The 2008-09 Budget Bill, as approved by the California Legislature, continues
the state's practice of pay-as-you-go funding of retiree health (OPEB) expenses.
The budget bill eliminates a program that provided supplemental subsidies for OPEB
costs for state retirees living in certain parts of rural California.
2008-09 Budgeted OPEB Expenses. The budget bill includes $1.2 billion of direct
cash outlays for pay-as-you-go OPEB expenses for state retirees and their dependents
in 2008-09. (This figure does not include estimated implicit subsidy costs of over
$330 million for OPEB expenses, which are paid through state departments' contributions
to active employees' health premiums.) This represents a 7.6 percent increase over
estimated pay-as-you-go OPEB expenses for the state in 2007-08. About $37 million
of the 2008-09 costs will be paid from employer drug subsidies received by the state
through the Medicare Part D program.
Budgeted Increase Much Less Than In Some Recent Years. While it remains much higher
than the rate of inflation in the overall California economy, the 2008-09 OPEB cost
increase is one of the lowest the state has budgeted in recent years. In large part,
this is attributable to the actions of CalPERS to minimize 2009 health premium increases
for the state and its members. CalPERS' actions to use program reserves to help
offset increasing costs in its PPO programs resulted in a 0 percent premium increase
for 2009 for its PERS Choice program, which has a significant weighting in the statutory
formula that determines the state's OPEB contributions to retirees. In addition,
quirks in the statutory formula helped minimize cost increases. For example, a higher-cost
PPO plan, PERSCare, was replaced in the statutory formula weighting this year by
the much lower cost Blue Shield NetValue HMO product authorized by CalPERS, and
this change contributed to the relatively low rate of increase in budgeted OPEB
costs.
Lower-Than-Expected Premium Growth Will Affect 2008 OPEB Valuation Favorably.
In 2007, the State Controller's Office released the first valuation of California's
unfunded OPEB liabilities, as directed by the Legislature. The valuation estimated
that the state's unfunded OPEB liability totaled $48 billion and that additional
annual expenditures of about $1.2 billion (in current dollars) would be required
to amortize that liability over 30 years. The lower-than-expected premium growth
rates negotiated by CalPERS in 2007 and 2008 will affect the state's second valuation—likely
to be released in fall 2008—favorably. While actuaries will consider many factors
beyond the rate of premium growth, we believe it likely that this valuation will
gauge the state's unfunded liabilities at a lower level than those listed above.
Given the wide variability in annual premium increases, this type of fluctuation
is common for employers with OPEB liabilities. In any event, the state's OPEB liabilities
are almost certain to remain the largest single component of the unfunded liabilities
for statewide pension and retiree health programs. These unfunded liabilities for
all statewide pension and retiree health programs currently are estimated to exceed
$100 billion—apparently, the largest such figure of any state.
Budget Eliminates Rural Health Care Program for State Retirees.
Assembly Bill 1389 (Committee on Budget), one of the "trailer bills" passed by the Legislature to implement parts
of the budget, eliminates authority for the state's Rural Health Care Equity Program
(RHCEP) for state retirees. The RHCEP was created by Chapter 743, Statutes of 1999 (SB 514, Chesbro), to provide subsidies for health care premiums for both state
employees and annuitants in rural areas not served by an HMO under CalPERS' approved
health care programs. AB 1389 eliminates the program's subsidies for annuitants,
but preserves them for state employees. The action reduces General Fund expenditures
in 2008-09 by $5.5 million, with savings continuing on an ongoing basis. This change
will increase the combined out-of-pocket health care expenditures for several thousand
rural retirees and their families by a like amount. Unlike most other retirement
programs, RHCEP involved statutory language that explicitly authorizes the Legislature
to change or terminate the program.
Other OPEB-Related Legislation and the Bipartisan
Commission Report of January 2008. The state's bipartisan Public Employee
Post-Employment Benefits Commission (PEBC)—appointed by legislative leaders and the Governor—recommended
to policy makers in January 2008 that government at every level in California prefund
OPEB liabilities just as they do pension liabilities. Sponsored by the PEBC and
signed by the Governor on September 27, 2008, AB 1844 (Hernandez) and SB 1123 (Wiggins)
contain various provisions to enhance disclosure and transparency of public pension
and OPEB liabilities.