Public Employee Retiree Benefits:
School District Retiree Unfunded Health Care Benefits Estimated to be $24 Billion

 

School districts throughout California are facing a massive unfunded liability for retiree healthcare benefits according to a September 25 report by The Legislative Analyst’s Office. In its report titled the Update on School District Retiree Health Benefits, schools’ inflation-adjusted spending on retiree health benefits has nearly doubled over the past 13 years and the unfunded liability is estimated at approximately $24.032 billion.

The report explained:

“Nearly all school districts in California provide health benefits to their active employees, and most districts provide benefits that continue after their employees retire. These benefits typically last until employees reach age 65 and qualify for Medicare. Districts pay for retiree health benefits out of their general operating budgets.

“A key measure of retiree health benefits is the unfunded liability – the total future cost of providing the retiree health benefits that employees have already earned, after subtracting the funds already set aside to cover those benefits. Our analysis identifies an unfunded liability of about $24 billion across all districts. … These costs and liabilities add pressure to district budgets at a time when districts face several other cost pressures, especially rising pension costs.”Most of the $24 billion owed is attributable to 11 school districts – unfunded retiree health benefits for Los Angeles Unified School District (the nation’s second largest school district with 501,440 students) teachers and employees accounted for approximately 56 percent of total statewide unfunded liability. Other districts with major unfunded retiree benefits include:

The remaining school districts not listed above account for unfunded retiree healthcare benefits of $6.88 billion. The average school district has prefunded 3 percent of its retiree healthcare benefits. Los Angeles Unified School District and the districts identified in the list above account for a greater share of unfunded healthcare liabilities because of generous benefits – such as providing relatively little or no cost-sharing requirement, providing health benefits to family members, or providing health benefits beyond age 65.

The LAO found that nearly 64 percent of school districts statewide provide health care benefits to retirees and larger school districts were more likely to provide retiree health benefits.

The LAO also found that school district eligibility for health benefits vary among school districts, but generally school districts require an employee to be at least 55 years of age and have a minimum of 10 years of service; however, some districts may offer retirees health benefits after as few as 5 years of service or as much as 30 years of service. In most cases, once an employee reaches age 65, 78 percent of school districts no longer provide health benefits to retirees, because at that time, retirees become eligible for Medicare. Seven percent of school districts provide retirees health benefits for life.

SCHOOL DISTRICTS PROVIDING RETIREE HEALTH BENEFITS

District Size by Student Population

Number of Districts

Total Attendance

Share of Districts Providing Retiree Health Benefits

Small Districts (fewer than 1,000)

399

121,934

36%

Mid-Size Districts (1,000-10,000)

399

1,610,614

80%

Large (more than 10,000)

148

3,706,733

93%

Statewide Total

946

5,439,281

64%

Source: Legislative Analyst’s Office

 

Since the state has begun tracking unfunded retiree healthcare liabilities in 2002, retiree health benefits have increased substantially. In 2002, inflation adjusted spending for retiree health benefits was approximately $91 per pupil. Today, these same benefits are about $171 per pupil.

In other news:

Pension Costs Will Decrease Spending on Parks, Schools and Social Services. A study released October 2 by Stanford University titled Pension Math: Public Pension Spending and Service Crowd Out in California, 2003-2030 claims California governments likely will have to make do with fewer teachers, parks employees and other public workers as they struggle to balance budgets amidst fast-rising pension costs.

The study performed by Joe Nation, a former Democratic Assemblyman and current researcher at the Stanford Institute for Economic Policy Research, projects that many cities, counties and school districts will double their spending on pensions by the year 2030 thus “crowding out” their ability to fund public services.

“As painful and as steep as these increases have been since 2003, my best estimate is that we are only about half way through these increases,” Mr. Nation said. “If you’re a public agency and you went from paying $1 million a year to $10 million a year, that’s an enormous increase.”

Many cities and counties have begun considering and placing sales tax and other tax increases that often cite increased pension and “administrative” costs.

The City of Loyalton, a tiny Sierra Nevada town of 862 residents, could no longer afford the pension costs for its four retired employees. Therefore, the City Council voted to leave the CalPERS pension once its final employee retired.

As a result, the city’s pensioner benefits were slashed by 60 percent and the city was hit with a $1.66 million termination fee that exceeded the entire city’s budget of $1 million.

Mr. Nation additionally found pension costs are outpacing growth in projected revenues across the board, leaving less revenue for “amenities” like parks, social services and hiring new employees to replace retired ones.

Mr. Nation’s report echoes the many complaints being aired by local government leaders about the rising pension costs.

Since CalPERS lowered its projected investment return rate last year, local governments have been required to pay more to fund their workers’ pensions and in a meeting last month, local leaders called pensions costs a “gradual strangulation” on public services.

Oroville Finance Director Ruth Wright told the CalPERS board, “In three to four years our cash flow is going to be gone…We don’t even know how we are going to operate past four years.”

Dave Low, Chairman of the union-supported Californians for Retirement Security, said CalPERS and CalSTRS are slowly digging themselves out of the losses suffered during the Great Recession and are asking local governments to spend a little more.

“You don’t recover from the Great Recession in two or three years. It takes decades,” he said. (Source: Sacramento Bee and Stanford University, October 4).

 

 

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