After years of making concessions to Gov. Jerry Brown, California labor leaders had hoped that the fourth-and-final-term Democrat finally would be in a giving mood.
But after the governor’s budget proposal two weeks ago, several unions are bracing for tough talks in the coming months about Brown’s determination to cut the state’s costs of insuring employees and retirees.
A range of options are on the table, from cheaper insurance plans and smaller subsidies to extending how long new hires must work to qualify for retiree health benefits. If history is a guide, Brown will prevail, said Mike Genest, a Department of Finance director under former Republican Gov. Arnold Schwarzenegger.
“Governors get 90 percent of what they want,” said Genest, who had a long state career before retiring in 2009. “I think Brown will get a substantial piece of what he wants here.”
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Brown first discussed overhauling state government’s retiree medical program during his comeback campaign in 2010. His latest budget proposal notes that the state’s “platinum” health care benefits are rarely found in the private sector.
State retiree medical costs are among the government’s fastest-growing expenses, according to the Governor’s Office. In 2001, those benefits accounted for $458 million, just 0.6 percent of the general fund budget. This year, the bills will total $1.9 billion or about 1.6 percent of the budget. Active employees’ insurance will cost about $3 billion this year.
California offers one of the most generous retiree-health benefit plans in the nation. Up to 100 percent of a retiree’s medical costs are covered, even if they retire long before qualifying for Medicare.
Many state workers – about one-third – retire before they turn 65 and qualify for the federal medical program. The state remains responsible for their insurance, and they account for half of the state’s retiree medical costs.
The remaining two-thirds of retirees in Medicare receive a state-subsidized “wrap around” policy that helps cover out-of-pocket expenses. The benefits also extend to spouses and other qualified dependents, with the state paying up to 90 percent of costs.
The state sets nothing aside for future retiree medical expenses. Unlike pension obligations covered by trust fund investments, state medical bills are pay-as-you-go annual budget appropriations.
That’s the most expensive way to do business, said Mike Shires, a Pepperdine University budget expert, and it obscures the true future expense of the promised benefits. It’s only been within the last decade that California has tracked its long-term health liabilities.
Those unfunded medical obligations now stand at an estimated $71.8 billion and will grow to more than $300 billion by 2048 if nothing changes, the Brown administration estimates.
Brown soon will begin bargaining with unions representing the civil engineers, scientists and correctional officers for changes he wants. Some proposals are clearly outlined in his budget plan: Active employees would split the cost of medical insurance 50-50 with the state. New hires would have to work longer to receive retiree health benefits. CalPERS, which is not under Brown’s control, would offer a high-deductible option with a health savings account.
Making employees pay more could be a tough sell for labor leaders after years of furloughs and pension contribution increases that cut into their members’ take-home pay. Bruce Blanning, executive director of the state’s civil engineers’ union, one of the groups with a contract expiring this year, downplayed the unfunded liability projections during a recent interview.
“Well, in general, health insurance premiums are paid at the time you need health coverage,” Blanning said, “So that $300 billion sounds ominous. If the governor wants to set aside money ahead of time, that’s fine. But if he wants to take a chunk out of employees’ paychecks now, that’s a problem.”
While most state employees pay nothing in advance for their retiree health benefits, three state-employee unions agreed a few years ago to contribute to a special pension-style medical benefits trust fund. California Association of Highway Patrolmen members, for example, contribute 3.9 percent of their pay. The state matches it.
Jon Hamm, the patrol union’s executive director, said the union agreed to the state’s first-of-its-kind prefunding plan several years ago out of concern that members’ benefits would collapse otherwise.
“This is an absolute honest approach at dealing with significant funding concerns for a future benefit,” Hamm said.
If a similar program were applied to all state employees, the Brown administration projects, the state would have to ante up another $600 million each year for its share, “but ultimately (it would) decrease the retiree health care liability, saving billions of dollars in the long term,” Brown’s budget proposal states.
California’s unfunded retiree health promises in 2012 equaled $1,721 per resident, according to Standard & Poor’s rating service. Only New York had a higher total of unfunded retiree medical obligations that year.
Standard & Poor’s found that 19 states haven’t saved anything for those future costs. Of the remaining states that set money aside, just four had the assets to cover at least one-half of their long-term promises to retirees. Another 21 had funding levels of less than 10 percent.
Leslie Scott, director of the National Association of State Personnel Executives, said states everywhere are considering how to cut “not only retiree health, but current employee health care costs. It’s taking a larger and larger chunk of budgets.” Options include pre-funding and trimming benefits, she said.
Arizona led the nation with 75.9 percent of its anticipated state retiree medical costs prefunded, according to the survey, although Arizona State Retirement System spokesman Dave Cannella said it’s more than 90 percent now. Pew Center on the States called the system a “solid performer” in the center’s national assessment of benefit plans.
“We prefund it. We’re really proud of it,” Cannella said. “It’s one of the strongest retirement health plans in the nation.”
Arizona’s benefits cost relatively little, but they’re also much less generous than those in California. Arizona’s 65,000 state retirees receive from $50 to $260 per month, Cannella said, depending upon the insurance plan selected.
“There’s going to be less of something,” Genest said. “Less care, less money in the pay envelope, or both. That’s what ‘cost control’ means.”
Call Jon Ortiz, Bee Capitol Bureau, (916) 321-1043.