Opinion // Open Forum
Last month I turned 65 and became eligible for Medicare, the national health insurance program for people my age and older. Medicare is fantastic — and fantastically cheap — health insurance. But, believe it or not, if I were a retired California state employee, both I and my dependents would be entitled to health insurance subsidies.
This fiscal year (2018-19), retiree health benefits will cost the state $2.6 billion, more than double the cost 10 years ago.
There’s no reason for California to shortchange current employees, impair discretionary programs or charge taxpayers to provide unnecessary subsidies when generous federal subsidies are available and not every retiree needs a subsidy.
Retired state employees aged 65 and older on Medicare get subsidies, including reimbursement for Part B premiums and even when those premiums are elevated by retirees earning consulting or other post-retirement income in addition to their pensions.
Retired state employees under 65 get subsidies even if Affordable Care Act subsidies are available.
Both groups get subsidies without regard to their incomes and even if they’re earning money from consulting or other endeavors.
Active state employees and California residents pay the price through lower salaries, higher insurance premiums and reduced state services.
If you think the state’s retiree health costs are growing fast just because overall health care costs are growing fast, think again.
Health costs for the state’s active employees grew at half the pace of the state’s retired employees’ health spending. Retiree health spending is growing fast because elected officials have created huge and fast-growing retiree health liabilities approaching $100 billion.
These costs are now the state’s second-largest retirement liability ($91 billion), after teachers’ pensions ($103.4 billion).
They even exceed the expense of the state’s general obligation bonds, which — unlike retiree health obligations — require voter approval.
Fortunately, the city of Glendale provides a model for how the state could reduce its retiree health liabilities and free up billions of dollars for active employees and other services while still ensuring satisfactory health coverage for retired employees.
By transitioning retired employees to Covered California (the state’s excellent health care exchange under the federal Affordable Care Act), unblending the medical insurance premium rates paid by active and retired employees, and limiting subsidies to retirees with less than $50,000 in household income, Glendale reduced in 2015 its retiree health liabilities and spending by more than 90 percent.
If that model was applied to the state’s 2017 retiree health liability, it would allow the state to reduce its liabilities by more than $80 billion and to save more than $2 billion per year. Unblending active and retired medical insurance premium rates would also lower the insurance premiums paid by active state employees.
The $2.6 billion cost of health care for retired state and California State University system employees might seem small compared to the state’s $140 billion General Fund, but because most of the state’s spending is determined by:
•Entitlements (e.g., Medi-Cal)
•The California Constitution (e.g., kindergarten through grade 12 education and community colleges) and
•Elected officials (who protect funding for state prisons), the consequences of retiree health spending fall disproportionately on discretionary programs such as courts, the University of California and the California State University system.
Looked at that way, this year, the $2.6 billion spent on retiree health represents:
•10 percent (about) of discretionary spending.
•35 percent more than the state will spend on courts,
•70 percent (or almost) of what the state will provide to CSU and UC each, and
•An amount equal to (perhaps most revealing) 13 percent of salaries paid to active employees.
The state should make full use of Covered California and means-test retiree health subsidies. In so doing, it would set an example for California’s many school districts and local governments suffering from similar unnecessary liabilities created by their elected officials.
For example, last year San Francisco Unified School District spent more than $30 million on retiree health subsidies. Saving that $30 million could translate into a $9,000-per-year raise for every active SFUSD teacher, who would also have lower insurance costs.
Likewise, the City and County of San Francisco has more than $4 billion of retiree health liabilities draining funds that could otherwise be use to enhance active employee salaries and improve city services.
The City of Glendale made the change because “the City’s first obligation is to residents” and “allocating scarce resources to our current employees who serve the community is our primary focus.”
The state should make full use of federal subsidies and means-test insurance subsidies for its retired employees.
In a sentence about Medicare Part B’s treatment of retirement income, this post originally described an incorrect treatment. The post has been corrected and updated.
David Crane is a lecturer in public policy at Stanford University and president of Govern for California.