FISCAL STORM ON HORIZON GOVERNMENT OFFICIALS SOON MUST START ACKNOWLEDGING UNFUNDED BENEFITS.

Byline: HARRISON SHEPPARD Sacramento Bureau

SACRAMENTO -- Already grappling with spiraling annual health costs, some of the largest agencies across California are facing a new squeeze as they're forced to begin fully accounting next year for retiree health-care liabilities.

And for the first time, many will have to acknowledge they have accumulated hundreds of billions of dollars in looming costs with no comprehensive way to pay for it other than by cutting strained budgets.

Annual health costs for state and local government retirees are expected to total at least $4.5 billion this year and could soar to almost $31.5 billion by 2019, according to a recent study by government consultant Steve Frates on behalf of the California Healthcare Foundation.

But under new federal accounting rules that take effect next year, cities, counties, school districts and special taxing districts must fully project those costs into the future -- acknowledging long-term liabilities collectively estimated in the hundreds of billions of dollars.

``There's going to be some very interesting budget sessions in government agencies up and down the state as the finance guys come in,'' Frates, also a senior fellow at The Rose Institute of State and Local Government at Claremont McKenna College, said about enforcers of the new federal accounting rules.

``You're talking big bucks.''

The unpaid bills, although they won't materialize all at once, are the result of generous health-care benefits for retirees as well as longer life spans and pending retirements of tens of thousands of baby boomers, analysts say.

At the local level, long-term liability of the Los Angeles Unified School District alone has been estimated at $10 billion, while Los Angeles County government's liability is estimated at $9 billion.

The state of California is still performing an actuarial study to estimate its liability.

Agencies will be required to show how much would need to be socked away in an investment account to pay for the liabilities without dipping into the general fund.

And so far most government agencies have failed to set aside long-term investment accounts to pay for the liabilities and instead have simply funded them out of annual budgets.

They have also failed to rein in continued granting of generous benefits over the years for employees -- benefits that are ending up costing far more than expected, with the cost of health care growing by double digits in recent years.

Two options

As budget officers and elected officials spend the coming months designing their agencies' spending plans for fiscal 2007-08, most are expected to continue to let the benefits spending grow.

``There are two options to address this problem: Change the benefits, or set aside money,'' said Jason Dickerson, a budget analyst with the state Legislative Analyst's Office. ``The vast majority of governments in California and around the country have not begun to do either of those things.

``But more governments are beginning to think in those terms -- to think of the need for a long-term funding strategy for this.''

LAUSD was among the first agencies to study the issue and produce an actuarial estimate of its liabilities.

David Holmquist, the district's director of risk management and insurance, said district officials have not put money aside to build an investment account for the liabilities because they believe the money is better spent in the short term on classroom needs.

Beyond control

The only way to address the problem in the long run, he said, will include steps beyond district officials' control.

``This is such a large problem, and it's not limited to the L.A. Unified School District,'' Holmquist said. ``Universal health care or some assistance from the state or federal government is really the way to go.

``There are so many school districts and government entities in this situation.''

Holmquist said last year the district negotiated a small reduction in the cost of retiree benefits by changing the calculation of the eligibility formula. The new formula will cut health benefits for those who worked for the district less than 15 years before retiring.

Retiree health benefits are costing the district $235 million this year and are projected to cost $255 million next year.

Los Angeles County Chief Administrative Officer David Janssen said county government is restricted in its ability to address the issue because of a 1982 state law requiring the same benefits for retired employees as active employees.

The annual cost to fund that liability has grown from $307 million last year to a projected $375 million next year, he said, and is expected to continue growing around 10 percent a year.

``The good thing about it is finally the state is addressing (health-care reform),'' Janssen said. ``At least, we don't think it can be solved without additional revenues.''

The new government rules were instituted by the Governmental Accounting Standards Board, an independent, nongovernmental agency that drafts accounting principles for government agencies and auditors throughout the country.

The board decided several years ago to institute the new rule because it found that as health care costs were rising, most agencies did not have an accurate handle on how much it would cost them in the long term every time they signed new employee contracts awarding such benefits.

In part, the rule was designed to prevent problems like those plaguing San Diego, where massive liabilities for pensions and health care have caused serious financial problems.

San Diego officials have been among few areas in the state to attempt to tackle the problem. Earlier this month, the San Diego County Board of Supervisors decided to cut $30 million in annual health-care costs for retirees.

The new rules apply first to larger government agencies, such as state government and larger counties and school districts. They will have to start producing total liability figures in the next fiscal year, which in most cases begins July 1.

But they are only required to report the figures after the end of that fiscal year, so a full accounting is not expected until at least 2008.

Trust funds

Suzi Rader, director of district and financial services for the California School Boards Association, said her organization has been trying to help school districts set up trust funds they can use to set aside and invest money for the long-term liability.

The association has also helped districts hire actuaries to perform the liability studies, although she estimates fewer than 100 districts meet the threshold to be required to report their liabilities next fiscal year.

Those that fail to meet the new accounting requirements, she said, will see the consequences when they try to issue bonds.

``If they don't comply, one of the consequences is when they need money in the public market for a general-obligation bond or certificate of participation, one of the first things the rating agency will ask is: What is your GASB number (estimated liability), and what's your plan to deal with it? If they have no number and no plan, then their bond ratings are going to be affected in major ways.''

harrison.sheppard(at)dailynews.com

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