San Diego’s Easiest Financial Fix Is Its Most Complicated

If any issue characterizes the quagmire that muddies efforts to restore the city of San Diego’s fiscal health, look no further than reform of retiree medical benefits.

Here it appears that the most complicated solution to the city’s budget woes also could be the easiest to accomplish. There’s little legal precedent and layers and layers of promises to unwind.

But unlike municipal governments’ other big debt, pensions, there aren’t universal iron-clad laws that guarantee health care to retirees. And, unlike most tax or fee increases that would alleviate the city budget, changes to retiree medical benefits don’t require the approval of city voters.

For more than three years, city leaders have known a possible fix, one that would take a snap of the mayor and City Council’s fingers.

The mayor could propose and the City Council could force employee unions to accept lower benefits. Yet this solution presents legal, historical and even moral complexities that frustrate the thoughts of major reforms. And today, the benefit — with a debt the size of the city’s annual operating budget — remains yoked to San Diego’s financial statements.

Drastic changes would bring a brisk legal challenge from the labor unions. Indeed, until last year, even Mayor Jerry Sanders didn’t believe the city legally could reduce these benefits, as he now contends.

At different points, city administrations have promised employees different levels of retirement medical coverage. And even if it’s legal to reduce some medical benefits, where’s the ethical line on cutting the coverage of someone who expects to retire soon — and expected health care when he does?

Retiree medical benefits always sat in the shadow of the city’s pension system. Mayor Pete Wilson promised them as part of a cost-savings plan to withdraw the city from Social Security in the early 1980s. Then the benefits played a scandalous role in the city’s pension crisis, as the city siphoned off pension earnings to pay for them. That was a no-no, according to the Internal Revenue Service. For decades, the city didn’t set money aside to pay for what became a ballooning liability.

Buoyed by a federal appeals court ruling this summer, Sanders’ office is pushing ahead on what could be a dramatic reform of the benefit. City Chief Operating Officer Jay Goldstone said retiree health care was one of the mayor’s top priorities in addressing the city’s long-term budget problems.

“Bottom line is we need to change the current plan because it is not affordable and sustainable,” Goldstone said.

‘Pretty Daunting’

The city’s labor negotiators and union leaders have been meeting since August to discuss retiree health care. Michael Zucchet, general manager of the city’s white-collar Municipal Employees Association, said he expects to have a joint study completed by the end of next month. Formal negotiations on the benefit will occur next year.

Silence surrounding the study prompted Councilman Carl DeMaio and Councilwoman Donna Frye to issue a memo this week asking for an update. Since city and labor representatives began meeting, they have researched and dismissed the idea of joining the state’s public retiree system for its health care plan and looked into alternative means of paying for benefits, Zucchet said. Goldstone said the report would include actuarial analysis of different options.

Zucchet and other union leaders are in a difficult position. Because the city’s debts are so great, the unions almost have to negotiate away some of the benefit to make sure it gets paid.

As of June 30, the city has an outstanding debt of more than $1.3 billion for retiree health care. It has only $41.5 million in assets. So unions are forced to consider a philosophical question: Is a benefit — no matter if it’s been promised or legally required — only 3 percent funded, truly a benefit? Zucchet called the debt “pretty daunting.”

“Certainly, I think MEA is going to have to make some decisions over the coming months and years as to what is in their best interest in terms of negotiating or fighting,” he said.

Similar deliberations are going on all across the county. New accounting standards forced governments to report health care liabilities on their financial reports and the deficits are massive. In November, the U.S. Government Accountability Office released a report saying that state and local governments have more than $530 billion in retiree health care debt. California put the debts of its governments at more than $118 billion two years ago.

Some governments are doing something about it. Orange County has reduced benefits. Sacramento County has, too. San Diego County cut its debt by 45 percent in 2006 after an effort led by Supervisors Dianne Jacob and Pam Slater-Price. The county’s unfunded liability now is $200 million, and it’s paying its annual required contribution.

But there ends the importance of comparisons between other governments and the city of San Diego. Legal precedent across government lines are hard to come by. San Diego County made it through its changes without legal troubles because it hadn’t made written promises about these benefits to county employees.

It’s not as simple for the city. At different times and in different labor contracts, the city made different healthcare promises. Different legal standards could apply to different employees depending on when they were hired. That could make unwinding benefits tedious, piecemeal and ripe to challenge.

“That does become the crux of the issue,” Goldstone said. “It’s what was promised, when was it promised, how was it promised, how was it applied.”

Task Force: Fund It or Get Rid of It

A federal appeals court ruling this summer said that the city’s retirement medical benefits aren’t “vested” or guaranteed. That means, City Attorney Jan Goldsmith said, that the benefits could be changed through contract negotiations or forced on employees if no agreement is reached.

Zucchet disagrees with Goldsmith’s interpretation, and said it’s no secret the union is willing to file a lawsuit. Both Zucchet and Goldstone said they hoped to avoid litigation, though conceded it’s an option.

“If the city wants to effectively eliminate the benefit there’s just absolutely no doubt we’re going to end up in court,” Zucchet said. “If the city wants to give the benefit a haircut and change some things about it, that would save some money, that would have some equitable basis in the law and that our members would support, then we won’t end up in court.”

Regardless, the chorus grows of those urging greater reforms to the retiree medical benefits program. The Office of the Independent Budget Analyst also this week issued a report recommending reductions to retiree medical benefits. A task force of Sanders’ business confidantes said the city needs to make its full retiree medical payment or do away with the benefit.

Two years ago, Sanders committed to fully funding retiree health care’s annual bill by 2010. He’s since backed away from that promise — this year the city spending $57.1 million, or about half its annual liability. Goldstone said Sanders made that decision for two reasons: the cost is too great and he’s counting on reform.

Please contact Liam Dillon directly at liam.dillon@voiceofsandiego.org and follow him on Twitter: twitter.com/dillonliam.