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2015

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Further Detail

Pursuant to existing labor agreements, the state contributes money to prefund retiree health benefits for California Highway Patrol (CHP) officers. In 2015-16, the administration anticipates that the state will spend about $54 million for this purpose. The administration proposes changing how the state appropriates this money. This proposal would affect how the state prefunds these benefits for CHP officers and any other employees for whom the state begins prefunding these benefits in the future.

In the past, the state has appropriated money to prefund retiree health benefits through a central budget item—Item 9651. Using Item 9651 for this purpose has been problematic as the state repeatedly has not appropriated sufficient funds in the Budget Act. As a result, mid-year augmentations have been necessary to avoid running a deficiency. The Department of Finance indicated that the state needed to appropriate an additional $3 million to prevent the item from running a deficiency in both 2013-14 and 2014-15.

As part of his January Budget, the Governor proposed ending the use of Item 9651 to prefund retiree health benefits and instead create a control section—Control Section 3.61—that prefunds retiree health benefits through departmental budgets. The May Revision includes minor changes to the January proposal. This decentralized method is similar to how the state makes its contribution payments towards pension benefits for state employees. Paying these costs through departmental budgets provides greater certainty as to the state’s prefunding obligations. In addition, paying these costs through departmental budgets provides the state greater ability to pay for these costs using federal grants and other funding sources that departments use to pay for personnel expenditures.

Recommendation

We generally agree with the administration’s approach to establish a more decentralized process to pay for the state’s ongoing obligations to prefund retiree health benefits through departmental budgets. As written, however, the proposal would grant the administration authority to adjust the amount of money the state pays to prefund retiree health benefits pursuant to (1) “approved memoranda of understanding” in the case of rank-and-file employees and (2) administrative actions for employees excluded from the collective bargaining process. This arguably could give the administration significant authority in certain circumstances to establish the state’s retiree health prefunding policy without prior legislative approval. Accordingly, to ensure that the significant decisions about retiree health prefunding remain under the control of the Legislature, we recommend modifying paragraph (c) of the proposed language to read:

LAO Contact: Nick Schroeder.