Retiree Health Subsidies Explained

Dear Legislators,

We are pleased that more and more of you are eager to address the billions you unnecessarily divert every year from services to extravagant insurance subsidies for retired state employees (“Retiree Health Subsidies,” or “RHS”). Following are some basic facts followed by a list of reform opportunities.

  • RHS should not be confused with pensions. RHS fall into the “Other Post-Employment Benefit “(“OPEB”) category, and unlike pensions are neither ubiquitously offered nor consistently provided (e.g., Stockton doesn’t offer them, Huntington Beach limits them, the state is generous with them, etc.).
  • You have clear authority over RHS:
    • Page 135 of your 2019 CAFR states, “Benefit terms are governed by state law and may be amended by the Legislature.”
    • Also on page 135: “The contribution requirements of plan members and the State are established and may be amended by the Legislature, and can be subject to collective bargaining” agreements that are submitted to the Legislature for approval.
  • The RHS benefits you are providing state retirees (including legislative staff) are extraordinarily rich:
    • The State generally pays 100% of the health insurance premium cost for retirees plus 90% of the premium cost for family members and all or a portion of the dental insurance premium cost for annuitants.
    • You provide those extraordinary benefits even if recipients have Medicare, are entitled to coverage from new employers, are eligible for premium support from the Affordable Care Act, and don’t live in California.
    • You also provide rate subsidies as described on page 16 of a separate report by the Controller here.
  • Because you have not adjusted your RHS policies since enactment of the Affordable Care Act, you are leaving federal dollars on the table. Local governments, school districts and transit and other agencies that offer RHS are leaving both federal and state dollars on the table by not adjusting their policies to account for both the ACA and the California Premium Subsidy you enacted into law in 2019.

Steps you could take (separately or in combination) to rein in RHS spending include:

  • Impose a lower cap. Colorado caps RHS at $230 and $115 per month for pre- and post-Medicare retirees while you permit maximum monthly RHS contributions of $725 for one-party coverage, $1,377 for two-party coverage, and $1,766 for family coverage.
  • Prohibit RHS to retirees or their family members who are eligible for health insurance from another employer.
  • Require retirees and family members to seek ACA subsidies before seeking RHS.
  • Impose a means-test. Eg., the City of Glendale provides RHS only to retirees earning $50,000 or less per year and caps that support at $200 per month.
  • Focus on expensive retirees with larger pensions. E.g., your most expensive Bargaining Unit is Number 6, Corrections, whose employees can retire as early as age 50 with large pensions and often take new jobs.
  • Phase out rate subsidies.
  • Require universities, colleges, local governments, school districts and transit and other agencies to which you provide support to enact RHS changes.

Savings could be large and immediate. Earlier this year GFC employed an actuary to provide an estimate of savings for San Francisco, which has an extravagant RHS program similar to the state’s program. Should SF cap RHS at $100 per month per year of service (i.e.,a retiree with 24 years of service would get RHS of $200 per month), it would reduce annual costs by 80 percent and annual cash spend by 67 percent. Applied to the State, that would imply annual savings of $4 billion in cost and $2 billion in cash.

There’s no lower-hanging, cost-and-cash-saving, fruit in your budget. RHS reform should be top priority. Govern For California supports lawmakers who serve the general interest.

David Crane
President, Govern For California