Editorial: California’s $31 billion time-bomb

It is anything but a new discovery that unfunded public employee retirement costs — particularly those fast-growing health benefit charges — amount to a looming fiscal crisis in California and nationwide. But at least from now on the politicians will find it harder to play hide-and-seek with the extremely disturbing numbers.

The Governmental Accounting Standards Board, an independent association that sets authoritative standards for state and local government financial reporting, has issued a new policy bulletin that will have the effect of requiring public agencies to estimate and report the cost of future retiree benefits starting in 2007.

Taking a closer look at how this policy will impact the state, the California HealthCare Foundation commissioned a think-tank report that was released last week. The report’s conservative estimate is that retiree health care costs for public employees in California are expected to expand ten-fold to $31 billion per year by 2020.

Public employees make up about 15 percent of the state’s workforce. Expenditures for retired civil servants already comprise from 1 to 3 percent of many public agency budgets. Some agencies spend as much as $10,000 annually for each retiree, although there is no general rule.

This year, the state of California will spend about $1 billion, or 1 percent of its general fund budget, for retiree health coverage. Fully funding these obligations to state employees would require an estimated $6 billion per year for 30 years.

The total burden becomes significantly higher when adding in the retirement benefits promised to public employees still on the job. Past trends point to yearly healthcare cost increases of 10 percent to 15 percent, plus a civil service retiree population growing 3 percent to 4 percent yearly.

What happens now is that most public agencies hide the extent of the problem by taking a pay-as-you-go approach, paying bills when they come due instead of setting aside funds to pay for future benefits. This scheme is likely to soon become impossible due to the aging baby-boomer workforce, increased life expectancy and especially the out-of-control health care expenses.

California public officials will soon be forced to stop avoiding hard choices about the trade-offs between retiree health care obligations versus more current spending needs, including competing public employee goals such as salary/benefit increases.

The California HealthCare Foundation report freely admits there are no simple answers for what to do about the expanding government retiree benefit load. But the new disclosure requirements by the powerful Governmental Accounting Standards Board are still providing an important service. Spotlighting the extent of the problem is a vital first step toward fixing it.

And, actually, there is a simple answer for how to puncture the retiree benefit balloon. But because of intense political pressures, just being simple doesn’t make it easy. That answer is to convert government retirement benefits gradually to something more like private sector benefits, an idea that got crushed into oblivion when Gov. Schwarzenegger tried moving in that direction last year.

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