The Good, the Bad and the Ugly: San Francisco Retiree Health Care

This is the second in a series on San Francisco retirement benefits. Last week, “The Good” examined The City’s relatively well-funded pension system. Today, we look at “The Bad”: retiree health care for city employees.

"Any employee who adheres to the faith or teachings of any recognized religious sect … [that] depends for healing upon prayer” was allowed to opt out of The City’s health care system back in 1937, when it was first added to the City Charter.

Back then, the system was funded entirely by employee and retiree participants, with no contribution by taxpayers. Through the years, voters amended the Health Service System and now it bears little resemblance to the original plan. In the name of competing with other cities for talent, San Francisco took over more and more of the costs of the system. (Charter sec. 12.) In fiscal year 2008-09, health coverage for the average member cost $765 a month, with The City paying $641 of that amount, or 84 percent. (Download Retiree Health Graph.)

Because The City’s obligation to pay for retiree health care is right there in the charter, retirees have a vested right to lifetime coverage. (Note to Mom: “Vested” is a fancy legal term meaning “absolute,” or “The City would have to sell police cars to pay this obligation.”) All city employees hired before Jan. 10, 2009, have a vested right to lifetime retiree health benefits after only five years on the job. Thus, for each vested employee — active and retired — The City has a debt obligation. Add them all together (there are about 60,000 members not including dependents) and we have one big debt. How big? According to an actuarial study released in July 2006, the number is — hold onto your hats — $4.9 billion. (Study here in big pdf: Download Towers-PerrinGASB45Report.)[Also, for a more clear picture of the cost chart scroll to the bottom of the post on the Examiner website here.]

 The problem is, instead of setting money aside to pay the debt, San Francisco has been doing “pay as you go,” which is the equivalent of paying the minimum on a credit card. Each year, The City only pays the cost of covering current retirees. According to the Controller's office, for fiscal year 2009-10 that number is budgeted at almost $129 million.

This pay-go system worked fine until 2006, when the Government Accounting Standards Board issued a new rule requiring government financial reports to include retiree health care debt. This is a very, very big problem for our fair city. (GASB announcement here: Download GasbBrief.)

(Note: The private sector has had to report this data since 1990. Not surprisingly, between 1988 and 2005, the number of large companies offering retiree health care dropped from about 66 to 33 percent.) (See GASBBrief above.)

You know how a person with a bad credit score has to agree to obscene interest rates on a loan because the bank is scared it won’t be paid back? Well, municipal bonds are essentially loans to The City, and San Francisco’s credit score is largely based on financial reports. In other words, if we have dicey financial reports, we’ll have to pay more in high interest rates to bond buyers.

Because the new accounting rules just went into effect, credit agencies have given localities some leeway to come up with a long-term plan to deal with this debt, so we haven’t been punished yet. Our credit scores are still quite good, but recent reports express concern about this looming obligation.

In moderately good news, San Franciscans passed Proposition B in 2008, making it harder for new employees to qualify for retiree health care. That proposition also requires city employees to pay 2 percent of their salaries into a dedicated trust fund. The City has to contribute the equivalent of 1 percent of payroll to the trust. There’s about $3.6 million in there right now. Baby steps.

The reason I refer to city-funded retiree health benefits as “The Bad” is not because I am anti-health care, but because our city’s financial health is now jeopardized by this enormous liability. We still need to make changes (and that’s the subject of Part III in next week’s column) because, unfortunately, we can’t opt out and depend upon prayer to heal this problem.

Comments

[Matt Stewart]

Dearest Sweetie Melissa Griffin who is 7 octillian percent more beautiful than Angelina Jolie,

You really know your shit and it appears you know how to fix the system. Have you ever thought about running for office? I would campaign vigorously for you.