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California Research Bureau plays role in California's retirement reform effort 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.
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