After decades of neglect, now there may be competition to handle the investments local governments are beginning to make to pay for an estimated $59 billion owed for retiree health care over the next three decades.

Legislation signed last month, SB 11, allows the retirement system for employees of California’s fifth largest county, San Bernardino, to market an alternative to a two-year-old CalPERS retiree health fund.

“Our campaign will target agencies throughout the state that have not yet started to prefund their OPEB obligations,” the San Bernardino County Employees Retirement Association said via e-mail.

OPEB is not to be confused with OPEC, the cartel of oil-producing nations that shocked the nation with an oil embargo in 1973. But an accounting change five years ago that requires state and local governments to report their OPEB obligation delivered a jolt.

“Other Post Employment Benefits” is accounting jargon for non-pension retirement promises made to workers, mainly health care but also other things such as dental and vision care and death benefits.

Pensions provide a monthly check that can be a fairly predictable cost, even with the usual annual increases for inflation. But retiree health is an open-ended guarantee of a service, whose costs have soared in recent decades.

Pensions are funded by annual contributions from employers and employees. The money is invested and earnings can pay most of the pension cost. CalPERS, for example, has been getting 75 percent of its revenue from investments in recent years.

In California, most government agencies have not been setting aside money or “prefunding” retiree health care — forgoing the chance to cover costs with earnings and passing the retirement cost for current workers to future generations.

Pay-as-you-go retiree health care has been one of the fastest-growing costs for state government. A decade ago the state spent $375 million on retiree health care. This fiscal year retiree health care is expected to cost $1.36 billion.

A governor’s commission last year made the first estimate of the cost of providing health care for current state and local government workers when they retire: $118 billion over the next 30 years.

 

Half of the amount is owed by local government (cities, counties, special districts, schools, and community colleges). The other half is owed by the state and the University of California.

The commission found that most pension funds were in fairly good condition. On average the funds were 89 percent funded and receiving about 4 percent of government general funds.

That was, of course, before the historic stock market crash last fall. Now many pension funds are seriously underfunded and in need of increased annual payments from struggling government agencies to make up for the losses.

But much of the urgency in the report issued by the Public Employee Post-Employment Benefits Commission chaired by Gerald Parsky was about the emerging issue of retiree health care costs, put in the spotlight by the accounting change.

Most of the commission’s 34 recommendations, including the first four, were about retiree health care. The first recommendation on the list: “Public agencies providing OPEB benefits should adopt prefunding as their policy.”

It’s not a new idea.

Two decades ago, AB 1104 by former Assemblyman Dave Elder, D-Long Beach, created a retiree health care fund in the treasurer’s office. But it remained just an idea. Little or no money was put in the fund.

Two years ago the California Public Employees Retirement System created a retiree health care fund to handle investments from its more than 2,500 local government contracting agencies.

Legislation made the California Employers’ Retiree Benefit Trust Fund available last year to local government agencies that are not in CalPERS. Now the fund has more than $1 billion from more than 200 agencies covering 150,000 active and retired workers.

One of the advantages of prefunding retiree health care cited by CalPERS is a lower OPEB unfunded liability, which can affect bond ratings. The annual earnings projected by CalPERS, 7.75 percent, reduces the unfunded liability.

For example, when Riverside County began prefunding retiree health care two years ago, CalPERS said the county’s projected OPEB liability dropped from $67.9 million to $48.6 million.

CalPERS plans to underscore the importance of prefunding retiree health care by posting the value of the trust fund on the home page of its web site, joining the currently posted running total of the main CalPERS fund, $196.8 billion over the weekend.

So, what does a comparatively small 30,000-member system, with about $5 billion in assets, have to offer that can’t be provided by a giant 1.6 million-member system, with $197 billion in assets, the nation’s largest?

The San Bernardino system said smaller can be a good thing: lower overhead, leaner, with an opportunity to be more efficient and responsive. Previously, local governments only had two choices for their investments: CalPERS or Wall Street.

“Currently, CalPERS invests OPEB assets and manages the benefits,“ said the e-mail. “At SBCERA, we will only invest the assets. This will allow agencies more flexibility. They will be able to invest their funds with SBCERA, but maintain control over managing their benefits.”

In addition to pensions, CalPERS provides health benefits for 1.3 million active and retired state and local government employees. The big pension fund uses its massive size to bargain for favorable rates from more than a half dozen health plans.

The San Bernardino fund has won awards, including the Mid-Size Public Pension Plan of the Year in 2007 from Money Management Letter. More importantly, the fund trimmed its stock holdings early last year before the market crash.

A Bloomberg news service story last Nov. 5 said the San Bernardino fund avoided the “pitfalls.” CalPERS, on the other hand, had some well-publicized missteps and general losses that put its performance in the bottom quarter among public pension funds.

The man who is both executive director and chief investment officer of the San Bernardino fund, Tim Barrett, is also vice president of an organization that represents the 20 county retirement systems that operate under a 1937 act.

Is the San Bernardino fund intended to be the anti-CalPERS alternative for the county systems?

Apparently not. An official of the State Association of County Retirement Systems said some of the members are thinking about handling retire health care investments for other government agencies in their counties.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com.