Sacramento’s Silliest Subsidy

In December 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 — insurance. But, believe it or not, if I was a retired California state employee, I would also be entitled to a state-provided health insurance subsidy that this fiscal year will cost taxpayers $2.6 billion — more than double the cost ten years ago:

California State Budget

If you think Retiree Health costs are growing fast just because overall health care costs are growing fast, you’d be wrong. Health costs for the state’s active employees grew at half the pace of Retiree Health spending. Nope, Retiree Health spending is growing fast because the state legislature and governor have created huge and fast-growing — and unnecessary — liabilities:

State Controller’s Office

At $91 billion, Retiree Health liabilities are now the state’s second largestretirement liability:

California State Budget — 2018–19 ($ millions). Retiree Health liabilities as of June 30, 2017

Even General Obligation Bonds, which require voter approval, are surpassed in size by the state’s Retiree Health obligations, which are created by the state legislature and governor without voter approval.

Because most of the state’s spending is determined by the constitution and entitlements and the legislature and governor tend to protect Corrections spending, the consequences of Retiree Health spending fall disproportionately on discretionary programs such as courts, UC and CSU. This year, the $2.6 billion spent on Retiree Health represents ~10 percent of discretionary spending. Looked at another way, $2.6 billion is 35 percent more than the state will spend on courts, nearly 70 percent of what the state will provide CSU and UC each, and more than 85 percent of the expected cost of insuring undocumented seniors in California.

The state’s Retiree Health spending is not necessary. For retired employees aged 65 or over, federally-funded Medicare is an excellent program. For retired employees under the age of 65, the Affordable Care Act (Obamacare) provides robust federally-funded subsidies through the state’s excellent health care exchange, Covered California.

Retiree Health obligations can be reduced by transitioning retired employees to Medicare and Covered California and delinking the medical insurance premium rates paid by active and retired employees. By taking that action in 2015, the City of Glendale reduced Retiree Health liabilities by >90 percent. Applied to the state’s 2017 Retiree Health liability, the state could reduce its liabilities by >$80 billion and start saving >$2 billion per year.

There’s no reason for California to starve discretionary programs and unfairly tap taxpayers in order to provide unnecessary subsidies when generous federal subsidies are available. The state should end the practice of subsidizing retired employee health care. In doing so it would also set an important example for California’s many school districts and local governments suffering from similar unnecessary liabilities.

Originally appeared on Medium, 1/6/19.