Benefits in the Balance: The Uncertain Future of Public Retiree Health Coverage

Report finds that costs outpace budgets; spending to exceed $31 billion annually by year 2020 in California


Local governments and school districts in California face rapidly rising retiree health care costs for their employees, according to a report released today by the California HealthCare Foundation (CHCF).

Beginning in 2007, a new government accounting standard will be phased in, requiring public agencies to estimate and report the cost of future retiree benefits, and drawing increased attention to retiree health care spending. A summary report, Benefits in the Balance: The Uncertain Future of Public Retiree Health Coverage, was released Tuesday morning during a presentation at the National Center for the Preservation of Democracy in Los Angeles. The report draws from multiple sources, including a new CHCF-commissioned analysis of public sector retiree health spending by the Center for Government Analysis.

“This report is intended to stimulate a frank conversation about this important issue,” said Mark D. Smith, M.D., M.B.A, president and CEO of the California HealthCare Foundation. “The two most important questions at this point are: ‘How big a problem is it?’ and ‘What are the financing options open to public agencies?'”

Most public agencies do not set aside funds to pay for health coverage promised to employees when they retire. Instead, each year they pay only for existing retirees as bills come due. An aging workforce, increased life expectancy, and health cost inflation are among the factors driving up the costs of these benefits, raising questions about whether this “pay-as-you-go” approach can be sustained over the long term.

Using conservative estimates, retiree health care costs for public employees in California are expected to reach $31 billion per year by 2020, according to the Center for Government Analysis. Without adequate planning, increased spending devoted to retiree health care could eventually force school districts, counties, and cities to divert resources from important community services.

Expenditures for retirees already comprise from 1 to 3% of many public agency budgets. While some agencies do not pay for retiree coverage at all, others spend as much as $10,000 annually for each retiree. Public employees make up about 15% of the state’s workforce.

Obligations are significantly higher when retirement benefits promised to public employees still on the job are considered. This year, the State of California will spend about $1 billion, or 1% of its general fund budget, for health coverage for retirees. In contrast, it would require an estimated $6 billion per year for 30 years to fully fund obligations to state employees.

“These accounting changes will illuminate the significant and growing impact of retiree coverage on many public agency budgets,” said Marian Mulkey, M.P.P., M.P.H., senior program officer at the California HealthCare Foundation. “Difficult decisions about spending priorities will follow.”

“By confronting this issue head-on and weighing options, elected officials, administrators, unions, and other decision-makers can begin to identify remedies to this complex problem,” said Dr. Smith.

Public Retiree Health Coverage FAQ

How do public sector agencies finance retiree health care?

Most public agencies pay for retirees’ health care only when bills come due; they do not set aside funds to finance commitments to retirees in the future. Because health care costs and the number of retirees both are projected to grow in coming years, spending under this “pay-as-you-go” approach will rise rapidly if public agencies continue these practices.

What is GASB 45, and how will it change public sector financial reporting?

GASB 45 is an acronym for Government Accounting Standards Board Statement No. 45, a new requirement for accounting and financial reporting by public employers for post-employment benefits not including pensions. The standard requires public entities to treat “other post-employment benefits,” or OPEB, similarly to pension benefits. That is because benefits constitute compensation for employee service and should be associated with the time period in which the exchange occurs, rather than later — often many years later — when benefits are paid or provided. GASB 45 will be phased in over three years, starting in 2007, with larger public agencies facing earlier deadlines for complying with the standard.

Why is the future of public retiree health coverage uncertain?

Rising health care costs, an aging workforce, and baby boomer retirements will increase the funding gap for many counties, cities, and school districts. Disclosure of the agencies’ unfunded liabilities is expected to shine a light on the significant and growing impact of retiree coverage on many public agencies, many of which will face difficult decisions on spending priorities.

What prompted CHCF to commission this analysis?

CHCF continues to support increased accountability and transparency in health care in California. This study helps to quantify an emerging problem that eventually could affect health care for up to 15 percent of California workers. CHCF seeks to promote a frank discussion among policymakers and stakeholders about the magnitude of the problem and potential solutions.

Are there important parallels to the private sector?

Public and private employers differ greatly in the nature and financing of their post-employment benefit commitments. When similar accounting standards were imposed in the private sector in 1992, the rate of employers offering retiree benefits dropped by half. CHCF hopes that by confronting the issue, policymakers and stakeholders can identify remedies that take into account the unique demands and needs of the public sector.

What can be done to address rising costs?

Factors such as the demographics of employee groups and underlying health cost trends are beyond the control of public sector decision-makers. Other factors, such as eligibility rules, covered benefits, and network characteristics, can be altered by agencies or through collective bargaining. Although there are no simple solutions, failing to address the issue now could limit future options.

What explains the wide variation in retiree coverage costs among public employers?

Many factors contribute to variation. Variation in insurance premiums is associated with scope of benefits; network options; geographic location; and whether retirees are rated as part of a pool that also includes active workers or whether they are in their own separate pool, among other factors. Agencies also differ widely in how much they, as employers, contribute to coverage versus how much they require employees to contribute, both for the individual retiree and for any dependents.

What methods were used for obtaining current retiree costs and forecasting future costs?

The Center for Government Analysis study is based on audited financial documents, known as Comprehensive Annual Financial Reports (CAFRs), from a representative sample of more than 100 public sector entities (counties, cities, school districts, and special districts) in California. The study also included data from the California State Controller’s annual reports and a California Association of Counties survey. Based on past trends (an increase of 10 to 15% per year in health care costs and 3 to 4% growth per year in the retiree population), the researchers adopted a conservative forecasting assumption of 16% annual growth. In addition, the forecast costs are provided as a range, with a band of +/- 10% around each point estimate.

What is the Center for Government Analysis?

The Center for Government Analysis is a non-partisan public policy analysis firm established in 2003 to provide readily accessible data regarding state and local government finances in the United States. As an independent corporation, the Center for Government Analysis is not influenced or controlled by any financial contributor or special interest. More information is available at www.govanalyst.com.


About the California Health Care Foundation

The California Health Care Foundation is dedicated to advancing meaningful, measurable improvements in the way the health care delivery system provides care to the people of California, particularly those with low incomes and those whose needs are not well served by the status quo. We work to ensure that people have access to the care they need, when they need it, at a price they can afford.