Tuesday’s May revise budget not only highlights this year’s good financial situation, but also what future liability California is facing. One of the largest unfunded liabilities is the cost of health care for retired public employees.
In California, the cost of pensions for public employees is a major burden on the state’s budget. Lesser known is the fact that on top of their pensions, most public employees receive what is called other post-employment benefits (OPEB), most of which are full health care benefits.
Due to longer life expectancy and rising health care costs, these OPEB are rapidly becoming another hole in the state’s finances. Under the current system, these costs are not funded and the state makes pay-as-you-go payments. The amount of unfunded liabilities reached $63.8 billion in 2013.
Governor Brown’s May revise included OPEB as one of the major upcoming liabilities for the state. The budget also stresses that between now and 2016-2017, the costs of retired state employees’s health care is projected to rise by 59 percent. This means that if California is expected to pay $1.8 billions in OPEBs, this amount would rise to $2.86 billion for the 2016-2017 budget.
In the upcoming weeks, negotiations will start in the California Legislature over how to use this year’s extra revenues. Addressing the unfunded heath care costs for retired public employees should be one of the priorities.