California Budget Deficit Analysis

CALIFORNIA

Presented by Valentina Forsythe, Neel Mehta, Sriram Prakash, Joanne Reinhard, Andy Soltani

A Troubled Fiscal Future

Presentation Agenda

OverviewHealthcarePensionsComplicationsConclusion

The Problems:Introduction

Present:Fiscal challenges exist for the present, short-term, and long-term futures

What if We Do Nothing?Introduction

Present:Maintaining current liabilities will grow to become more striking problems

• Decrease in credit rating• Collapse of pension and healthcare systems• Drastic cuts of programs and services• Compounding debt to future generations

2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-1670

80

90

100

110

120

130

Total Revenues and Transfers (Dollars in Billions) Total Expenditures (Dollars in Billions)

Medi-Cal Spending as a Percentage of the General Fund

What if We Do Nothing?Introduction

Present:Maintaining current liabilities will grow to become more striking problems

• Decrease in credit rating• Collapse of pension and healthcare systems• Drastic cuts of programs and services• Compounding debt to future generations

2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-1670

80

90

100

110

120

130

Total Revenues and Transfers (Dollars in Billions) Total Expenditures (Dollars in Billions)

Medi-Cal Spending as a Percentage of the General Fund

$20 Billion Gap

ProposalsIntroduction

Present:California must act now and make drastic changes across the board

• Appeal to US Government to ease restrictions or subsidize Medi-Cal • Restructure retiree healthcare benefits• Reduce pension obligations for new state employees

Presentation Agenda

OverviewHealthcarePensionsComplicationsConclusion

State Workers Health ObligationsH

ealthcare

Present:GAO estimates that healthcare costs will drive future budget problems

• Current $52 Billion unfunded liabilities• Costs to increase 6.7% per year• Retirees to increase 1.2% per year• Obligation to cover regardless of cost

Annual Growth of Healthcare Costs  Hospital Care 8.20%Physician Services 5.50%Drug Costs 3.40%Overall Cost per Retiree 6.70%   Number of retirees 1.30%

California’s Medi-CrisisHealthcare

Medi-Cal will become unaffordable if left at current growth rate in 30 years

• End of ARRA stimulus increases yearly costs from $10 to $23 Billion• Affordable Care Act to increase coverage, costs $2 Billion annually• Current expense growth rate = 8%• Unsustainable by 2040

Medi-Cal Spending as a Percentage of the General Fund

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-1610%

12%

14%

16%

18%

20%

22%

24%

California’s Medi-CrisisHealthcare

Medi-Cal will become unaffordable if left at current growth rate in 30 years

• End of ARRA stimulus increases yearly costs from $10 to $23 Billion• Affordable Care Act to increase coverage, costs $2 Billion annually• Current expense growth rate = 8%• Unsustainable by 2040

Medi-Cal Spending as a Percentage of the General Fund

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-1610%

12%

14%

16%

18%

20%

22%

24%

ARRA Stimulus

Recommendation: Medi-CalHealthcare – Proposal I

Present:Appeal to US Government to ease restrictions or subsidize Medi-Cal

2Make Medi-Cal

Flexible

Increase Federal Contribution

Federal Take-Over of Medi-Cal

13

• Present fiscal problems to Federal Government• Leverage California’s ability to opt out

• Opt out of Medicaid• Allow Federal Government to take over

• Decide which optional Medi-Caid programs to take

Recommendation: Retiree HealthPresent:Restructure retiree healthcare benefits

2Create a Retiree Healthcare Fund

Reduce Retiree Healthcare Benefits

Make Retroactive Changes

13

Healthcare – Proposal II

• Cap annual payments• Shift risk of higher premiums to retirees• Require longer service for health benefits

• Acknowledge that health benefits are not a right• Consider the removal of all retiree healthcare

• Start gathering assets for the fund• Actuarial estimation of liabilities and their growth

Presentation Agenda

IntroductionHealthcarePensionsComplicationsConclusion

Painsion ProblemPensions

Present:Pensions provide overly-generous compensation to state employees

• Public guaranteed 250% more the retirement benefits of private workers

• Pension loopholes:• Pension-Spiking• Double Dipping

• Retroactively grown from bills and translations:

• SB400• Safety Pensions

CA Pension Benefit Formulas Before and After SB 400

Employee Category Before SB 400 After SB 400 (Eff. Jan. 1, 2000)

Miscellaneous/Industrial 2% at 60 2% at 55

Safety 2% at 55 2.5% at 55

Peace Officer/Firefighter 2.5% at 55 3% at 55

Highway Patrol 2% at 50 3% at 50

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

Public Private

Benefit

Contribution

Hourly Benefit Compensation

Pension TrendsPensions

Present:Pension liabilities are increasing while assets have decreased

Change in Public Benefits over Last Decade

• Assets have declined by 25% or $100 Billion and will run out by 2030 • Discount rates skew these liability projections from $55 to $500 Billion

Source: Reason Foundation

Recommendation: PensionsPensions – Proposal III

Present:Reduce pension obligations for new state employees

2Prevent Cheating

the System

Prevent Against Beneficiary Increases

Shift to Defined-Contribution plan

13

• Stop retroactive increases like SB 400• Control state employee growth• Prevent translation of benefits

• Give new employees defined contribution plans• Equalize benefits between public, private sectors

• Average multiple years for pension sample• Deduct post-retirement income from pensions

Presentation Agenda

IntroductionOverviewHealthcarePensionsComplicationsConclusion

Resistance to ChangeComplications

Present:• Ethical Issues

• Placing a Price on Life• Lowering Standard of Living for State

Employees• Opting out of Medi-Cal will place entire

burden on Federal Government• Legal Issues

• Contractual rights cannot be revoked• Technical Issues

• Comparisons are often imperfect» Private and Public Sector

• Cannot institute overarching systems» Judgment calls required for

healthcare

Ethical, legal, technical challenges arise with the institution of proposals

Presentation Agenda

IntroductionHealthcarePensionsComplicationsConclusion

ConclusionConclusion

Present:California’s fiscal future needs drastic action to be taken in the present

• California cannot sustain its current expenditure level• Pension Liability is 5 times greater than outstanding debt• Upcoming Medi-Cal cost growth is 50% of budget deficit

• California must reform its programs:– Medi-Cal

• Appeal to Federal Government– Retiree heath care

• Fund or lessen benefits– Pensions

• Change to Defined-Contribution structure

Thank you

IntroductionHealthcarePensionsComplicationsConclusion

Questions

References1. Legislative Analyst’s Office;

http://www.lao.ca.gov/laoapp/PubDetails.aspx?id=23652. The 2011-2012 Budget: California’s Fiscal Outlook;

http://www.lao.ca.gov/reports/2010/bud/fiscal_outlook/fiscal_outlook_2010.pdf3. Going For Broke: Reforming California’s Public Employee Pension Systems;

http://siepr.stanford.edu/system/files/shared/GoingforBroke_pb.pdf4. Medicaid Meltdown: Dropping Medicaid Could Save States $1 Trillion;

http://www.heritage.org/Research/Reports/2009/11/Medicaid-Meltdown-Dropping-Medicaid-Could-Save-States-1-Trillion

5. California Bond Woe Bodes Ill for States; http://online.wsj.com/article/SB10001424052748703688704575620912858864200.html?mod=WSJ_hp_MIDDLENexttoWhatsNewsForth

6. $10-billion Medicaid plan approved for California; http://articles.latimes.com/2010/nov/03/nation/la-na-california-medicaid-rules-20101103

7. S. R. Collins, How the Affordable Care Act of 2010 Will Help Low and Moderate Income Families, The Commonwealth Fund Blog, July 2010.

8. Addressing California’s Pension Shortfalls: The Role of Demographics in Designing Solutions; http://www.milkeninstitute.org/publications/publications.taf?function=detail&ID=38801252&cat=resrep

AppendixCA Retirement Benefits Compared to Selected Other States

  Employee Retiring in 2004*Employee

ContributionState Benefits at Age 55

Benefits at Age 60

Benefits at Age 62

Benefits at Age 65

California $25,200 $36,098 $40,958 $46,500 5%Florida $11,914 $20,424 $24,439 $28,410 -Illinois ** $24,250 $26,115 $28,913 4%Oregon $15,242 $24,831 $26,741 $29,606 6%Texas ** $34,199 $36,829 $40,775 6%

* Assumes employee started working for the state at age 34 and has earned $60,000 in salary in the last year before retirement.** Not eligible for retirement at this age.

Source: CA Legislative Analyst's Office

LAO General Fund Forecast (Dollars in Millions)

Fiscal Year 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16Total Revenues and Transfers

$ 87,041 $ 93,283 $ 83,530 $ 88,723 $ 94,708 $ 100,478 $ 106,197

Total Expenditures $ 87,037 $ 92,505 $ 102,756 $ 111,167 $ 115,149 $ 120,683 $ 125,631 Mide-Cal Spending $ 10,136 $ 12,595 $ 17,642 $ 18,831 $ 20,291 $ 22,101 $ 23,976