SACRAMENTO (CBS / AP) — The unfunded cost of providing future health and dental benefits to retired California state employees has grown by $8.1 billion in one year, to $59.9 billion, the state’s controller said Monday.
Controller John Chiang warned that the state should act quickly to reduce its long-term liability. The new actuarial projection comes as lawmakers in California and across the nation debate the cost of government pensions and benefits.
“It is critical that we begin making down payments on this tab and adopt strategies to reduce health care costs,” Chiang said in a statement.
Paying more money into the fund now would be cheaper in the long run because the investments would have time to grow along with the obligation, he said. State retirees are guaranteed health and dental coverage for life under a plan administered by the California Public Employees’ Retirement System, the nation’s largest public pension fund.
The state’s current budget has added to the unfunded liability. It provides only $1.4 billion of the $4.2 billion that the new actuarial projection shows is owed by the state for an additional year of costs, payments and interest.
About half the $8.1 billion increase over the past year is because CalPERS adjusted its assumptions. The pension fund determined that retirees are retiring earlier and living longer, and that premiums are higher than previously projected.
CalPERS had used surplus money to cover premium increases for two years, but premiums jumped when the pension fund stopped its subsidy last year.
Chiang is required to provide financial reports for the state’s unfunded retiree health care obligations under federal rules that took effect in 2004. Last year’s showed a $51.8 billion obligation, while the current report includes the unfunded liability as of June 30, 2010.
The $59.9 billion is the total present value of future retiree health benefits. The state is supposed to cover the annual costs on a pay-as-you-go basis, which this year would require paying $4.2 billion at a time when the state is struggling to close a deficit of nearly $27 billion.
Most of the money for providing the benefits would come from California’s general fund, which pays for most state services and is where the deficit resides.
Chiang recommended the state begin setting aside additional money to pay for future benefits, and not just rely on the underfunded pay-as-you-go model. Even paying part now would help reduce the long-term costs, he said.
Some state employee unions, including the one representing California Highway Patrol officers, have started doing that.
Chiang also urged the pension fund to take steps to reduce the cost of health care among its retirees, in part by promoting prevention and wellness programs. He also recommended switching from the traditional fee-for-service model to one that pays health care providers based on outcomes.
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