Unnecessary spending on retiree health care is crushing California

By David Crane | California has asked Washington for $14 billion in Covid-related support, in addition to the $8 billion already provided by the CARES Act. But because the state, with an annual General Fund of $150 billion, incurs more than $24 billion of annual expenses for pensions and other post-employment benefits (OPEB)—including post-employment subsidies for health insurance—a big chunk of the federal disbursement won’t go to schools, hospitals, or roads.

California’s pension problems are well known, but the OPEB crisis is almost as bad. California pays 100 percent of the health-insurance premiums for retired state employees and 90 percent of the premiums for retirees’ family members. As a result, the state incurs annual OPEB expenses of more than $7 billion. Because the state covers that cost with a combination of cash ($2.7 billion this year) and debt, California’s OPEB deficit is $85 billion, exceeding the amount of the state’s outstanding General Obligation Bonds, which—unlike OPEB debt—were approved by voters. OPEB subsidies for retired employees are not only gold-plated but also largely unnecessary, because California—alone among the states—offers its middle-class residents health-insurance subsidies on top of what they get from Washington. Under that program, individuals earning up to $75,000 per year, and families of four earning up to $150,000 per year, are entitled to support from Sacramento.

Retired state employees whom I know are embarrassed by their OPEB benefits. As early as age 50, they and their dependents get premium-free insurance and prescription-drug coverage; to pay for the largesse, the state diverts money from other programs. No other state offers such a rich OPEB program.

To read the entire column in City Journal, please click here.

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