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March 15, 2011

California, Where Being Boned Is A Way of Life!

One of the major downsides to a large welfare state full of unfunded ("pay as you go") entitlements is that actuarial mistakes can really bite you in the ass. In this case, California's bill for retiree health and dental benefits unexpectedly shot up $8.1 billion dollars over and above the $51 Billion they had estimated just last year. Much of the increase was due to...wait for it...wait for it...bad forecasting, bad rate-of-return assumptions and over-reliance on subsidies.

The unfunded obligation as of June 30, 2010, grew $8.1 billion from the $51.8 billion obligation identified in the prior year. Less than half of the increase was simply due to another year of costs, payments and interest. The bulk of the increase was due to a change in the California Public Employees' Retirement System's (CalPERS) pension-benefit assumptions based on their latest 10-year study. That study found employees are retiring earlier, retirees are living longer, and actual premiums increased more than previously projected by the actuary. The increase appears larger because in 2008 and 2009, CalPERS decided to use surplus funds from its health care plans to reduce increases in health care premium rates. The 2011 rates were not subsidized, causing the premiums to jump back closer to what the level would have been without the surplus.
(Emphasis mine.)

Public-sector actuaries are...how shall I put this?...highly motivated to use the most optimistic numbers for their projections. The problem is, when these projections don't pan out, guess who gets to make up the shortfall?

More on this story here.


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posted by Monty at 08:53 AM

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