CALIFORNIA

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

A Troubled Fiscal Future

Presentation Agenda

Overview
Healthcare
Pensions
Complications
Conclusion






The Problems:
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Present:
Fiscal challenges exist for the present, short-term, and long-term futures
What if We Do Nothing?
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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
70
80
90
100
110
120
130
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16
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?
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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
70
80
90
100
110
120
130
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16
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
Proposals
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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

Overview
Healthcare
Pensions
Complications
Conclusion






State Workers Health Obligations
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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%
Californias Medi-Crisis
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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
10%
12%
14%
16%
18%
20%
22%
24%
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16
Californias Medi-Crisis
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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
10%
12%
14%
16%
18%
20%
22%
24%
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16
ARRA Stimulus
Recommendation: Medi-Cal
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Present:
Appeal to US Government to ease restrictions or subsidize Medi-Cal
Make Medi-Cal
Flexible
Increase Federal
Contribution
Federal Take-Over
of Medi-Cal
Present fiscal problems to Federal Government
Leverage Californias ability to opt out

Opt out of Medicaid
Allow Federal Government to take over



Decide which optional Medi-Caid programs to take



Recommendation: Retiree Health
Present:
Restructure retiree healthcare benefits
Create a Retiree
Healthcare Fund
Reduce Retiree
Healthcare Benefits
Make Retroactive
Changes
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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

Introduction
Healthcare
Pensions
Complications
Conclusion






Painsion Problem
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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 Trends
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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: Pensions
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Present:
Reduce pension obligations for new state employees
Prevent Cheating
the System
Prevent Against
Beneficiary Increases
Shift to Defined-
Contribution plan
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

Introduction
Overview
Healthcare
Pensions
Complications
Conclusion






Resistance to Change
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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

Introduction
Healthcare
Pensions
Complications
Conclusion






Conclusion
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Present:
Californias 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

Introduction
Healthcare
Pensions
Complications
Conclusion






Questions
References
1. Legislative Analysts Office;
http://www.lao.ca.gov/laoapp/PubDetails.aspx?id=2365
2. The 2011-2012 Budget: Californias Fiscal Outlook;
http://www.lao.ca.gov/reports/2010/bud/fiscal_outlook/fiscal_outlook_2010.pdf
3. Going For Broke: Reforming Californias Public Employee Pension Systems;
http://siepr.stanford.edu/system/files/shared/GoingforBroke_pb.pdf
4. 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/SB1000142405274870368870457562091285886420
0.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 Californias Pension Shortfalls: The Role of Demographics in Designing
Solutions;
http://www.milkeninstitute.org/publications/publications.taf?function=detail&ID
=38801252&cat=resrep





Appendix
CA Retirement Benefits Compared to Selected Other States

Employee Retiring in 2004*
Employee
Contribution
State
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 2015-16
Total 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