Actuary: School System Faces 'Sizeable' Liability

Wednesday, Aug. 15, 2007 | Nearly a year ago, the San Diego Unified School District patted itself on the back for escaping the fate of other government agencies that had promised their employees generous benefits long after they retire, without putting aside the money needed to pay for them. But the district may soon find itself in the same boat after all.

A new study, commissioned by the school system and expected to be delivered to district officials later this month, estimates that San Diego Unified will face a “sizeable” liability for its retiree health care benefits, the report’s author said Tuesday. Last August, a spokesman for the district had told a newspaper that the district would not owe a cent.

Dennis Daugherty, an actuary with Nicolay Consulting, who was by hired the school system to calculate the cost of medical and other benefits promised to employees, said his report will show that the school system will fare better than many other districts and government agencies. The Los Angeles Unified School District, for example, faces liabilities that exceed $5 billion dollars.

“They do have a pretty limited benefit, unlike many districts,” he said of San Diego.

However, Daugherty said the amount of benefits the district has signed off on is still significant.

Because the school district does not have its own pension system, unlike the city of San Diego, the liability does not include the district’s pension payments, which are calculated each year by the California State Teachers’ Retirement System.

Daugherty would not provide the actual figure for San Diego Unified’s health care liability because he said he hasn’t yet shared it with the district.

“It’s not one of those horror-story numbers,” he said. “But it’s sizeable.”

The district commissioned the actuarial report to comply with new bookkeeping recommendations released by the Government Accounting Standards Board, a body that establishes accounting-best practices for public agencies, several years ago. Before the new GASB rule, government agencies were required to report only what they expected to pay in benefits in a given year, not to project the total cost of their promises over the full term of the commitments.

While the new rule only changes the way governments account for their retiree debts — it doesn’t add or subtract to the total owed — reporting the additional liabilities on their books can be damaging to governments by alerting creditors to upcoming deficits and hurting their credit ratings, thereby raising the cost of borrowing. The size of its liability could prove particularly relevant to San Diego Unified, which expects to ask voters to approve more than $1 billion in new bonds in 2008.

Previously, the district had argued that it did not have to commission an actuarial valuation for its liabilities because it could stop paying for its retirees’ health care at any time by simply removing it from its union contracts. Not only does the school system stop paying for retirees’ health care when they become eligible for Medicare, the district has argued, but it has hedged itself against skyrocketing retiree health costs by making no open-ended promises like many other government agencies.

There are generally two types of retirement benefits: defined-contribution plans that limit the amount a government has to spend for its employees and defined-benefit variants that commit the agencies to paying whatever it takes to provide a certain level of services. The school district has long argued that it has a defined-contribution system.

But the district’s chief financial officer, Bill Kowba, said last month that GASB recently rejected the district’s contention that its commitment to retirees included a finite cap on the district’s contributions and ordered the district to commission an actuary to calculate how much it owes. To satisfy the accounting board’s requirements, the district hired Daugherty.

The district has been grappling with how to account for its retiree benefits since the GASB rule change in 2004. Scott Patterson, the San Diego Unified’s former finance chief who is now the deputy superintendent for business services at the Grossmont Union High School District, said he had worked on the effort before he left the district in June of last year.

Even as the district has grappled with how to properly calculate and account for its retiree costs in recent years, it has publicly insisted that it did not face any unfunded burdens.

In an interview with the editorial board of The San Diego Union-Tribune last summer, school board member Katherine Nakamura told the local paper that she was concerned about the generosity of the school district’s health care plans, including the implications of the retiree benefits on the district’s books.

However, the district’s communications consultant, Richard Van Der Laan, quickly corrected Nakamura, telling the paper that the district had no “unfunded health care liability for their retirees” and an opinion writer for the Union-Tribune criticized Nakamura, saying “she didn’t know what she was talking about.”

Asked about Van Der Laan’s comments last month, Kowba, the CFO, said the district was surprised by the GASB ruling. He would not estimate the district’s liability, deferring to the actuary’s report, though he said he hoped the bill would be small or nonexistent.

“I do not have any preconceived expectations for what they will say,” Kowba said. “I’m hopeful that we will be on the right side of that issue with little or no liability because of the good work of our predecessors,” who made the decision to limit how much the district’s pays toward its retiree’s health care.

Kowba was on vacation Tuesday and a spokesman for the district said he could not comment on Daugherty’s report because the school system has yet to see the document.

Nakamura said she didn’t think the district was being consciously misleading when Van Der Laan made his statement.

“In defense of the district, we didn’t have that number before, so what I think they were saying [was] the truth,” she said.

District officials will have a chance to review Daugherty’s report, and challenge its conclusions and assumptions, before a final version is included in the school system’s annual audit.

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