Article: State and Local Government Funding of Health and Retirement Benefits for Employees: Current Problems and Possible Solutions with California Health Benefts as an Example

Government employee health and retirement benefits have come under a likely unprecedented critique, some may say attack, during the difficult economic times, particularly for state and local governments, during the beginning of the second decade of the twenty-first century.  Some suggested changes are more incremental than others.  The City of San Diego is putting a measure before voters to offer new city employees 401(k)’s rather than defined benefit pensions.[1]  The voters in the City of Carlsbad, a San Diego suburb, have already approved an initiative requiring future city employees’ benefits to be approved by voters.  Carlsbad had already implemented a two-tiered pension system in which new employees receive significantly lower retirement benefits.[2]  The University of California Board of Regents (“UC Regents”) has recently voted to increase employee and employer contributions to the retirement plan as well as to raise the retirement age for future university employees and to require those employees to pay more for their health care benefits.[3]  The UC Regents also has been resisting an effort to raise the limit on compensation upon which pensions are calculated.[4]  Other efforts have been to restrict the ability of employees to add to their pensions, for example, by buying additional years to add to the pension formula (normally, for example, years of services times final salary year or three year compensation times 1.2% to 3%).[5]

Some attempts at curtailing public employees’ retirement and health benefits are likely more radical.  The California Little Hoover Commission, an independent group including five governor-appointed citizens, four legislature-appointed citizens, two state senators, and two state representatives,[6] recently recommended “freez[ing] pension benefits for current state and local government workers” and moving to a “hybrid model” that would include a 401(k).[7]  The Commission also recommended a two-tiered system with lesser benefits for new employees, increasing contributions from government workers, preventing workers from increasing pay in final year of service, capping annual salary for calculating pension benefits, and increasing minimum retirement age, among other suggestions.[8]  The State of Wisconsin passed legislation to deny collective bargaining to government employees for benefits.[9]  Finally, the City of San Diego successfully litigated against the city police union to be able to renegotiate future health benefits of retirees.[10]

This article will first examine the various estimated costs for future retirement and health benefits of state and local government employees.  Secondly, the article will evaluate some of the suggested reductions in retiree health benefits and the limitations on such reductions, particularly in the context of the laws of California as an example.  Finally, the article will examine the health and retirement benefits of state and local government employees within the larger context of the societal stake in such benefits.

View Full PDF

John R. Dorocak, Honors A.B., Xavier University, J.D., Case Western Reserve University, LL.M. (Tax), University of  Florida, C.P.A., California and Ohio, is a Professor of Accounting at California State University, San Bernardino.  James Estes, B.A., M.B.A., California State University, Fullerton, Ph.D, California Coast University, CFP, CPCU, ChFC, CLU, is a Professor of Finance at California State University San Bernardino.  The Authors thank Lloyd E. Peake, B.A., University of Southern California, J.D., Southwestern University, Professor Emeritus in the Department of Management at California State University, San Bernardino, for his insightful comments.