The state handles the costs on a "pay as you go" basis, meaning that money needed to cover future retiree health benefits isn't set aside in advance -- a key difference from public sector pensions, which, even when underfunded, are premised on money that's put away years before it's needed.
We're not alone in this problem, though some states have worked to find a strategy to fund their employees' long-term health care costs. California's retiree health care debt has been the nation's largest for years, but analysts often conclude it's hard to compare states on the issue, given the wide range of "other post-employment benefits" (OPEB) that are offered.
An interesting note about the new debt number, which is an estimate of the obligation due as of this past June 30: The recent changes in the affordability of health care should have actually led to a leveling out, a fiscal hole that didn't get any deeper. What happened? Here's the explanation offered by the controller's report:
"...Those positive events were outweighed by new mortality assumptions that alone added $7.1 billion to the liability. Specifically, men are assumed to live approximately 2 years longer than previously expected. For women, the new mortality assumptions increase life expectancy by up to 1.8 years."
Yes, we're living longer. And every year that life expectancy rises, there's the potential for the costs to rise even more.
Retiree health care has been the stealth issue in California debt circles, at least compared with the much noisier battle over public employee pension benefits. But there's a sign that might be changing, with the man who seems focused on debt -- Gov. Jerry Brown -- apparently ready to engage.
"We're going to have to tackle that," said Brown's top adviser, Nancy McFadden, about retiree health care at a Sacramento event earlier this month. "We can't talk about fiscal stability without dealing with some significant unfunded liabilities."
Just what Brown might propose, of course, remains a mystery. Those in government circles around the state Capitol took McFadden's comments as a sign of something to come in 2015, but there are no guarantees.
That means the state keeps on paying the medical and dental bills of retirees as they come due -- a dicey proposition when it comes to how much larger a slice of the budget pie those bills will amount to in years to come. But any solution would also mean fewer dollars for other services. The new actuarial report concludes that the state should be setting aside $5 billion a year for current and future retiree health care costs, far more than the $1.9 billion in this year's state budget.
Chiang's announcement of the new, deeper hole includes his own proposal, one similar to an idea he first suggested in March: a five-year fix to slowly add in more dollars for future retiree health care. Under his scenario, those future services would be fully "pre-funded" for current government workers by the summer of 2020, thus reducing the state's long-term shortfall by almost $20 billion.