TAXPAYERS FACE $48 BILLION IN EXTRA EXPENSES STATE'S RETIREE HEALTH COSTS GROWING.

Byline: HARRISON SHEPPARD

Sacramento Bureau

SACRAMENTO -- Over the next 30 years, California taxpayers will have to come up with an extra $48 billion to pay health benefits for state government retirees, according to a new study by State Controller John Chiang.

The study, required under new federal accounting rules, found that next year alone, escalating health-care expenses for state retirees will cost taxpayers an extra $3.6 billion.

Still, other officials believe the study underestimates the future burden, which they say will range between $70 billion and $100 billion.

Whatever it is, Chiang said the massive "unfunded pension liability" is pressuring state government to set aside funds in a long-term investment account, just as it does with its pension system.

If the state fully covers the future obligation with investment funds, that long-term $48 billion liability could shrink to about $31 billion, he said.

Chiang said the problem "is not a crisis today" but will require a long-term solution.

"These are big numbers, but they are not insurmountable," Chiang said. "We need not panic or rush to judgment."

Rules of the new Government Accounting Standards Board require state and local governments throughout the country to perform actuarial studies of their long-term liabilities for providing health benefits to retirees.

Traditionally, government agencies have funded such benefits when the payments came due, but as health-care costs have continued to jump, accounting experts recognized that better long-term financial planning was needed.

At the local level, Los Angeles Unified School District has estimated its long-term liability at $10 billion, and Los Angeles County government estimates its at $9 billion.

Some analysts believe the state's long-term liability is worse than Chiang's projections.

Last year, the state Legislative Analyst's Office issued a preliminary estimate of up to $70 billion.

Former Assemblyman Keith Richman, who now heads a foundation pushing for state pension reform, believes that Chiang's study underestimated the rate of health-care inflation over the long term. Richman believes that the actual liability for state government pensions could be closer to $100 billion.

"Even if it's $48 billion, which is probably too low of an estimate, it's still a huge number," Richman said. "It's time to address this problem, and it's time for the special-interest groups who continue to put their head in the sand to help resolve this issue."

Richman's California Foundation for Fiscal Responsibility is planning to introduce a ballot measure within a few weeks to reform the pension and health-benefit system for state employees.

The initiative, which the foundation hopes to place on the November 2008 ballot, would raise the retirement age for state and local employees to be consistent with federal Social Security standards.

Depending on the job, that could raise retirement ages five to 10 years for government employees, who now in some cases can retire at age 50 or 55.

It would also revise the formulas on how pensions are calculated, basing them on a longer-term average to prevent the pension-spiking that occurs when employees earn a higher salary in their final year. The changes would affect only new employees, not those working under the current system.

In the past, efforts to reform the pension and health-benefit system have met with stiff opposition from the state's powerful public employee unions. In 2005, Gov. Arnold Schwarzenegger proposed switching the state's pension system to a defined contribution plan, similar to a 401(k).

But after the unions charged that he was cutting off benefits to widows of firefighters and police officers, the governor quickly retreated and withdrew his plan.

This year, he has taken the more cautious approach of creating a commission to study the problem.

"As the governor has said, we have to find the best way to meet these obligations without harming other government programs and taxpayers -- or handing the problem off to future generations," state Finance Director Mike Genest said in a written statement. "That's exactly what the commission he created is in the process of doing."

Dave Low, an official with the California School Employees Association, said unions would likely resist Richman's proposal.

"I think it's absolutely a horrible and ridiculous idea," Low said. "I believe the public will see that as a very draconian and unacceptable statewide ballot measure."

Instead, Low said, most unions likely will be willing to work with the governor through the collective-bargaining process. He said it is a problem best resolved by separate negotiations with unions, rather than by a single statewide solution.

Low, who sits on the governor's pension-reform commission, noted some unions in recent years have agreed to some reductions in retirement benefits. He also noted that more than half of retirees for local government agencies and districts receive no health-care benefits from their former employers at all.

harrison.sheppard(at)dailynews.com

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