Retiree Health Costs Soar

The cost of public-employee pensions has attracted increasing concern in California and across the nation. But pensions are not the only retirement benefit whose growing costs are straining budgets and restricting governments’ ability to provide basic services. Retired public employees – unlike their counterparts in the private sector – typically qualify for free or low-cost health insurance. These benefits may begin as early as age 50 and continue for life, sometimes supplementing Medicare. While a great deal for retirees, these "Other Post-Employment Benefit (OPEB)" programs are costing California municipalities hundreds of millions of dollars a year at a time when layoffs and cutbacks have become all too common.

What makes matters worse is that, unlike with pensions, most governments have not begun to set aside assets to fund these future liabilities. Those few that have – Anaheim would be one example – still face massive funding gaps that may reach into the hundreds of millions or even billions of dollars.

But there is some good news: Some local governments, such as Orange County, have taken decisive actions that point the way to a solution of the OPEB dilemma. Significantly, they have done so not by raising taxes but by initiating programmatic reforms.

First, some background may be helpful here. Because of the prevalence of defined benefit- pensions in the public sector, many workers retire long before age 65, when Medicare kicks in. They are then allowed to remain on the same group plan with younger active employees. This benefit alone is worth a few thousand dollars per year. Governments often also pick up some or all of the premium, producing a total benefit that can exceed $20,000 a year in value per retiree.

At 65, Medicare assumes primary responsibility for most health care costs, but many state and local governments continue to provide health coverage in the form of "Medigap" supplemental insurance. In such cases, state and local governments promise lifetime health insurance to workers.

OPEB packages vary widely among governments. According to Girard Miller, chief investment officer of the Orange County Employees Retirement System, "one third of plans are Cadillacs, one third are Chevys, one third are skateboards."

But even in their most basic form, retiree health-care benefits are more generous than what most private sector retirees can expect: nothing.

And the costs are immense. California governments have accrued a long-term retiree health-care liability of over $130 billion, a figure almost certain to rise because of the baby boom retirement wave and unchecked health-care cost trends.

Present taxpayers are now paying almost the entire bill. Unlike pensions, most governments treat retiree health-care costs as an operating expense, paying for benefits directly out of the annual budget instead of a separate trust fund. They therefore require current taxpayers to compensate retired workers for services rendered decades ago.

But as daunting as California’s OPEB problem may seem, the time for reform is ripe. OPEB programs remain relatively undeveloped. Many important decisions have yet to be made regarding benefit structures, cost sharing and funding arrangements and benefits’ legal status.

Some governments are better positioned to manage costs than others, either because they never allowed benefits to become overly generous (Fresno, for example), or because, like Orange County, they have cut benefits. Though this action was controversial and provoked a lawsuit by retirees, the County’s August victory in federal court over the Retired Employees Association of Orange County should encourage other governments to take similarly bold action.

Any OPEB reform must begin with an honest reassessment of the need to offer these benefits in the first place. Are retiree health-care benefits truly necessary to attract and retain a skilled workforce for government employment? Since the 1980s, private-sector corporations have drastically cut back on retiree health care. State and local governments have not. Is this because the public sector knows something the private doesn’t – or is it the other way around?

This piece originally appeared in Orange County Register

This piece originally appeared in Orange County Register