California Individual And Group Health Insurance Plans

For decades, California's state and local governments have been promising their workers health insurance in retirement. But those same governments have never set to the right money to pay for these benefits or even bothered to tally up how much that assure might cost future taxpayers.

Now somebody is finally doing the math. And it's clear that the cost of commitments already made is going to lead to serious cuts in services, tax increases or both. With government workers retiring earlier and living longer, the cost of their health care is growing, fast. And it cannot be sustained under current conditions. The leading edge of this crisis _ and that overused word actually applies here _ is already upon us.

The cost of paying for health care for retired state workers has more than tripled in the past decade and is currently approaching $1 billion a year. But that is only the beginning. A review by the state's nonpartisan legislative analyst suggests that the long-term costs of health care in retirement for state workers who have already been promised that benefit will exceed $40 billion and possibly reach as high as $70 billion.

If the state were to set aside enough money now to pay for those benefits, rather than saddling future generations with that trouble, it would cost about $6 billion a year. That's the equivalent of the entire taxpayer cost for the University of California and the California State University systems combined.

There is no way, given the current financial condition of the state that lawmakers will vote to bank that much money for the future. But if they don't, the eventual cost of the benefits threatens to overcome future taxpayers. At some point, we'll have to pay the bill. Part of this problem is out of the state's hands: Health care costs are rising for everybody, retired or not.

But a big part of it can be traced directly to decisions made by state policymakers. First was the idea of providing health insurance for people who retire before they turn 65 and are eligible for Medicare. This put public employees in a fortunate class different from most of their peers in the private sector, and opened the door to ever-expanding costs.

That decision was compounded by changes in pension benefits in the late 1990s that made it easier for workers to retire as early as age 50 for public safety employees and 55 for everybody else. Now, many state workers are quitting while they are still relatively young and getting full medical benefits paid by the taxpayers for a decade or more before they qualify for Medicare.

Combined with the natural demographics of the current state work force, those policies have resulted in an increased rate of retirements, with the retired work force expected to grow by 4 percent a year over the next 10 years. That will lead to continued, double-digit increases in the cost of providing their health care. There is little or nothing that can be done about the costs for those workers who already have been promised this benefit.

The benefit is considered delayed compensation, meaning it already has been earned and cannot be taken away. Nor should it be. But the state needs to stop making this same, invalid promise to future hires. The most obvious option would be to simply stop promising health care for life to new employees. The central Medicare system is there for the rest of us, and workers who do not think they will be happy with it are free to set aside their own money to pay for supplemental insurance.

A second, less draconian change would be to offer supplemental health insurance for retirees but only after they turn 65, or 55 for public security workers. That way, anyone who wanted to quit early would have to bear the financial burden of that decision themselves. In the meantime, though, policymakers are going to have to tackle the cost of the promises already made. And the state government is not the only one on the hook.

The quasi-independent University of California provides even richer benefits than the state, though they are explicitly not guaranteed forever by contract, and its costs are now about $200 million annually and rising. Many local school districts have promised benefits for life. The state's largest district, Los Angeles Unified, is one of them, and the district's future costs for those already promised the benefit are now estimated to be about $10 billion. Many cities, counties and special districts have similar plans, and the total cost of their guarantees may in the end exceed that for which the state is already on the fastening.

New accounting rules that take effect for the 2007-08 financial year will force all of these governments to finally calculate the likely cost of the promises made and report them publicly. But the rules are silent on what the governments are to do about their unfunded obligations. That's a political question, a huge one that is certain to emerge as a major challenge in the years further on.