Crisis looms for retiree healthcare

Times Staff Writer

Gov. Arnold Schwarzenegger received more bad fiscal news Monday as a commission he appointed said California needed to immediately set aside $1.2 billion to pay for lifetime healthcare promised to state employees.

The governor is already struggling to find ways to balance a budget that his office says has plunged at least $14 billion into the red. But the panel said the commitments made to retirees were so large they would overwhelm the budget if money to cover them was not set aside now.

Local governments should do likewise, said the panel, which estimated the costs of retiree healthcare benefits for both state and local governments at about $118 billion over the next 30 years.

Some experts say that number was low because it assumed that healthcare costs will stop spiraling upward within a few years.


“This is not an issue that should be passed on to future generations,” said Gerald Parsky, the commission chair. “It is an issue that should be dealt with now.”

Administration officials said they would respond to the panel’s recommendations within 30 days.

“This is not going to be a report that will collect dust on a shelf,” said H.D. Palmer, deputy director of the California Department of Finance.

Schwarzenegger created the panel, called the Public Employee Post-Employment Benefits Commission, after his 2005 plan to save billions by replacing government pensions with a 401(k)-style system for new workers flopped. Opponents of that plan warned a sympathetic public that it would cause police and fire officials to lose their death and disability benefits, and Schwarzenegger withdrew the proposal.


Since then, the governor has avoided calling for cuts in pension benefits.

The commission he appointed includes several union representatives. Its report concludes that gold-plated health benefits enjoyed by hundreds of thousands of government workers -- a rarity in the private sector -- are justified.

The panel’s refusal to call for a reining in of benefits irked some fiscal conservatives. They say government workers in California are more richly compensated than their counterparts in other states and at private companies.

“Other states simply don’t unilaterally grant retirees these healthcare benefits for life,” said Jon Coupal, president of the Howard Jarvis Taxpayers Assn.


He said the commission should have proposed cutting the costly health benefits and raising the retirement age of state workers.

Former Republican Assemblyman Keith Richman, who is leading an effort to place an initiative on the ballot that would cut pension benefits for government workers, agreed.

“We have people retiring at age 50 with more than 100% of their salaries and lifetime health benefits, and the commission didn’t address that at all,” he said. “The benefits offered to public employees in this state are extravagant. . . . It is just wrong.”

Richman, a physician, was also critical of the commission’s projections on healthcare cost inflation.


The report assumes that healthcare costs for state workers will increase an average of about 4% a year over the next 30 years. But the nonpartisan California Healthcare Foundation has said the increase could be more than double that.

Since 1998, the cost of providing health benefits to UC retirees, for example, has grown by 12% a year, according to a legislative report.

The commission and its critics agreed on one point: A fiscal crisis is brewing. Some local governments will be particularly hard hit without immediate action.

A Times analysis published in June found that the Los Angeles Unified School District, already struggling financially, is spending more than 4% of its budget on healthcare for retirees. In less than 20 years, those costs could consume 17.6% of its overall spending.


In the Bay Area, Contra Costa County’s retiree healthcare tab could drain more than 11% of its budget by 2027 -- money that would be taken from public safety, health programs and other government services. Retiree health benefits currently account for 2.5% of the county’s spending.

“You can’t close your eyes to this,” Parsky said.