Icebergs are dangerous and deceptive because almost 90 percent of their bulk is invisible below the water’s surface.
San Francisco’s budget for the 2006-07 fiscal year resembles an iceberg. Even with an unexpected $137 million in one-time increased revenues, the iceberg looming below the surface is in the form of billions of dollars in retiree health benefit liabilities and obligations that
aren’t reported anywhere on The City’s balance sheet.
But that’s about to change. New accounting rules adopted by the Governmental Accounting Standards Board are taking effect before the end of 2006 and will require all local governments to show the true cost of providing health benefits to retired government employees, thereby fully disclosing their long-term financial exposure.
The private sector has been doing this for a few years. Governments that don’t adopt the new rules are likely to see their bond ratings suffer. They will pay substantially higher interest when borrowing money to build roads, schools and other projects.
Why should you care? Because these new rules will result in a sizable hole in San Francisco’s balance sheet. We still don’t yet know exactly how large. We do know that the amount that will need to be accounted for will be in the billions.
The San Francisco Controller’s Office will soon release an actuarial study detailing how much San Francisco will pay to care for its 19,573 retirees. Early reports put the figure somewhere in the range of $10 billion over 30 years. Why so much? First, city employees have richer, much costlier benefits packages than most private sector workers. Second, medical costs for all workers are skyrocketing.
San Francisco workers make an average of $75,000 per year with benefits. They can retire at age 55 with 75 percent of their final year’s salary if they’ve been with the city long enough. This year The City will once again pick up the employees’ share of the pension contribution. The City will give a full 15 percent of a worker’s salary to the pension.
There’s nothing wrong with providing great benefits if you can afford them. These days, however, few governments can. As they struggle to balance the books,more and more cities aren’t setting aside enough money every year to pay for the benefits to which they committed to current and future retirees. They rely, instead, on investment performance to carry them through.
San Francisco, fortunately, has managed to fully fund its pension obligation. Medical benefits are a different story.
Retiree medical benefit costs are skyrocketing. San Francisco’s employee medical budget increased by $35.9 million, or 13 percent, last year, and is up 42 percent in just four years. City employees get lifetime health benefits after just five years of service. Under the current system, San Francisco can actually spend more providing health benefits to a former employee than it ever paid in salary while on the job.
The Governmental Accounting Standards Board’s rules puts our city leaders in a Catch-22. Currently 43 labor union contracts, representing half The City’s public work force, are being negotiated. At the same time that union leaders are seeking wage and benefits increases, The City must disclose its financial obligation to pay for the benefits it has already committed to current and retired city employees. This is a crisis in the making.
The crisis can be avoided only by a full accounting of what The City already owes to its active and retired employees before the mayor and Board of Supervisors agree to any wage and benefits increases. This must be done now. Before funding any supplemental appropriations for city departments or new programs, The City should set aside a portion of windfall revenues in a trust fund to help cover the deficit in our retiree medical system.
San Francisco taxpayers shouldn’t face higher taxes and service cuts to pay for a benefit that none of them receives in their own jobs. San Francisco can tackle these problems by disclosing them honestly and developing a sensible plan. Otherwise, we are just looking at the tip of a giant iceberg.
Nathan Nayman is executive director of San Francisco’s Committee on Jobs.