Analysis of the 2006-07 Budget Bill Legislative Analyst's Office February 2006

Health and Dental Benefits For Annuitants (9650)

Through this budget item, the state contributes toward health and dental insurance premiums of more than 200,000 retired state employees, their family members, and other eligible annuitants. Retirees and other annuitants may choose to enroll in one of several plans from health maintenance and preferred provider organizations. These plans are administered by the California Public Employees’ Retirement System (CalPERS), the third largest purchaser of health services in the U.S. (We discuss retiree health benefits, their costs, new accounting standards related to them, and options for the Legislature to reduce costs of this fast-growing budget item over the long term in “Part V” of The 2006-07 Budget: Perspectives and Issues [P&I].)

Budget-Year Costs Not Yet Completely Determined

We withhold recommendation on the request for $1 billion from the General Fund for annuitants’ health and dental benefits pending final determination of the state’s health and dental premium rates for calendar year 2007.

The budget proposes total expenditures of $1 billion from the General Fund for health and dental benefits for annuitants (including retired state employees, their family members, and certain others eligible under law) in 2006-07. This is $124 million, or 14 percent, more than estimated expenditures for this purpose in the current year, as shown in Figure 1. Although the costs initially are paid from the General Fund, the state recovers a portion of these costs (about one-third) from special funds through pro rata charges.

Projected Growth in Premiums Drives Most of the Increase. The budget request assumes that the premiums CalPERS negotiates with health plans will increase on average by 9.5 percent across its basic and Medicare plans in calendar year 2007. (Basic plans enroll most employees and retirees under age 65, and Medicare plans enroll most retirees over age 65.) Under current law, the state contributes 100 percent of the average annual costs of health premium for retired state employees and 90 percent of average costs for their family members. The rate of premium increase, therefore, is a critical factor in determining the overall amount required for this budget item each year. The more that health premiums increase, the larger the required state contribution for each annuitant. The budget also assumes comparable growth in dental premiums, which represent about 7 percent of the total funding requirement for this budget item.

Budgeted Increase Also Reflects Accelerating Enrollment Growth. The budgeted increase reflects estimated net enrollment growth of 4.7 percent, continuing recent trends of reported enrollment acceleration due to: (1) the aging of the large “baby boom” generation of state employees, (2) new benefits allowing some state employees to retire at lower ages, and (3) a long-term trend of increasing longevity among Californians. Since 1998, the average annual growth of retirees and others receiving state health care contributions funded in this budget item has been about 3.6 percent. We expect that a comparatively higher rate of growth in retired health plan enrollees will continue through the next several years.

Amount Needed Depends on Negotiations With Health Plans. The actual amount of funding needed in the budget year is dependent primarily on negotiations over health insurance premiums currently underway between CalPERS and the plans. As discussed in “Part V” of the P&I, CalPERS has adopted a number of initiatives in recent years-most recently by attempting to build coalitions with other large purchasers-to cut the rapid rise in premium rates experienced by the state during the last few years. The negotiated premium rates for the 2007 calendar year should be available for review during legislative budget hearings. At that time, CalPERS may be able to provide information on whether their various cost-control efforts are working. Pending receipt of the new rates, we withhold recommendation on the amount requested under this item.