Controller Malia M. Cohen Releases Updated Costs Needed to Fully Fund State Retiree Health and Dental Benefits

SACRAMENTO - State Controller Malia M. Cohen today released an updated report showing the state's net liability to fully fund retiree health and dental benefits - also known as other post-employment benefits (OPEB) - has decreased to an estimated $77.8 billion. Given the current two-year temporary halt of state and employee prefunding contributions toward these benefits, Controller Cohen issued a reminder that a return to prefunding will ensure that the state responsibly plans for these retirement promises while protecting future generations from the budgetary impacts.

The net OPEB liability represents the present-day cost to provide health and dental benefits to state retirees and their dependents earned as of June 30, 2025, and is an estimate developed by actuaries in consideration of current and future economic, demographic, and health care-related assumptions that are subject to change on a yearly basis.

"While the year-over decrease in long-term costs for retiree health and dental benefits is welcome news, the responsible course of action for the state is to ensure that we are planning for these future costs by growing prefunding contributions with investment income," said Controller Cohen. "Returning to prefunding will better position the state as a fiscal steward with an eye toward protecting future budgets and taxpayer dollars."

California's net OPEB liability decreased by $13.7 billion since the prior year's valuation of $91.5 billion. In comparison, the net OPEB liability increased by $6.3 billion from the end of fiscal year 2022-23 to the end of fiscal year 2023-24 and also increased by $2.8 billion from the end of fiscal year 2021-22 to the end of fiscal year 2022-23.

The net OPEB liability is the total OPEB liability less the market value of assets including investment income and prefunding contributions. Health care claims experience, plan design and trend rates updates, demographic experience, and changes to assumptions including the blended discount rate affected the total OPEB liability estimate of $89.4 billion. The total OPEB liability decrease is mainly attributable to changes to the blended discount rate, which is based on the combination of the full funding discount rate of 6 percent and the 20-year municipal bond index which increased from 3.97 percent at the end of fiscal year 2023-24 to 5.2 percent at the end of fiscal year 2024-25. The change to the blended discount rate decreased the total OPEB liability by $13.4 billion. Higher than expected per member healthcare claim costs and selection of higher cost plans increased the total OPEB liability by nearly $1.3 billion. Changes in the health care trend rate assumptions, including adjustments to reflect the potential impact of the Inflation Reduction Act on Medicare prescription drug benefits, increased the total OPEB liability by more than $1.6 billion. Demographic experience, including rates of retirement, termination, disability and mortality, reduced the total OPEB liability by more than $3 billion, while changes to pension-related assumptions further reduced the total liability by more than $1.8 billion. The market value of OPEB assets increased by $2.6 billion, to $11.6 billion at the end of fiscal year 2024-25, resulting in the $77.8 billion net OPEB liability.

Beginning in January 2010, California entered into collective bargaining agreements to prefund retiree health and dental benefits with contributions deposited into the California Employers' Retiree Benefit Trust to generate investment income. The trust funds cannot be used to pay the retiree health benefits until the state has fully funded the legacy liability, or 2046, whichever comes first. Prior to prefunding efforts, the state paid for the benefits on a pay-as-you-go basis - only covering the minimum amount needed to fund the costs as they were due. With all bargaining units except for those under the California State University having contributed to the trust, analysts expected to see acceleration of the funded ratio.

Several bargaining agreements reached with state public employee unions beginning in fiscal year 2025-26 suspended state and/or employee prefunding contributions toward future benefits for two years. The report projects that the pause in prefunding will delay full funding by two years and that future suspensions could lead to a substantial deviation from the full funding plan - ultimately influencing factors used to calculate the liability including a decrease in the discount rate.

"It's important to note these long-term costs are not insurmountable so long as we continue to plan ahead and save," said Controller Cohen.

The California Public Employees Retirement System (CalPERS) is the state's largest purchaser of public employee health benefits, and the Controller serves as a voting member of its Pension & Health Benefits Committee. CalPERS uses its market position to contain rising health care costs for its members and retirees by providing choices for affordable health plans, negotiating for lower premiums, encouraging prevention, and stabilizing and lowering the costs of prescription drugs where feasible.