Analysis of the 2004-05 Budget Bill Legislative Analyst's Office February 2004

Control Section 4.20

The Public Employees' Retirement System (PERS) administers the health insurance program for state employees and retirees, as well as local governments that contract with PERS for this program. The budget includes $18 million in the PERS' budget for this purpose in 2004-05. To cover administrative costs, the state and contracting agencies pay a percentage of total health insurance premiums. This control section establishes the fee.

The fund that pays an employee's salary and benefits also pays the administrative fee for the health insurance program. State costs are split about evenly between the General Fund and special funds. This represents 60 percent of program revenue—30 percent each from the General Fund and special funds. Local governments make up the remaining 40 percent.

Administrative Fee Should Be Reduced

We recommend that the Legislature reduce the health insurance premium charge to 0.35 percent to accumulate a smaller fund balance and save the state $3.9 million ($1.9 million General Fund).

Recent Fee Levels. In the past, this administrative charge had been 0.5 percent of premiums, as established each year in the budget act. However, the 2002-03 Budget Act reduced the fee to 0.2 percent to achieve General Fund savings by drawing down a very high fund balance. The 2003-04 Budget Act returned the fee to 0.44 percent to maintain a prudent reserve while accounting for continued double-digit hikes in health insurance premiums. The current-year fee will generate an estimated fund balance of 22 percent of expenditures at the end of the current year.

Recommend Lowering Proposed Fee. The budget proposes to restore the administrative fee to 0.5 percent. This would accumulate an unnecessarily high fund balance of 50 percent by the end of the budget year. We estimate that a 0.35 percent charge would result in a more appropriate fund balance of approximately 11 percent. A 0.35 percent charge would reduce state costs by $3.9 million ($1.9 million General Fund) while also saving local governments $2.6 million. Consequently, we recommend that the Legislature reduce the premium charge to 0.35 percent.