Copyright© 2007 by School Services of California, Inc.

                                      Volume 20                   For Publication Date: January 5, 2007             No. 1

Governor Establishes New Commission to Address
Public Employee Postemployment Benefits 

The Governor issued an executive order last week to establish the Public Employee Post-Employment Benefits Commission to address the issue of unfunded liabilities faced by California’s public employers for other post-employment benefits, mainly health benefits for retirees. 

The Commission consists of 12 members, six of whom are appointed by the Governor and three by the leader of each house. The Governor appoints the chairperson. The Commission is to identify the amount of unfunded liabilities for all of California’s public agencies for other postemployment benefits, identify various approaches for addressing the unfunded liabilities, compare the advantages and disadvantages for each approach, and propose a plan or plans for addressing the unfunded benefits. This work is to be completed and submitted to the Governor and the Legislature by January 1, 2008. 

We have written many articles in our Fiscal Report in recent years about the unfunded portion of the two public employee pension plans—Public Employees’ Retirement System (PERS) and State Teachers’ Retirement System (STRS)—and the growing unfunded liability for other postemployment benefits (OPEB) that public agencies will be required to begin recognizing on their financial statements starting next year (2007-08) because of Governmental Standards Accounting Board Statement No. 45 (GASB 45). The combined unfunded portion of the PERS and STRS basic retirement plans is currently estimated to be $49 billion. The unfunded portion of the state of California’s OPEB is estimated to be $40 billion to $70 billion, and, combined with all of California’s public agencies, the liability is estimated to be up to $200 billion.  

The challenge is that there really is only one choice—reduce the liabilities; but there are many ways to do this, none of which are going to be a single panacea. Agencies can reduce the benefits offered, reduce the cost of those benefits, shift more of the costs to employees as they are working or to the retirees, increase taxes, set aside funding for the liabilities, cut other programs to pay for the benefits, improve management of the costs charged by the health care industry, issue pension obligations bonds, and myriad other options.  

Limiting postretirement benefits for public employees was part of the Governor’s disastrous “year of reform” platform in 2005. The proposal to move from a defined benefit retirement plan to a defined contribution plan was so poorly drafted that opponents charged that it would force the survivors of police and firefighters killed on the job to subsist on whatever meager savings the employee had set aside in a defined contribution retirement plan. To be successful, the Governor must avoid the perception that he is hurting the widows and orphans of police and firefighters. 

Unfortunately, we already see posturing by influential parties that certain options will not be considered, and the Commission has not yet begun its work. Stay tuned.

  —Sheila G. Vickers and Terry Anderson