Rising health care costs fuel California’s $91.5 billion retiree liability

California and its state employees now face a $91.5 billion liability for retirement health and dental plan benefits, the State Controller reported Thursday.

In the last fiscal year, the cost of providing retirement benefits to state workers and their dependents — Other Postemployment Benefits — jumped by $6.3 billion.

The increase in liability reflects a long-term financial challenge for California. While the state’s goal is to fully fund these benefits by 2046, recent decisions to suspend contributions for two years threaten to delay that goal. By pausing contributions, the state budget is freed from a $700 million expense.

Several factors have contributed to this growing liability. According to the report, higher than expected health care costs and new federal regulations are driving the liability increase. UC Irvine Health Professor Dylan Roby explained that the increase stems primarily from the state’s retiree benefit program paying more for services than actuaries had predicted.

“It’s not clear if that spending was due to increased use of services or increases in prices,” Roby said, adding that he thinks that health care costs are the more likely reason. “Health care spending can go up due to both, or either reasons.”

The report also cited the Inflation Reduction Act’s impact on Medicare prescription drug benefits, which increased the liability by nearly $2.5 billion.

The unexpected spending requires a recalibration for future years, Roby explained. Actuaries will integrate the higher spending trend into their projections which could increase retiree contributions as health insurance costs rise.

Before the prefunding approach, the state paid for retirement benefits by covering the minimum amount needed to fund the costs as they were due with the state general fund, a system known as “pay-as-you-go.”

To address the rising healthcare costs at the time, the state shifted its approach.

Funding began in 2010 with the goal of 100% by 2046

Prefunding efforts started in 2010 when a collective bargaining agreement was set into action. Since then, employee contributions are deposited into the California Employers’ Retiree Benefit Trust to generate investment income.

Money from the CERBT fund, which is managed by CalPERS, must stay in the trust until 2046 or until the liability is entirely funded.

“The estimated liability for retiree health and dental benefits is a significant long-term cost facing California, which is why the state set a responsible goal to fully fund these benefits over the long term by 2046,” Controller Malia Cohen said in a statement.

As of June 30, 2024, 15 out of 17 membership groups — about 80.9% of the active covered members— have entered into prefunding arrangements with the state, according to the State Controller’s report.

In the fiscal year 2024, the prefunding efforts resulted in a 9% funding status, with the state funding about $3 billion.

While the percentage is seemingly small, it represents a significant step from the state’s “pay-as-you-go” system. Nick Schroeder, the Legislative Analyst’s Office’s public employment analyst, said it’s important to remember that this funding plan is still in its early stages.

The 9% funded status shows how far the state has to go to fully fund these benefits by 2046, Schroeder said, but it also indicates how much progress has been made since the effort was launched in 2010.

These funds are accumulated to generate long-term investment income, which helps alleviate the financial strain on future state budgets. Cohen further explained that the long-term priority is to achieve the funding goal despite the short-term considerations of the state budget deficit and rising healthcare costs.

“Given the current climate of economic uncertainty and looming budget shortfalls, the state’s current actions to pause prefunding contributions will save General Fund dollars,” Cohen said in a statement. “However the most fiscally prudent plan for fully funding these promised health and dental benefits includes a return to prefunding when feasible, as well as remaining vigilant in our efforts to contain healthcare costs.”

This story was originally published August 9, 2025 at 5:00 AM.