Retiree health care: can $118 billion debt be cut?

San Diego officials think a federal court ruling will allow a cut in one of the biggest debts owed by California state and local governments — $118 billion or more promised public employees for retiree health care.

The federal court ruled that San Diego’s retiree health obligation is not a “vested right” like public employee pensions, which are widely believed to be protected by court rulings that allow cuts only if replaced by something of equal value.

San Diego officials think retiree health obligations can be reduced in negotiations with labor unions and, if there is no agreement, that a cut can be imposed through standard “impasse” procedures.

Jan Goldsmith, the San Diego city attorney, told the city council this month that “a big good step” was taken when several labor unions agreed to “analyze, evaluate and negotiate” the retiree health system under “meet and confer” rules.

“This past summer we had an appellate decision that was in our favor that found — a 9th circuit federal court decision — that found that our retiree health system is not vested and may be negotiated,” he said. “There are still some questions raised by labor organizations. But it’s one of those areas, in the future, that we can, we believe, negotiate reform.

“As Mr. Goldstone pointed out — the meet and confer, which goes through the impasse process, if there is not success at the negotiating table. There are other pension issues that cannot go through that process due to the vesting issue, but retiree health is one thing that is open for discussion.”

Jay Goldstone, the city chief operating officer, said in response to questions from councilmember Carl DeMaio that the city is paying $58 million for retiree health care this year, roughly evenly split between current expenses and future obligations.

Goldstone said properly funding future retiree health, the “annual required contribution” in actuarial terms, would be an additional $60 million. DeMaio said the additional $60 million would boost the total city deficit to about $260 million.

The councilmember asked what will happen if the labor unions do not agree to reduce the retiree health obligation.

“I would imagine that we would end up declaring an impasse and be presenting this to the city council,” said Goldstone. “There will be a question that the attorney’s office would have to answer in terms of whether or not this is a vested benefit or not. We believe it is not a vested benefit.

“And then if the council imposed a new health care plan, then we would take it forward, and labor would decide what response they would have to it.”

(The full exchange can be seen in in the video archive of the Dec. 2 city council meeting, available on the city’s website. Click on “city council,” then on “council meeting video archives,” then on the Dec. 2 meeting, and go to about minute 30.)

The federal court ruling last June came in a lawsuit filed by the San Diego Police Officers Association after the city imposed a salary ordinance in 2005 when negotiations failed.

Among other things, the plan extended the time on the job needed to qualify for full retiree health care from five years to 10 years. The police association argued that retiree health is a vested right protected by contract law.

The federal court disagreed. The ruling discussed the potential importance of whether lawmakers have shown intent to make retiree health agreements binding contractually.

In San Diego, however, the court said the city “presented evidence showing that the retiree medical benefits here were considered a term of employment that could be negotiated through the collective bargaining process.”

Whether the ruling in the San Diego suit might apply to other government agencies is not clear. But it does show that there are legal questions about whether the huge unfunded liabilities for retiree health can be cut.

A governor’s commission last year estimated that state and local governments in California have an unfunded liability of at least $118 billion for retiree health promised current workers and retirees during the next three decades

Retiree health care became a widespread public employee benefit decades ago before health costs sharply increased. Unlike pensions, many government agencies have not set aside money to pay for future retiree health costs.

The governor’s commission recommended that government agencies begin setting aside money or “prefunding” retiree health care. The San Diego ruling may also encourage government agencies to look at the option of negotiating cuts.

The nonpartisan Legislative Analyst, for example, raised the issue in a state budget analysis last year (p. F-118) of whether retired state workers could be required to pay part of the cost of their health care.

“Some experts believe these payments are a constitutionally guaranteed benefit to retirees,” said the analyst. “To our knowledge, however, the ability of the state to reduce the percentage of premiums it pays for retirees has never been addressed by a court.”

If retirees choose an average-cost health plan, the state currently pays the full cost of the premium. The Schwarzenegger administration, in a proposal last June to cut retirement benefits for new hires, said active workers pay 15 percent of their health costs.

One law firm, Best Best & Krieger, thinks the San Diego ruling “could provide public employers with greater flexibility in modifying collectively-bargained terms of employment affecting retirement benefit calculations and/or eligibility.”

San Diego is under unusual pressure to cut retirement benefits. Years of deliberate underfunding produced a pension debt estimated at $1.7 billion at one point, leading to severe budget cuts, layoffs and the inability to issue bonds for nearly two years.

Six former San Diego pension board members are charged with lowering the city’s annual pension payment in connection with benefit increases for themselves. The six and two additional former members also face federal fraud charges.

The Voice of San Diego reported last month that a draft of recommendations by a mayor’s task force included, among other things, “a massive reform or elimination of retiree health care benefits.”

If a sweeping package of spending cuts and tax increases is not enacted, the draft said, the city should consider bankruptcy. The San Diego County Taxpayers Association held a forum on municipal bankruptcy in October.

San Diego’s well-publicized plight may have influenced voters in nearby Oceanside, who last week soundly rejected a public employee union-backed attempt to recall a city council member said to support developers and cuts in police and fire services.

“With this mandate of the electorate I will continue to work on behalf of the Oceanside taxpayers to contain our costs while providing the maximum services during these challenging economic times,” Councilmember Jerry Kern said in a statement after the recall failed.

“Part of this balancing act includes containment of our employee benefits so that the taxpayer doesn’t end up footing the bill,” he said.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/ Posted 5 Nov 09

7 Responses to “Retiree health care: can $118 billion debt be cut?”

  1. Yuk Says:

    The Civil Service Unions will never cut sufficiently into this retiree healthcare nightmare. The city should be thinking a 50-75% cut (THAT’s whats really needed … and remember, 99% of the taxpayers who pay for it get NOTHING !), but the Unions are probably thinking …”ok, we’ll give ya 1, or maybe 2%).

    It’s in the Unions DNA (goes along with the entitlement mentality) and cannot be changed.

    City council …. JUST DO IT … start with a 50% cut.

  2. Taurin Says:

    I worry about the Obama Healthcare Plan. Will it cause bad changes on my fathers expenses? Do the pros counterbalance the negative aspects?

  3. Charles Sainte Claire Says:

    How can a currently retired person’s medical benefits be “bargained” when they are no longer part of the bargaining unit and have no vote or representation?

    I can’t see this passing any kind of judicial scrutiny.

  4. Emma H. Says:

    How about the senior citizens? What will happen to their healthcare benefits?

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