A giant Southern California water agency’s controversial plan to increase pension benefits also would take a “groundbreaking” step toward paying for future retiree health care — an estimated $118 billion problem for state and local governments.
New hires at the Metropolitan Water District, a consortium of 26 cities and water districts serving 19 million people in six Southern California counties, would contribute 8 percent of their after-tax pay to a retiree health fund.
An independent actuary, John Bartel, told the “Met” board at a workshop this week that he agreed with a staff analysis that the increased pension benefits would be offset by other cuts, producing savings during the proposed five-year labor contact.
Bartel said that whether savings would continue after the contract expires depends on two main “risks:” whether new contracts continue to control pay and require that new hires make an 8 percent contribution to the retiree health fund.
“The one area I am probably most worried about is that 8 percent post-tax contribution for retiree health care,” Bartel told the board. “I will tell you it is a bit groundbreaking.
“There are not very many agencies around the state that have negotiated to have employees pay a portion of a retiree health benefit,” he said.
Bartel said it’s uncertain whether the 8 percent contribution would continue, particularly “if you look down the road and it continues to be unique” among government agencies in California.
A salty response came from Ed Little of the West Basin Municipal Water District headquartered in Carson.
“If we give back the 8 percent you ought to be kicked in the butt,” Little told his fellow board members. “We don’t need to do that. If you aren’t going to vote for this because you are afraid we are going to give it back, you shouldn’t be here.”
Most state and local government agencies in California provide health care for their retirees and, in many cases, the spouses and the dependents of the retirees. The benefit became common several decades ago when health care was relatively cheap.
But health care costs have soared in recent years. Many government agencies have lowered retirement ages to 50 and 55, and people now tend to live longer than they did in the past.
Government pensions are “prefunded” with annual employer and employee contributions that create investment funds, which have been producing about 75 percent of the revenue for the California Public Employees Retirement System (CalPERS).
But there has been little prefunding for retiree health care. Most government agencies are pay-as-you-go, setting aside no money for the health care promised to their workers when they retire, passing the bill to future generations.
The Met currently pays $12 million a year for retiree health care. The state currently pays $1.36 billion a year for the health care of its retired workers, the equivalent of 7.6 percent of payroll.
An obscure agency, the Governmental Accounting Standards Board, put the spotlight on the huge debt for retiree health care five years ago by directing government agencies to calculate and report their unfunded liability.
A governor’s pension commission issued a report last year with the first estimate of the unfunded liability for state and local government retiree health care in California — at least $118 billion over the next 30 years, $48 billion owed by the state.
Some local governments have begun prefunding retiree health care. A retiree health care fund created by CalPERS two years ago to manage contributions from local agencies had $584 million at the end of last year.
In June of last year, San Francisco voters approved a measure that requires new city employees to contribute 2 percent of their pay to a new retiree health care fund, matched by 1 percent from their employer.
San Jose has taken a bigger step. General city employees contribute 4.65 percent of their pay to a retiree health fund, matched by 5.25 percent from the city. Police contribute 3.78 percent, matched by 4.19 percent from the city.
Labor negotiators for the California Highway Patrol have agreed to what would, if approved by members, be the first prefunding of the state retiree health debt — from 1 to 3 percent of expected CHP pay, with a state match beginning in 2012.
Fully prefunding retiree health care is costly. At the Met, the 8 percent employee contribution is expected to yield about $20 million in 15 years. About $30 million a year is needed to stop the growth in the unfunded liability, now an estimated $400 million.
The Met is one of the government agencies providing live video of board meetings over the Internet, archived for on-demand viewing later.
(The California State Teachers Retirement System plans of CalSTRS live Internet audio of board meetings, with video recordings available later at the CalSTRS building in West Sacramento. CalPERS does not have live or recorded board coverage.)
The Met workshop yesterday came after the board postponed a vote on the tentative labor contract. The plan to increase the pension formula from 2 percent of final pay for each year served at age 55 to 2.5 percent at 55 drew heated criticism.
San Diego Mayor Jerry Sanders said in a letter to the Met that a pension increase costing $70 million over several decades will drive up costs for ratepayers, who already face a double-digit percentage increase in their bills.
Others said a pension increase is ill-timed because the Met’s pension fund lost $400 million in the stock market crash last fall, requiring a big increase in the Met’s annual payments to the fund in the years ahead.
Larry Dick of the Municipal Water District of Orange County told the board his district may have been regarded as “the most successful stealth agency in the county,” ignored by ratepayers and others.
“We have had more attention paid to this (pension) discussion than any rate discussion we have had during my service on the board,” said Dick.
Bill Robinson of the Upper San Gabriel Valley Municipal Water District said negotiations, kept secret by bargaining rules until several weeks ago, would be better served by public debate.
“Could we perhaps as an outcome of this meeting let the public know, and perhaps even the Los Angeles Times can find the story?” Robinson said. “It’s a common story in Orange County and San Diego County.”
Rhonda Hilyer, a Met consultant, mentioned the possibility of a legal challenge from labor groups if the board rejects the proposed contract. She said board members were informed of progress during talks and a committee approved the pact.
“There is a lot at stake here,“ Hilyer told the board, “and I don’t think I would want to be in your shoes necessarily to have to make these decisions.”
A spokesman said the Met board may vote on the tentative labor contract on October 13.