California's state and local governments face at least $118 billion in unfunded retiree health care costs over the next 30 years and should begin setting aside money now to cover those bills, a state commission recommended Monday.
"We must ensure that the promises that have been made to the valued work force will be kept in a way that won't pass the bill on to our kids and grandkids," said commission chairman Gerald Parsky, the head of a Los Angeles investment company and a University of California regent.
"Prefunding ... is the best approach to dealing with this issue."
Parsky said the $118 billion figure could be higher if health care costs rise faster than current estimates. It's on top of $63.5 billion in unfunded pension benefits owed state and local government workers.
California's public pension systems already have set aside money to cover more than 89 percent of their pension obligations. Otherwise, the $63.5 billion figure would be significantly larger, the Public Employee Post-Employment Benefits Commission reported.
But agencies have been less diligent about prepaying retired public employee medical and dental benefits. Only about 22 percent of the state and local agencies responding to the commission's survey have begun to set aside money to cover those costs.
"We don't see any reason why health care benefits should not be treated equally as important," Parsky said at a Capitol news conference.
The state's share of that $118 billion is $47 billion or $48 billion. The commission is urging lawmakers and the governor to set aside $1.2 billion in the budget that takes effect July 1 to begin to cover those costs.
That would add to the state's current budget shortfall, which could total as much as $14 billion over the next 18 months without addressing the unfunded health benefit liability.
"Unfunded liabilities are a problem, and you have to see it in the context of how it can be addressed currently," Parsky said.
He said the amount the state would have to put aside each year eventually would decline based on income from investing the set-aside funds.
Gov. Arnold Schwarzenegger praised the commission's "diligent work" but was noncommittal about the 12-member panel's recommendations.
"I will be reviewing the findings and submit a formal plan to address this issue in the next 30 days," he said in a statement. "I look forward to working with leaders in both parties to ensure that public employee retirement benefits are protected while governments move forward in a fiscally responsible way."
State Treasurer Bill Lockyer was more specific, saying that funding future health care benefits should be included in state budget decisions made this year.
"Prefunding and investment earnings will save the state billions of dollars in unnecessary over-expenditures in the next three decades," he said.
Dwight Stenbakken, deputy executive director of the League of California Cities, also generally praised the report. He called the recommendation to start funding the benefits now a good way to tackle retiree health care costs.
But he said he wished the commission had joined the league in recommending that cities scale back pensions to the levels they were before local officials authorized significant increases in the late 1990s and early this decade.
"If you're ... not spending money on potholes because you're spending too much on pensions, that is out of balance," he said.
Parsky said the commission, which was appointed by the Republican governor and the Legislature's Democratic leaders, sought unanimity. It did not get into the question of whether health and pension benefits should be scaled back.
"Our job was to look at, on the assumption there were no changes, how do we meet these problems," he said. "That's what we have done."
The commission made 34 recommendations in eight categories. Other proposals include adopting legislation to give more public exposure to pension benefit decisions and requiring periodic independent performance audits of public pension plans.
The commission's report was based on responses from nearly 1,200 public agencies, including the state, the University of California, the California State University, the 58 counties and California's largest cities, school districts and special districts.
Not all local agencies participated. Most of those that did not were smaller agencies with annual budgets below $100 million, the commission said.
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