$16 billion budget waste looms

Some might think state Controller John Chiang’s announcement last week that a way has been found to “save the state more than $16 billion over the next 30 years, and reduce by $1 billion the annual amount we need,” would not only be considered cause for rejoicing, it would impel Sacramento lawmakers into taking action.

Actually, in the reality of day-to-day Capitol politics, the news has caused hardly a ripple thus far. The catch is that the state budget would have to start prepaying an additional $1.2 billion a year now, in order to escape having to pay an additional $2.2 billion a year very soon. And voters would not notice immediate visible benefits from this fiscal prudence.

What we are looking at here is another facet of the looming unfunded retirement benefit liability for California public employees, which worries every county, city and school district in the state — not to mention nationally. In this particular liability, California taxpayers are on the hook for some $48 billion to pay lifetime health coverage for currently working or already retired state government employees.

This health care obligation has never even been previously tallied, let alone pre-funded. But new federal Government Accounting Standards rules now require states to publicly disclose the future dollar amounts of their nonpension retirement benefit liabilities.

In 1961 the California Legislature blithely started offering state employees lifetime health protection after 10 years of service. It seemed a relatively modest commitment in that sunnier time of economic expansion and low health insurance premiums. First-year costs were just $4.8 million, at $5 monthly per retiree. Of course, people are now living decades longer, while skyrocketing health costs are a major national crisis in the making.

California’s yearly pay-as-you-go is currently $1.4 billion for public retiree health benefits. Chiang’s new actuarial report shows that if the state started prepaying an additional $1.2 billion a year into an interest-earning trust account, it would save one-third off the future annual obligation — which will soon be rising to $3.6 billion. That is more than the state spends on higher education at the University of California or the California State University systems.

In other words, Sacramento needs to put an extra $1.2 billion into annual savings right now, in order to eliminate predictable annual expenses of $2.2 billion over the long run. This would seem like quite a good deal, especially when considering that the controller’s $48 billion liability projection is probably too conservative because it assumes a health care inflation rate slowdown.

Gov. Arnold Schwarzenegger already has a special Public Employee Post-Employment Benefits Commission analyzing the entire retiree health coverage situation. This commission needs to call loud and clear for trust fund pre-payments to start. Otherwise our children will be paying even more of the bills for our indebtedness.

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