The Uncertain Future of Public Retiree Health Coverage

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Rising Retiree Health Insurance Costs Could Impact the Financial Viability of State, County, and City Governments and School Districts

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.

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Expenditures for retirees already comprise from 1 to 3 percent 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 percent 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 percent 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.

Reports and related resources are available through the link below.

About the California HealthCare Foundation

The California HealthCare Foundation (CHCF), based in Oakland, is an independent philanthropy committed to improving California's health care delivery and financing systems. Visit www.chcf.org for more information.

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