The state’s net liability for retiree health and dental benefits is now $95.19 billion, according to a report published today by State Controller Betty T. Yee. The liability represents the present-day cost to provide health and dental benefits to state retirees and their dependents earned as of June 30, 2020 – one of the state’s largest long-term liabilities. A year earlier, the state’s net liability for retiree health care, commonly known as Other Postemployment Benefits (OPEB), was $91.93 billion.
California’s total OPEB liability increased $100 million more than anticipated in last year’s valuation report. The key factor continues to be changes to the blended discount rate, which resulted in a nearly $8.16 billion increase in total OPEB liability. The second key factor was demographic experience. From June 30, 2019, to June 30, 2020, the number of retirees increased by 2.8 percent, while the number of active members only increased by 1 percent, resulting in a liability increase of $1.06 billion. Gains of $5.58 billion for changes in health care-related assumptions and $3.59 billion for health care claims experience helped offset losses attributed to the discount rate and demographic experience.
“While the funding gap grew slightly more than anticipated, I am hopeful policies implemented after the period considered in this valuation – such as a return to prefunding – will get us back on track,” said Controller Yee, the state’s chief fiscal officer and board member of CalPERS and CalSTRS. “State workers were able to get relief from prefunding as they endured furloughs to help the state through uncertain times. With pay reductions behind us, a return to prefunding will move us toward our goal of eliminating the legacy liability.”
In January 2010, California began entering into collective bargaining agreements to prefund retiree health care benefits. Prior to this, California covered retiree health care benefits strictly as costs came due. As of June 30, 2020, all state bargaining units and judicial employees have agreed to make prefunding contributions to the California Employer’s Retiree Benefit Trust (CERBT). The CERBT Fund is expected to earn approximately 6.75 percent per year over the long term. As of September 17, the state’s share of the Fund had a market value of $4.29 billion. Governor Gavin Newsom suspended member prefunding contributions for FY 2020-21 and FY 2021-22 to help blunt the impact of a two-year 9.23 percent pay cut state workers took to help California weather the pandemic-induced recession. Pre-funding has been reinstated for FY 2021-22, but the OPEB valuation was prepared based on policies in place as of June 1, 2021, before the recent reversal.
The state has set a policy goal of full funding by 2046. CERBT funds cannot be used to pay OPEB benefits until the state has fully funded the legacy liability, or 2046, whichever comes first.