After starting to rein in San Francisco’s pension costs last year, city officials are rolling up their sleeves to tackle the skyrocketing cost of health care for retired government workers.
A City Controller’s Office report released Tuesday, which shows a retiree health care liability of $4.4 billion during the next 30 years, set the stage for discussions between city officials and labor leaders to hammer out an agreement to help fund the tab. If last year’s pension compromise — the voter-approved Proposition C — is any indicator, the effort will take months of meetings and include heated debates.
But the political will may see the issue through.
“As public officials, we cannot ethically and morally avoid this issue,” said Supervisor Mark Farrell, who is taking the lead on the situation for the Board of Supervisors. He called The City’s retiree health care liability “the largest threat to our financial future.”
The City’s budget woes are seen in its continual inability to pay for such basics as repaving streets, adequately staffing the Recreation and Park Department, properly maintaining street trees and adequately funding Muni’s capital needs.
Last fiscal year, The City spent $151 million subsidizing a portion of the health care premiums for former city government workers. But that annual tab will increase to $500 million within two decades. There are 19,270 members in The City’s retiree health care system. Depending on their selected health plan and number of dependents, individual contributions vary from zero to $1,048 per month for a pre-Medicare retiree with one or more dependents.
For decades, city employees and San Francisco did not contribute funds to help pay for these future costs. Instead, The City just paid the bill every year.
“From a financial management perspective, there is a better way to do this,” City Controller Ben Rosenfield said.
That “better way,” he believes, is to implement a “pre-funded” model, similar to how The City funds its pensions. That means having a healthy interest-bearing fund filled by adequate contributions from both The City and its workers.
The City has taken some steps toward this end. In 2008, voters passed Proposition B, which created a Retiree Health Care Trust Fund and eliminated some of The City’s more generous retiree health benefit provisions, such as full vesting after five years of service. And workers hired after January 2009 have to contribute 2 percent of their salary into the fund, with The City kicking in another 1 percent.
The 2011 pension ballot measure included the provision that workers hired before 2009 would begin contributing up to 1 percent of their pay into the fund beginning in 2016 with a matching 1 percent from The City.
Mayor Ed Lee supports the effort to curb city retiree health care costs.
“Clearly, there is a significant challenge ahead about how The City pays for health benefits for those hired before 2009,” mayoral spokeswoman Christine Falvey said. “The mayor will work with labor, the board, and other key stakeholders to identify ways to bring down this long-term liability and strengthen the City’s fiscal outlook.”
Farrell said he is hoping to have a proposal by mid-2013, which could include a proposed November ballot measure.
A ballooning crisis
The City’s health care liability promises to grow steadily:
Unfunded retiree health care liability over 30 years
What The City has spent on retiree health care premiums, per fiscal year:
- FY 2007-08: $111M
- FY 2008-09: $117M
- FY 2009-10: $128M
- FY 2010-11: $146M
- FY 2011-12: $151M
- FY 2020-21: $300M
- FY 2031-32: $500M