San Diego expects to save $714 million over the next 25 years under a tentative retiree-health agreement with labor unions announced last week by Mayor Jerry Sanders, a step toward cutting a long-ignored public employee cost.
Rising pension costs during a time of deep government budget cuts, intensified by alarming projections of massive pension debt, have received most of the attention. But retiree health costs are edging into the spotlight.
Though seldom found in the private sector, retiree health care is a standard benefit for most state and local government employees. Yet little money has been set aside to pay for care promised current workers, passing the cost to future generations.
Most government agencies had not calculated their retiree health debt until an accounting rule change in 2004. State Controller John Chiang issued the first estimate of state worker retiree health debt in 2007 — about $50 billion, since growing to $60 billion.
To encourage local governments to begin prefunding retiree health care, the California Public Employees Retirement System began offering a service in 2007 that invests the money and manages health care payments for retirees.
The program director, Rand Anderson, told the CalPERS board in March that growth of the Caliornia Employees Retiree Trust Fund has been faster than expected during a period when many governments are struggling with budget deficits.
He said CalPERS expected several hundred million dollars from employers initially but received more than $650 million. By March more than 280 local government agencies had put money in the investment fund worth nearly $1.8 billion last week.
Anderson said five private firms offer a similar service. He said he has seen no evidence of marketing by the San Bernardino County Employees Retirement System, which obtained legislation to offer a retiree health investment service.
San Diego is in a unique situation, suffering from the self-inflicted wound of two deals in 1996 and 2002 that dropped city pension contributions below the actuarially required amount while also raising pensions.
After a pension scandal surfaced in 2003 the city removed the “America’s Finest City” slogan from its website for a time and was redubbed “Enron by the Sea” in some of the national media.
Well before the stock market crash in 2008 punched big holes in public pension investment funds nationwide, causing employer costs to go up, San Diego was hit with a moratorium on bond sales, lawsuits against pension officials and budget cuts.
When voters rejected a sales tax increase linked to pension reforms last fall, Mayor Sanders announced that he would place an initiative on the ballot that would switch new city hires to a 401(k)-style individual investment plan.
The drive to place the initiative on the ballot next year gained support last month when Sanders and Councilman Carl DeMaio, who wanted to include police and firefighters in the switch to 401(k) plans, reached a compromise that excludes only police.
The tentative retiree health agreement announced last week did not include the police union. But the city’s bargaining position was strengthened by state and federal court decisions that police retiree health benefits are not a vested right and can be cut.
“For the first time our employees will contribute to the retiree health care costs, and the financial risk of this benefit will be shifted from the shoulders of the taxpayers,” Sanders said at a news conference.
Here’s how the tentative agreement, still needing a sign off by some union leaders and rank-and-file approval, is estimated to cut $714 million from projected retiree health care costs over the next 25 years:
City retiree health payments are expected to begin at $58 million next year and increase to $73 million by 2036. Without the reduction in the new agreement, city costs are projected to go from $46 million next year to $132 million in 2036.
“In terms of sheer savings to the taxpayers this is easily the largest cost-saving measure ever implemented by the city of San Diego,” said Sanders. “In fact, we are not aware of any cost savings of this kind or magnitude anywhere in the state of California.”
Long-term employees nearing retirement will have the option of paying on average about $1,200 a year for $8,800 a year in retiree health coverage, growing at no more than 2 percent a year, down from current growth of up to 10 percent a year.
Shorter term employees have the option of paying about $600 a year for $5,500 a year in retiree health coverage, which is frozen and will not increase. A third option is an $8,500 investment plan, where the risk is born by the employee not the city.
Employees hired by the city since July 2005 do not receive retiree health care, one of the early cost-cutting moves by the city after the pension scandal. Retiree health benefits for those already retired are regarded as a vested right that can’t be cut.
Another complication that may be unique to San Diego is that in 1981, when former Gov. Pete Wilson was mayor, city employees voted to drop out of Social Security and Medicare in exchange for a city promise of pensions and retiree health care.
In response to a federal requirement, five years later the city began placing all new hires in Medicare. Now there is concern that due to the gap about 1,300 city workers nearing retirement may not be eligible for Medicare.
(Last week the Assembly public employees retirement committee approved a bill, AB 1248 by Assemblyman Ben Hueso, D-San Diego, prohibiting local governments from eliminating pensions if their employees are not covered by Social Security.
(“Until the federal government provides adequate safeguards of investments, 401(k)s are going to be extremely risky,” Hueso told the committee. “It’s possible our employees will retire without any coverage at all.”)
An opponent of the tentative retiree health agreement, Councilman DeMaio, said that with the exception of some employees hired from 1981 to 1986 retirees will get a “generous” $8,800 or $5,500 a year in addition to Medicare.
“Just when you thought bad pension deals were a thing of the past at City Hall, along comes this unprecedented 15-year binding contract that guarantees life-long taxpayer-funded health benefits to city employees that are far in excess of private sector benchmarks,” DeMaio said in a news release.
Backers of the agreement said a “safety valve” allows the city to modify or eliminate retiree health benefits after July 2014. DeMaio said it is improbable that “reformers” would get the six council votes needed to modify the agreement.
The state is one of the government employers that have not tried to control rising retiree health care costs, either by cutting benefits or prefunding costs. After 20 years of service, a state worker is eligible for 100 percent coverage of retiree health care costs.
“We estimate that annual cash flow (health) costs for State of California retirees, which are about $1.4 billion in 2010-11, will quadruple by the middle of the next decade,” a study commissioned by a pension reform group said last week.
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 9 May 11