Almost
80 years ago, in 1928, the California Commission on
Pensions of State Employees recommended the establishment
of a “prefunded” pension system in which an employee
and employer would make contributions to a designated fund
during the employee’s career that, together with the
interest earned, would be sufficient to pay the entire
cost of the employee’s pension benefits. The Commission
warned that “any system which proposes to provide funds
only as they are needed to [pay for benefits] is inviting
disaster,” and that mounting debt from such a system
could eventually “cause serious embarrassment to the
state, forcing it either to make staggering
appropriations, or to default in its obligations to
members of the system.”
Today,
most public employee pension plans in California are
prefunded in the manner recommended by the 1928
Commission. As a result, California’s public retirement
systems are substantially funded with the majority of
pension costs paid by investment gains earned by pension
plan trust funds rather than by employer and employee
contributions. A recent California Research Bureau survey
of the state’s public retirement systems found that even
after the financial market downturn of the early 2000s,
the state’s public retirement systems on the whole are
better off financially than they were in the mid-1990s.
In
contrast, it appears that the 1928 Commission’s
predictions about mounting debt from retiree benefits that
are not prefunded have come true with respect to retiree
health benefits for public employees. Historically, the
State and most public employers that provide health
benefits to retirees have done so on a “pay-as-you-go”
basis, paying for benefits as the costs come due with
little or no money set aside to pay benefits in future
years. New accounting rules now require governmental
employers to report their liability for retiree health
benefits as it accrues. Due to recent double-digit
increases in the cost of medical care and longer life
expectancies that will increase the amount of medical
services that the typical retiree will receive, this
liability has grown to an estimated $100 billion.
In
response to ongoing concerns about the cost of providing
pensions and health benefits for retired public employees
in California, on December 28, 2006, Governor Arnold
Schwarzenegger established, by Executive Order S-25-06,
the Public Employee Post-Employment Benefits Commission to
address unfunded obligations for promised post-employment
benefits. The Commission will release its final report in
January 2008, and will likely recommend that the State and
local governments consider options for prefunding retiree
health benefits as well as the establishment of mechanisms
to increase the oversight of trust funds used to pay
retiree benefits.
In
February 2007, the Commission requested that Grant Boyken,
Senior Research Specialist with the California Research
Bureau (CRB) write a report to provide the Commission and
members of the public with background on the issues. The
report, titled “Funding the Golden Years in the Golden
State” was released in March 2007 (http://www.library.ca.gov/crb/07/05/07-005.pdf).
The
Commission also asked Boyken to conduct a statewide survey
to determine the current funding status of California’s
85 public retirement systems. He presented the results of
the survey at a hearing in Burlingame in July. A summary
of the survey and results is included in December 2007’s
California
Research Bureau Public Retirement System Survey.
Boyken
has also prepared research briefs for the Commission and
testified at hearings held throughout the state in 2007 on
topics such as actuarial accounting practices for retiree
benefits, governance and oversight of retiree benefit
trusts, options for prefunding retiree health benefits,
and strategies used in other states to address the costs
of post-employment benefits.
For
more information about the research or about the
Commission’s work, please contact Grant Boyken, Senior
Research Specialist in the California Research Bureau at
the California State Library at (916) 651-9700 or via
e-mail at gboyken@library.ca.gov.
The California Public Employee Post-Employment Benefits
Commission also maintains a website at http://www.pebc.ca.gov.
