OPEB Funding in California Pensions
OPEB Funding in California Pensions
Executive Summary
Other Post-Employment Benefits (OPEB) represent a significant long-term financial obligation for California public agencies, distinct from pension liabilities but often interconnected in fiscal planning. California state and local governments collectively face approximately $187 billion in unfunded OPEB liabilities, with unfunded healthcare retirement obligations now surpassing unfunded pension obligations at the national level for the first time. This report examines the regulatory framework governing OPEB in California, the specific approaches taken by San Joaquin County jurisdictions, and the City of Lodi's unique sick leave conversion-based OPEB program.
Understanding OPEB in California
Definition and Scope
OPEB encompasses all non-pension benefits provided to retired public employees, including:
- Retiree health insurance (medical, dental, vision)
- Life insurance
- Medicare supplement insurance
- Long-term care benefits
Unlike pensions, which provide income replacement, OPEB addresses the health and welfare needs of retirees. The obligation arises when employees earn these benefits during active service, even though the actual payments occur during retirement.
Regulatory Framework
Two critical regulatory mechanisms govern OPEB for California public agencies:
| Framework | Description | Key Requirements |
|---|---|---|
| GASB 74/75 | Governmental Accounting Standards Board statements effective for fiscal years after June 15, 2017 | Requires recognition of Net OPEB Liability on balance sheet; expanded disclosures; actuarial valuations every 2 years |
| PEMHCA | Public Employees' Medical & Hospital Care Act | Minimum employer contribution required for agencies contracting with CalPERS health benefits |
The PEMHCA minimum employer contribution for 2025 is $158 per month, increasing to $162 per month for 2026. This statutory minimum applies to both active employees and annuitants who contract through CalPERS health plans.
Funding Approaches: Pay-As-You-Go vs. Prefunding
California public agencies predominantly fund OPEB obligations on a pay-as-you-go (PAYGO) basis, paying only current-year retiree benefit costs without setting aside assets for future obligations. A 2016 survey found that the vast majority of California cities and counties continued this practice despite its long-term fiscal implications.
| Funding Approach | Characteristics | Fiscal Impact |
|---|---|---|
| Pay-as-you-go | No advance funding; current premiums paid from operating budgets | Higher long-term costs; large unfunded liabilities on financial statements |
| Partial Prefunding | Some contributions to irrevocable trust | Lower discount rate benefits; reduced liability growth |
| Full Prefunding | Annual Determined Contribution (ADC) funded to trust | Lowest long-term cost; investment returns offset future payments |
Prefunding through vehicles like the California Employers' Retiree Benefit Trust (CERBT) at CalPERS offers significant advantages: investment earnings reduce long-term employer costs, trust assets directly offset reported liabilities, and agencies demonstrate prudent financial management. Over 600 California public employers now participate in CERBT.
San Joaquin County OPEB Landscape
County-Level OPEB Management
San Joaquin County's OPEB obligations are managed separately from its pension system administered by the San Joaquin County Employees' Retirement Association (SJCERA). SJCERA is a 1937 Act county retirement system providing defined benefit pensions to approximately 10 participating employers, including the County, Superior Court, LAFCO, and several special districts.
As of recent financial reporting, San Joaquin County maintains:
- Total OPEB Liability: Approximately $81.5 million to $103.8 million (varying by measurement date)
- Funding Status: Primarily unfunded (pay-as-you-go approach)
- Retiree Health Benefits: Offered through County-sponsored medical plans including Kaiser Permanente and County Managed Care Plan options
Sick Leave Conversion: A Distinctive OPEB Component
A critical component of OPEB liability for San Joaquin County employers derives from sick leave conversion programs. Under SJCERA administration, eligible employees hired on or before August 27, 2001 who made an irrevocable election in 2001 can convert unused sick leave at retirement to either:
- Sick Leave Bank: Cash value ($221.24 per 8 hours of sick leave) to pay retiree health and dental premiums
- Service Credit: Conversion to additional retirement service credit
This election is permanent and implemented by SJCERA upon retirement. Members who elected the sick leave bank have SJCERA monitor their balance and receive notification when it nears depletion.
The Stockton Precedent
The City of Stockton's 2012 bankruptcy fundamentally shaped OPEB policy understanding in San Joaquin County. Stockton—the largest U.S. city to file for Chapter 9 bankruptcy at the time—eliminated all retiree health benefits with an unfunded liability of $417 million while maintaining full pension obligations to CalPERS.
Key Takeaways from the Stockton Case
| Issue | Outcome | Implication |
|---|---|---|
| Legal status of OPEB | Can be terminated or reduced in bankruptcy | Unlike pensions, OPEB lacks constitutional protection |
| Impact on retirees | Approximately 1,000 retirees lost city-funded health coverage | Retirees forced to pay full premiums ($800-$1,126/month) |
| Precedent established | Judge Klein ruled federal bankruptcy law trumps state protections | Governments may cut OPEB to address fiscal distress |
The bankruptcy judge's 2014 ruling emphasized that Stockton's retirees made "significant concessions" through the cancellation of retiree health benefits—valued at approximately $550 million. This precedent underscores the vulnerability of OPEB promises compared to pension benefits.
City of Lodi: OPEB Structure and Funding
Current Financial Position
The City of Lodi's fiscal year 2023-24 Annual Comprehensive Financial Report (ACFR) reveals the following long-term liability position:
| Liability Category | Amount | Year-over-Year Change |
|---|---|---|
| OPEB Liability | $25.6 million | Decreased $2.5 million |
| Net Pension Liability | $182.3 million | Increased $62.0 million |
| Long-term Debt | $167.0 million | Decreased $7.7 million |
| Net Position | $379.5 million | Increased $49.4 million |
The City has received the Government Finance Officers Association Certificate of Achievement for Excellence in Financial Reporting for 30 consecutive years, indicating strong financial reporting practices.
Lodi's Sick Leave Conversion Program
The primary driver of Lodi's OPEB liability is a closed sick leave conversion program established for employees hired before July 1, 1994. This program, documented in the City's Memoranda of Understanding with bargaining units, provides retiree medical premium support based on accumulated sick leave.
Eligibility Requirements
| Hire Date | Eligibility | Available Options |
|---|---|---|
| Before July 1, 1994 | After 10 years of City service, upon retirement | Options 1, 2, or 3 |
| After July 1, 1994 | No sick leave to medical premium conversion | Option 3 only (CalPERS service credit) |
Conversion Options for Pre-1994 Employees
Option 1 – "Bank" Method
- Accumulated sick leave hours reduced by 16⅔%
- Remaining balance converted to days
- Days multiplied by current monthly premium (employee + dependents)
- 50% of dollar amount placed in a "bank" for medical insurance premiums
- For each year of employment over 10 years, 2.5% is added to the 50% base
- Bank pays total premiums until depleted; may also cover dental, vision, chiropractic
Option 2 – "Conversion" Method
- Accumulated hours multiplied by 50% and converted to days
- For each year over 10 years, 2.5% added to the 50%
- City pays one month's premium per day after conversion
- Premium amount fixed at retirement-time rates (capped per contract)
- Employee responsible for any premium increases above the capped amount
Option 3 – "Service Credit"
- Unused sick leave converted to CalPERS service credit upon retirement
- Available to all employees regardless of hire date
- Conversion rate: 2,000 hours = 1 year of service credit
Practical Example
An employee hired in 1990 with 25 years of service at retirement who accumulated 2,000 sick leave hours under Option 1:
| Calculation Step | Value |
|---|---|
| Hours after 16⅔% reduction | 1,667 hours |
| Days equivalent | 208.4 days |
| Assuming $1,500/month premium | $312,600 base |
| Service adjustment (50% + 37.5% for 15 years over 10) | 87.5% |
| Bank Amount | $273,525 |
This closed program means Lodi's OPEB liability will decline over time as participants in the pre-1994 cohort retire and their benefits are exhausted. The reduction of $2.5 million in OPEB liability from FY 2022-23 to FY 2023-24 reflects this trend.
Lodi's OPEB Funding Strategy
Based on available documentation, the City of Lodi appears to fund its OPEB obligations primarily on a pay-as-you-go basis. The City is not listed among CERBT participating agencies, indicating it has not established a prefunding trust through CalPERS.
The City's approach to managing OPEB liability focuses on:
- Closed Plan Design: No new participants can enter the sick leave conversion program for retiree medical benefits (post-July 1994 hires receive only CalPERS service credit conversion)
- Contributions to Long-term Liabilities: The City has made efforts since 2017 to increase funding to address PERS and OPEB obligations
- Premium Caps: Medical insurance contribution caps limit exposure to healthcare cost inflation
- Actuarial Valuations: Biennial GASB 75 actuarial valuations track liability progression
Comparative Analysis: Regional OPEB Approaches
| Jurisdiction | OPEB Liability | Funding Approach | Key Characteristics |
|---|---|---|---|
| City of Lodi | $25.6 million | Pay-as-you-go; closed program | Sick leave conversion for pre-1994 hires; CalPERS service credit option for all |
| San Joaquin County | ~$81.5 million | Pay-as-you-go | County-sponsored retiree health plans; SJCERA-administered sick leave bank |
| City of Stockton | Eliminated (was $417M) | N/A (terminated 2012-2013) | Bankruptcy eliminated all retiree health benefits; pension preserved |
| City of Tracy | Reported in TDA financials | Mixed | Net OPEB liability reported per GASB 75 |
California Statewide Context
California's aggregate unfunded OPEB position provides important context:
- State of California Net OPEB Liability: $91.5 billion (increased $6.3 billion from prior year)
- Statewide Local Government OPEB Debt: Approximately $187 billion
- National Trend: Unfunded OPEB liabilities ($789 billion) now exceed unfunded pension liabilities ($753 billion) for the first time
Risk Assessment and Policy Implications
Fiscal Sustainability Concerns
The vulnerability of OPEB benefits demonstrated by the Stockton bankruptcy creates uncertainty for public employees planning retirement healthcare. Unlike pensions protected under Article XVI of the California Constitution, OPEB commitments can be modified or terminated by governing bodies facing fiscal stress.
Recommended Best Practices
For agencies like Lodi seeking to responsibly manage OPEB obligations, the League of California Cities OPEB Task Force recommends:
- Establish an Irrevocable OPEB Trust: Consider CERBT or PARS trust options to prefund obligations
- Develop a Funding Policy: Commit to paying at least a portion of the Annual Determined Contribution beyond pay-as-you-go
- Modify Benefits Prospectively: Cap retiree premium contributions; implement tiered vesting schedules
- Use Dependent Cost Sharing: Require retiree contributions toward dependent coverage
- Coordinate with PEMHCA Minimum: For CalPERS health agencies, consider setting retiree contributions at the PEMHCA minimum to limit liability growth
Lodi's Position
The City of Lodi's closed sick leave conversion program represents a naturally declining liability structure—a favorable position compared to agencies with open-ended OPEB commitments. The reduction of $2.5 million in liability over a single fiscal year demonstrates this trajectory. However, the absence of a formal prefunding mechanism means the City relies entirely on operating revenues to meet current obligations, which may create budget pressure if retiree healthcare costs accelerate.
Conclusion
OPEB funding in California reflects a complex interplay of statutory requirements (PEMHCA), accounting standards (GASB 74/75), and local policy decisions. San Joaquin County jurisdictions, including Lodi, have adopted approaches shaped by historical benefit promises and the sobering lessons of the Stockton bankruptcy.
The City of Lodi's OPEB structure—centered on a closed sick leave conversion program for pre-1994 employees—positions it to see declining liabilities over time without requiring dramatic benefit cuts. However, the pay-as-you-go funding approach creates long-term financial reporting challenges and foregoes the investment returns available through prefunding vehicles like CERBT.
For public employees and policymakers in the region, the key insight is that OPEB benefits carry meaningfully less protection than pensions. Prudent financial planning should account for the possibility that retiree health benefits may be reduced or modified, particularly for agencies facing fiscal distress. Simultaneously, agencies should evaluate whether establishing prefunding mechanisms would strengthen their long-term financial position and provide greater security for future retirees.
References and Sources
- OPEB: The Trillion-Dollar Acronym - American Legislative Exchange Council
- California's Other Fiscal Time Bomb: $187 Billion in OPEB Liabilities - Reason Foundation
- Other Post-Employment Benefits (OPEB) - Truth in Accounting
- Retiree Health Care OPEB Guide - League of California Cities
- Other Post-Employment Benefits (OPEB) - CalHR
- California Employers' Retiree Benefit Trust (CERBT) Fund - CalPERS
- GASB 74/75 Reporting - CalSTRS
- Sick Leave Conversion - San Joaquin County Employee Retirement Association
- City of Lodi FY 2023-24 Annual Comprehensive Financial Report
- City of Lodi Mid-Management Association MOU 2023-2025
- Stockton retirees sue to stop city from cutting health benefits - Los Angeles Times
- Judge Approves Bankruptcy Exit for Stockton, Calif. - New York Times
- New PEMHCA Minimum for 2025 is $158 - Liebert Cassidy Whitmore
- Health care retirement debt surpasses state and local government pension debt - Reason Foundation
- San Joaquin County Financial Statements FY 2023-24