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Wednesday, March 15, 2006 | The city of San Diego owes employees and retirees nearly $1 billion in retiree health care costs, according to a report released Tuesday that put the first official tally on a lesser-known but equally burdensome dimension of the city’s pension problems.
Getting a jump on accounting standards that will force governments to report annually what they owe toward retiree health care, city officials heralded the report as the first step in crafting a solution for one aspect of a pension crisis that threatens to consume the city’s annual budget for years to come. However, Mayor Jerry Sanders said the city has no choice this year but to continue the payment practices that have, along with increased health care costs nationwide, caused the billion-dollar deficit.
The severity of the city’s retiree health care liabilities has long been known, and estimates since 2003 have pegged the deficit at anywhere between $500 million and $1.1 billion. Tuesday’s report formalizes the city’s deficit at $978 million and forces city officials for the first time to acknowledge the size of a burden that has long lurked in the background of the pension crisis.
The release of the report comes only days before city officials will learn how much they owe the pension system in the coming fiscal year. The retirement board is scheduled to release its annual financial report Friday, at which point the pension system’s most current deficit, and the city’s required annual payment toward that deficit, will be known.
Sanders and City Attorney Mike Aguirre have said they expect the deficit to climb from $1.37 billion to nearly $2 billion and that the city’s total retirement costs could climb near $300 million for the fiscal year 2007 budget.
“What we wanted was accurate information. That’s what we got. Now we can start crafting solutions,” Sanders said.
Ballooning retiree health care costs have squeezed the public and private sector nationwide, but have taken a back seat in San Diego, where a multi-billion pension deficit has spurred a financial crisis and led to criminal charges from state and federal prosecutors.
The city began promising city employees lifetime health insurance upon retirement in 1982 and has been paying annually the health care bills for retirees as they have come due. However, it has failed to squirrel away enough for future cost increases, leaving it with a deficit that consultants estimate will climb to $1.8 billion by 2009 if untreated.
If the city were to pay the full costs of the retiree health care benefit, the bill would be $115 million this year, according to the report. Instead, Sanders said the city will continue its current payment practices at least through this budget cycle, when the city will contribute $21 million.
“I don’t see that we have much choice but to do it this year,” the mayor said.
When asked how the city will have additional funds to cover this funding gap next year when it doesn’t this year, Sanders said he had just received the report and would need time to craft a plan.
Beginning in fiscal year 2008, city governments will be forced to annually report the difference between the full cost of retiree health care benefits and what they actually pay into the system.
Tim Marnell, an actuary with Towers Perrin who prepared the report, said the city would carry a liability of approximately $101 million if it were forced to adhere to those regulations this fiscal year.
Municipalities across the country are expected to record sizable liabilities when the new Government Accounting Standards Board regulations take effect in 2008. Amy Doppelt, managing director with credit rating firm Fitch Ratings, said they will judge an organization’s credit worthiness based more on its plan to deal with the liability rather than just the size of the liability.
“We’re really looking to see that a municipality understands its problem,” Doppelt said.
City officials said the city was ahead of its municipal counterparts in ordering a formal study of its retiree health care costs.
Until last year, the city funded the retiree health care cost by essentially siphoning off earnings from the retirement system. The practice was seen as one of myriad factors in the ballooning pension deficit, as investment returns that were supposed to be squirreled away were instead diverted to cover a cost that would have ordinarily come from the city’s annual budget.
The practice ended last year and the city now pays the retiree health care benefit directly from its annual budget. Beginning July 1, 2005, the city ceased offering the benefit to new employees.
Unlike regular pension benefits, the retiree health care benefit is considered a wage and some believe the benefit, and a large portion of the existing debt caused by it, could be negotiated out of labor contracts, or the city could unilaterally impose contracts on the unions that would eliminate the benefit for all employees that have not yet retired. Unions would likely challenge such actions in court.
Please contact Andrew Donohue at