Retiree healthcare costs spark changes in some districts

Retiree healthcare costs spark changes in some districts

(Calif.) Like most of corporate America and virtually every government agency, school districts in California face staggering future expenses for the health care benefits of retirees.

According to new research from the non-partisan Legislative Analyst Office, the total unfunded liability is almost $25 billion. And the annual cost to schools to keep pace has doubled over the past 13 years, climbing from $91 per student to $171 per student in 2015-16.

While some local boards are working to contain the costs, the LAO said that lawmakers need to pay close attention to the growing costs as a key component of district fiscal health.

“Moving forward, districts that prefund would see investment returns cover an increasing share of their benefit costs,” the report said. “Over time, this would reduce the share of costs that these districts would need to cover out of their current operating budgets. By contrast, districts that remained on a pay-as-you-go approach would need to continue covering all costs as they come due.”

California law makes health care benefits of both school employees and retirees subject to collective bargaining agreements. Thus, there is significant variation in what districts pay for and when.

Almost 80 percent of districts provide health care benefits to their retired employees until they reach 65 years old and qualify for Medicare. The average age of retirement of school employees is 61, thus most district cover an additional four years.

Another 15 percent of districts extend health benefits between the ages of 67 and 70, or between three and seven years past retirement.

Generally, districts pick up the lion’s share of health care costs with employees and retirees paying a relatively small share, the LAO said. Some districts extend the benefits to family members. In other cases, workers are required to pay a bigger share and family members are not covered.

As part of disclosure requirements, districts are audited annually and most report publicly on the future cost of health care. To calculate the unfunded liability, actuaries must take into consideration a variety of factors, including life expectancy of the retirees, district investment returns and changes in the economy.

The LAO reported that statewide, schools have a total liability of $25.5 billion in future health care costs for retirees. Districts have set aside a combined $750 million as a hedge to cover those costs.

Like overall pension obligations, the health care benefit of retirees posing a dilemma for district governing boards. Setting aside more funds to buy down the expense will save a lot of money in the long run—but it also means less resources for carrying out the core mission to provide education services to students.

Not surprisingly, several of the state’s largest urban districts have accumulated the biggest unfunded liabilities, according to the LAO survey:

  • Los Angeles Unified   $13.5 billion
  • San Francisco Unified  $619 million
  • Long Beach Unified    $327 million

Common traits among districts with large debt loads, the LAO said, is that they require relatively small cost-sharing from their retirees, extend cost benefits to family members, or provide benefits past the age of 65.

Some districts are beginning to take action. Fresno Unified, which has an unfunded liability of nearly $1 billion, ended lifetime benefits for employees hired after 2005. Clovis Unified, which has a liability of $260 million, raised its qualification from 15 years of service to 30 years.