Commentary
It’s July. The California State Legislature has successfully met the budget submission deadline of June 15, and it was signed by the governor. There was one small fly in the ointment: how to cut $12 billion in spending? All while trying to provide $750 million in tax credits annually to one specific industry: Hollywood. Go figure.
One massive spending reduction strategy that Gov. Gavin Newsom is negotiating is nonpayment for two years of the state’s unfunded actuarial accrued liability for retiree medical benefits. This nearly $85 billion debt would not be paid down by Sacramento and its employees, causing this languishing debt to increase from interest costs, for this unique lifetime benefit rarely seen in the private sector.
The wrong way to address the obligation of future costs is the “pay as you go” method, which deals with the immediate and not the upcoming higher bills on the horizon. Known as an “other post-employment benefit,” or OPEB, paying these retiree medical bills is a future cost that should be addressed systematically with an “annual required contribution,” or ARC, every year. Not doing so fits the definition of “kicking the can down the road.”
Not paying the ARC, or a higher amount, each year is a technique being pursued by what I would refer to as bottom-dwelling states that can’t afford to honor their commitments.
It’s July. It’s also backpacking season. And camping etiquette 101 is “Leave your campsite better than you found it.” But Sacramento, over the last decade, has failed to leave California’s balance sheet in better shape, even in flush economic times when this would have been a smart money move to make.
Reducing liabilities with higher payments helps to reduce the annual minimum payment, like with a credit card balance. But California leaders did not renegotiate or aggressively pay down the retiree medical liabilities.
I reminded both the Brown and Newsom administrations of this every year I served in the California State Senate, from 2015 to 2020. Not to toot my own horn, but I was vocal every budget cycle, to no avail.
