cost increases would appear to ensure an increase in this item.

However, Item 9650 of this year’s budget forecasts an increase of zero. Maybe the legislative analyst should have included in its characterization “substantial cost omissions.”

A Method to Reduce These Costs. The administration has no control over CalPERS’ inept health-care negotiating skills and Government Code 22825.1 guarantees retiree health care to each qualifying state employee. Therefore, it appears that the “retiree health care” item is uncontrollable by the administration.

However, it may not be so. One method of controlling the costs of this item is simply to avoid the cost. How do you do that? You encourage state employees to work longer–and you do it with a public-relations campaign, thereby avoiding the unions.

Most state employees only work 20 years, and most retire in their late 50s. In addition, when state employees retire at 55, they lose 47 percent of their pension, compared to retiring at 65. When they take social security at age 62 instead of at 65, they lose 25 percent of their monthly benefit. Each state employee who works from 55 to 65 walks away with a combined social security-state pension benefit 60 percent larger than those who retire at 55.

Does it cost the state more to keep that employee, rather than replace them with a younger employee? Not really. And the “retiree health care” cost is the biggest factor of all. You saw that number–$12,117 a year. Over five years that number is $60,585.

Let’s use the example of an Associate Government Program Analyst retiring at the top step of $62,064 a year. The replacement is an Associate Governmental Program Analyst at the bottom step of $51,060. Automatic increases of 5 percent per year quickly bring the replacement’s salary to the top step of $62,064 a year. The state may save $28,314 in salary over the five-year period by replacing the retiring employee with a younger employee.

However, the state pays $12,117 a year for the younger employee’s health
insurance and $12,117 a year for the retiree’s health insurance. In essence, the state pays $60,585 ($12,117 a year times five years equals $60,585) in order to save $28,314. That’s a loss of $32,271 per retiring employee.

By encouraging only 5,000 state employees (or less than 2 percent of the state’s work force) to work 10 years longer and reap larger pensions and social security, the state can save $1.6 billion over the 10 years, or at least $160 million per year.

This could be done with no changes in union agreements and no negotiating! Just good public relations. Will state employees be receptive? Absolutely.
How do we know that? Just count the number of retired annuitants on the payroll this year versus 1997. The number has increased from 2,856 to 5,506, a 93 percent increase. That tells you right there that retired state employees are coming back to work in droves–voluntarily!

All state employees hear is “2 percent at 55.” The administration can surely come up with a better slogan–such as “60 percent more pension at 65”! You would see an instant reduction in retirements and a slowing in the growth of Budget Item 9650. We don’t think it will stop growing–that’s a fantasy; but all you have to do is slow the growth of this item to save $100-200 million per year.

And you can do so without taking away the benefits from any state employee.

Ken Mandler teaches a monthly workshop on How to Land a State Job. The workshop focuses on a variety of tactics and strategies designed to make the state job process an effective one for you. The workshops are three and one-half hours and include over 400 pages of information for your review. The next workshops are on Saturday, January 27, 9 a.m. to 12:30 p.m.; or Tuesday, February 27, 6:30 p.m. to 10 p.m. The cost is $84. You can sign up by calling (916) 443-6788 or visiting the Web site today!

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