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Los Angeles Schools Facing $15 Billion Debt for Retiree Health Care

An unreleased analysis of the school district's post-employment benefits shows liabilities climbed from $13.5 billion in 2015 to $14.9 billion in 2017.

picture alliance / Frank Duenzl/Newscompicture alliance / Frank Duenzl/NewscomA forthcoming report on the Los Angeles Unified School District's retirement costs will show that the district has nearly $15 billion in unfunded health care costs for current employees and retirees.

The district's so-called OPEB liability—that's actuarial jargon for "other post-employment benefits," which includes the cost of medical, dental, and other health care benefits that fall outside the traditional pension system—has climbed from $13.5 billion in 2015 to $14.9 billion in 2017, according to the report, a copy of which was obtained by Reason. It has not yet been released publicly by the district. A spokeswoman for Aon Hewitt, the accounting firm that completed the assessment on the school district's behalf, confirmed the report's legitimacy.

The increase in the district's unfunded liability is driven by an adjustment in accounting standards that prohibits school districts and other public employers from using artificially high estimates for future investment returns, a strategy that in the past has allowed governments to hide some of their retirement liabilities. Under the new rules, future returns will be estimated at 3.6 percent, rather than the previous rate of 4.7 percent.

This change in accounting standards is expected to affect pension systems from coast to coast, leaving a more realistic (but also more expensive) picture of what taxpayers and governments will owe to current public employees when they retire. The change will also require public entities to show their OPEB liabilities on official balance sheets, something that few governments previously did.

In other words, the LAUSD is running out of ways to hide its public employee debt—and is running out of money to pay for it.

Because school districts in California receive state aid based on the number of students enrolled in district schools, the LAUSD's declining enrollment means there is less state funding to cover those future costs. The district has done a poor job of setting aside funds to keep its OPEB accounts full—the school district has only $244 million in assets to cover more than $15.2 billion in liabilities, the report shows—and a pay-as-you-go strategy works only as long as future cash flows can keep up. Public employees will continue to accrue benefits until they die, but declining enrollment exposes the district's fiscal problem.

While there are a variety of rules governing when school district employees can retire, most are eligible for retirement when their years of service and age add up to 80. In other words, a 55-year-old with 25 years of employment could retire with full benefits. The report shows that the most common ages for LAUSD employees to retire are between 59 and 61.

As Marc Joffe, a senior policy analyst for the Reason Foundation (which publishes this blog), wrote last year in the Orange County Register, the LAUSD's OPEB costs per student are much higher than several other large California school districts. For the 2016 school year, LAUSD paid $525 per student for OPEBs compared to $81 at Irvine Unified, $29 at San Diego Unified, and $0 at Oakland Unified, which does not subsidize retiree health insurance coverage at all. Unlike most other districts, the LAUSD provides the same health coverage for employees and retirees, with neither group paying premiums for their insurance. By contrast, retirees in Oakland pay their full health insurance premiums.

If the LAUSD required employees and retirees to cover just 10 percent of the health insurance premiums, the district could save $54 million annually, according to a 2015 report from the district's Independent Financial Review Panel.

And as the Los Angeles Times editorial board noted in November, even a supposed "freeze" on health care spending wasn't much of a freeze. "That doesn't mean its expenses will stay the same; instead, the district will withdraw dollars from a healthcare reserve to cover the higher costs, rather than spending out of the general fund," the paper explained.

The arrangement, the Times said, was "like saying it'll be easier to talk about buying health insurance after you're in the hospital."

If the forthcoming report from Aon Hewitt is any indication, the school district should be calling a metaphorical ambulance.

Photo Credit: picture alliance / Frank Duenzl/Newscom

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  • Fist of Etiquette||

    A spokeswoman for Aon Hewitt, the accounting firm that completed the assessment on the school district's behalf, confirmed the report's legitimacy.

    I guess the president is right. Accountant-client privilege is dead.

  • JesseAz||

    Umm... School district budgets are public information...

  • Earth Skeptic||

    Not if they can avoid it...

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    Go this web and start your work.. Good luck...... www.jobs63.com

  • Libertarian||

    "A forthcoming report on the Los Angeles Unified School District's retirement costs will show that the district has nearly $15 billion in unfunded health care costs for current employees and retirees."

    That's weird. They've got plenty of money to paint their streets white in order to combat global warming.

  • Citizen X - #6||

    Well. You know, one must prioritize.

  • JesseAz||

    Have you not seen global warming math? Every 0.00001 degree of reduction is 1 trillion dollars in healthcare savings.

  • Rat on a train||

    At $40k/mile it is a bargain.

  • BambiB||

    I can't WAIT for Kalifornia to go bankrupt - then begin telling the Feral government that they have a RIGHT to be bailed out by the Feds.

    Meanwhile, the taxpayer exodus continues.

  • shawn_dude||

    Well, you might be waiting quite a while.

    The taxpayers leaving the state tend to be those that have the least education and pay lower taxes. Those coming into the state tend to be those with at least a bachelors degree and pay more in taxes.
    http://lao.ca.gov/LAOEconTax/Article/Detail/265

    Between births and immigration (domestic and foreign), California's population continues to grow and is nearly 40 million residents.

  • I am the 0.000000013%||

    Whoa Whoa Whoa. Just hold on there. You can't choose one color over another when doing something as important as combating global warming. That is just so ist.

  • JesseAz||

    As long as there are millions class and above as a source of government revenue, liberals won't care about future liability.

  • loveconstitution1789||

    Wait.... I though Governor Moonbeam said that California had a budget surplus?

    Because when a large school district that is too big to fail cannot pay its liabilities in Taxifornia, you know who will pay the bill?

  • Old Mexican - Mostly Harmless||

    Re: lovetheTrumpstate,

    I though Governor Moonbeam said that California had a budget surplus?


    Mr. Brown is no more a budget hawk than Mr. Orange, and that's quite a scary thought.

  • Old Mexican - Mostly Harmless||

    Los Angeles Schools Facing $15 Billion Debt for Retiree Health Care


    So much for 'immigrants takum er welfare tax dollars!'.

  • Careless||

    Even if it made sense that only one group can do that at a time, that's not welfare in the first place.

    Try to be less terrible

  • Longtobefree||

    No problem.
    Enact a tax on the net worth of greedy individuals who start businesses in their garages, and then end up with a gazillion dollar campus in California. Say 50% of their net worth, every time the school pension deficits exceed 5 billion dollars?
    Alternatively, all businesses with a presence in California have to give school pension funds a share of stock for each privately held share in California.
    For the children, or course.

  • Earth Skeptic||

    Tax garages?

  • JWatts||

    Only privately owned garages, of course.

  • leninsmummy||

    healthcare costs will be socialized by then so they'll adjust payouts to be much lower.

  • DrT||

    Eric, the actuarial methods understate the real economic problem surfaced in roughly 1980 by Fischer Black. The actuaries are consistently using a discount rate which is too high and inappropriate for the liabilities which are promised with certainty. They ought to be using the Treasury rate of the appropriate duration for discounting. The work of Jeremy Gold documents this clearly. Using a first order approximation, for the change in liabilities that would be created if the real economic discount rate were used, we can calculate how much the liabilities are understated:
    (% change in liabilities) ~ -(duration of liabilities)X(change in discount rate)
    Supposing the actuaries to be using a 7.5% rate (which is common), the change in yield compared to the current long Treasury rate is ~ -4.5% (long Treasuries are very flat at about 3%). So, assuming the medical benefits have a duration of 8 years (which seems conservative) the liabilities are understated by (-8)x(-4.5%) = 36%. So the liabilities as reported are understated by roughly a third. This is a problem across the US.

  • BYODB||


    The increase in the district's unfunded liability is driven by an adjustment in accounting standards that prohibits school districts and other public employers from using artificially high estimates for future investment returns, a strategy that in the past has allowed governments to hide some of their retirement liabilities.


    So in other words, there may or may not be an actual increase.

  • buybuydandavis||

    Big government pension plans are a ponzi scheme. Who knew?

  • EirkKengaard||

    "Californians have an amazing capacity to turn over problems until they are smooth and shiny. Understanding never follows, much less corrective action." (inspired by Julie Cart at CALmatters)

  • shawn_dude||

    And entirely false, but it's a cute statement anyway.

    Large California institutions first attempted to change pension agreements and the courts refused. You cannot legally change a person's retirement benefits after they've already earned them. (This should be non-controversial among libertarians.) So California's educational systems adjusted pension benefits for new employees. Among those changes, employees must contribute to their pension (much like people do 401K plans) and the rate at which benefits accrue has been adjusted as well. All of this is "corrective action."

    The issue is that employees who earned benefits prior to the changes get to keep them and they are starting to retire in large numbers. Younger employees have reduced benefits and, assuming the system still stands when they retire, shouldn't create an unfunded tax burden.

  • Empress Trudy||

    So? Just raise taxes.

  • Curly4||

    Most of the government districts that are facing a crisis like this is mostly in the areas that are strongly progressive/liberal. The have promised unions these great contracts with high wages and good pension plans without funding it. Like I just read recently about a employee in California who will be retiring soon with a retirement income of $76,000/month. That happens because these government entities have been promising huge benefits but they don't fund if. That retirement continues even after the employee retires and no longer works for the government. In addition the government now has to hire another person to replace the retiree so the government now has to fund the retiree plus the new employee. As anyone who is not blinded by good intentions (to be kind) or political expediency (to be truthful) that is not sustainable. Taxes cannot pay for that kind of drain unless the taxes soon eats up all of the wage earners income.
    A better way would be for the employee and the employer both contribute into a 401k retirement account. That money would be invested and over the next 20-40 years that money would grow. When the employee retired the government agency would no longer be bound to contribute to that retiree retirement account. Much easier for the government agency to control budgets but would not allow the politician the chance to bribe the employees with promises to gain their vote to stay in power and the voter to bribe politician with a promise of a vote.

  • shawn_dude||

    What's your source for "Most" here?

  • Hank Phillips||

    1. Government declares plant leaves dangerous
    2. Doctors testify government is right about leaves
    3. Government protects doctors from competition
    4.

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