Los Angeles has the best-funded retiree health care among the nation’s big cities, a new study found, and it’s also paying a big price for a policy praised by many but practiced by only a few.
The city’s rare attempt to set aside money now to pay for retiree health care promised in the future accounts for nearly a quarter of the soaring retirement costs former Mayor Richard Riordan warns are driving the city toward bankruptcy.
Most cities, as well as the state of California, just pay the annual health care bill for their retired workers. Little or no money is set aside to invest and help pay for health care promised current workers when they retire, lowering the total cost in the long run.
It’s what some call “pay-as-you-go,” instead of “prefunding” like a pension. Debt is being deliberately passed on, critics say, unfairly forcing future generations to pay for services enjoyed by the current generation.
The Pew Center on the States issued a study last week of 61 cities, all either over 500,000 or the largest in a state, that found their total shortfall for retiree health care, $118 billion, exceeded their shortfall for pensions, $99 billion.
In total dollars, said the study, what the cities have promised in pensions is three times larger than their promised retiree health care. But pensions were 74 percent funded and retiree health care only 6 percent funded.
Los Angeles retiree health care was 55 percent funded in 2009 (the latest comparable data available) followed by Denver 51 percent, Washington D.C. 49 percent, Louisville 40 percent, Sioux Falls 37 percent and San Antonio 31 percent.
“Far earlier than most, Los Angeles began setting aside money for retiree health insurance in 1987, and the city has been praised by the bond-rating agencies for this practice,” said the study.
The three other large California cities included in the study had retiree health care funding levels far below the Los Angeles level: San Jose 9 percent, San Diego 3 percent and San Francisco less than 1 percent.
Why are billions of dollars in retiree health care debt viewed with much less alarm than billions of dollars in pension debt?
Some think retiree health care, unlike pensions, is a benefit that can be cut for current workers without violating a “vested” right, protected by court decisions under contract law. But the issue is not settled and may depend on local circumstances.
A superior court judge ruled in April 2011 that the retiree health care promised two San Diego policemen is an optional benefit that can be cut. The city later announced a deal negotiated with unions to cut retiree health care, saving $714 million over 25 years.
In an Orange County retiree suit, the state Supreme Court ruled in November 2011 that an “implied” contract for retiree health care can be created if “intent” by elected officials can be shown. A federal court later upheld the county’s retiree health care cut.
Many state and local government employers, only paying annual costs, did not calculate retiree health care debt until after the Governmental Accounting Standards Board adopted a new phased-in reporting policy in 2004.
An estimate of future retiree health care costs is probably a firmer number than estimates of 30-year pension debt, which can vary widely with investment earnings forecasts and actuarial choices for valuing assets and paying off debt.
Pension funds often expect to get two-thirds of their revenue from investment earnings. The three big California state pension funds (CalPERS, CalSTRS and UC Retirement) are forecasting 7.5 percent annual earnings.
Critics say the forecasts are too optimistic and conceal massive debt. Pension funds stand by their forecasts and note that a spurt of double-digit earnings could erase much of the debt.
A non-squishy number is the annual retirement cost. In local government, where personnel is the big budget item, growing retirement bills are crowding funding for other programs, leading to voter-approved pension reform last year in San Diego and San Jose.
Riordan and others in Los Angeles last year pointed to the alarming growth of the city’s retirement costs — doubling in the last seven years to more than 18 percent of the general fund and projected to reach 25 percent in the next four years.
If Los Angeles were not setting aside money to begin paying now for retiree health care promised in the future, the growth in pension costs might still be alarming. But the bite from the general fund would be much smaller.
Actuarial reports show the city contribution for most employees is 20.6 percent of pay for pensions and 5.6 percent of pay for retiree health care. For police and firefighters, the city contribution is 30.5 percent for pensions and 10.8 percent for retiree health care.
Several years after Los Angeles began setting aside money for future retiree health care in 1987, legislation by former Assemblyman Dave Elder, D-Long Beach, created a retiree health care fund for state workers.
But unlike Los Angeles, the Legislature chose not to put money in the fund. Now two decades later state workers have one of the most generous retiree health care plans with one of the biggest debts.
The unfunded obligation for state worker retiree health care over the next 30 years is $62 billion, state Controller John Chiang said last February. His actuarial report said fully paying for present and future retiree health care would cost $4.7 billion a year.
The state continues to pay only the annual premiums for the health care of current retirees. The general fund budget Gov. Brown proposed for the new fiscal year beginning July 1 has $1.5 billion for retiree health care, up from $800 million in fiscal 2004-05.
Brown’s 12-point pension reform plan in 2011 would have added five years to the retiree health care eligibility scale for state workers and changed “the anomaly of retirees paying less for health care premiums than current workers.”
The state pays 80 to 85 percent of health care premiums for current workers and 80 percent for dependents. If retirees have more than 20 years of service, the state pays 100 percent of average premiums and 90 percent for dependents.
A pension reform bill signed by Brown last September, AB 340, covered most of the governor’s 12 points but omitted state worker retiree health care. A Senate floor analysis of the bill gave this explanation: “Regarding state retiree health care vesting, state employee bargaining units have shown a willingness to bargain over this issue and so the Conference Committee believed it should remain subject to collective bargaining.”
As the new accounting policy that reports retiree health care debt took effect, the California Public Employees Retirement System created a new investment fund for local governments that choose to begin setting aside money for future retiree health care.
About 350 local governments are putting money in the CalPERS California Employers Retirement Benefit Trust Fund, valued this week at a total of $2.5 billion.
Ed’s Note: Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/