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San Diego Mayor Jerry Sanders announced a landmark and long-awaited deal with city labor unions Friday to cut health care benefits for current employees when they retire. The agreement tames a cost that had spiraled out of control for three decades, but won’t gain immediate savings for the city’s cash-starved budget.
The pact, the mayor said, will shave $323 million off a $1.1 billion unfunded liability, resulting in a cumulative savings of $714 million over 25 years.
The growing cost of health care promises to retirees is one of three financial nooses that have threatened to strangle San Diego’s solvency. Along with annual budget pressures fueled by rising pension costs and the continued crumbing of the streets, sidewalks and other assets, retiree health care is a billion-dollar bill the city has allowed to grow without ever paying in full.
Friday’s agreement, which came after two years of labor talks, would allow the city to pay one of those bills, $58 million next year, for the first time in recent memory. Without the accord, the city would’ve owed $98 million. The deal, Sanders said at a jubilant press conference, was “easily the largest cost-savings measure ever implemented by the city.”
“This settlement isn’t just a big leap, it’s a quantum leap,” Sanders said.
But given the city’s precarious fiscal condition, the leap might still not be far enough. The decision will do nothing to fix the city’s current $56.7 million budget deficit, and little to reduce deficits projected over the next five years. The city has never accounted for the full cost of paying health care promises to retirees in its financial projections.
Under the deal, which would take effect after formal council and union approval, city workers will begin contributing to their retiree health care benefits for the first time. Workers close to retirement can pay $1,200 a year and receive $8,800 annually, which would increase by 2 percent each year. Younger employees can either pay $600 annually for a $5,500-a-year benefit or receive roughly $100,000 for their health care when they retire.
Benefits for already-retired workers, which make up about half of the current unfunded liability, won’t be touched. The city eliminated the benefit for new hires six years ago, though more recent employees now receive a much smaller benefit.
The agreement lasts 15 years, unprecedented for labor contracts, but allows for a supermajority of the council to reopen it in 2014.
As of Friday morning, the city’s white-collar and fire unions had agreed to the pact, and its blue-collar, lifeguard and deputy city attorney unions are expected to sign off by early next week. The city remains in negotiations with the police union, which has fought over health care in court.
Instead of trying for more drastic changes, Sanders decided to tame a benefit once infamously called the “snake in the grass” of the city’s retirement system. Wiping away retiree health care for current workers entirely could have saved hundreds of millions more, but likely would have faced years of litigation. Sanders said going further would have made for “great rhetoric and good politics, but reckless public policy.”
Banking major savings now led Councilman Kevin Faulconer to support the deal. Faulconer, a Republican, voted in closed session Friday morning with the council’s five Democrats to support the pact.
“The choice was clear,” Faulconer said. “We need guaranteed savings that we can invest and will invest in our neighborhoods.”
The council’s two other Republicans, Councilman Carl DeMaio and Councilwoman Lorie Zapf, opposed it, saying it didn’t go far enough to cut costs.
Following Sanders’ announcement, DeMaio held his own press conference and compared the pact to the infamous pension deals that set off the city’s financial crisis a decade ago.
The city can’t afford an agreement that locks in for 15 years medical benefits that he said were far in excess of private sector retirees.
Asked about the threat of lawsuits, DeMaio replied: “How about the threat of insolvency? The financial threat is greater than any threat of litigation.”
Further, he added, the city’s recent history of winning lawsuits on retiree health care shows there’s precedent for big changes.
Regardless, Friday’s agreement could mark the end of 30 years of sordid history in the promises made to city workers to pay for their health care when they retire. In 1981, prompted by Mayor Pete Wilson, general city employees voted out of the Social Security and Medicare systems in return for the promise of city-sponsored pensions and retiree health care. Federal law eventually forced San Diego back into Medicare, federally subsidized health insurance for seniors. But those decisions left a gap in Medicare coverage for city employees.
That gap was just one of the many problems in the city’s retiree health care program. San Diego never fully funded the cost of the benefit, and for a time scraped money out of its pension fund to pay the benefit in violation of IRS rules.
In 2005, the city totaled up health care costs for the first time and found it owed more than $1 billion. It’s never been clear that the benefit could be changed, and as recently as 2008 Sanders didn’t think it could. But two court decisions, one in 2009 and one last week, said the city could cut the benefit and provided significant leverage in negotiations.
The agreement also could put San Diego ahead of most local governments in addressing unpaid health care debts. Many experts believe promises to pay for health care in retirement are even less funded than government pension plans. A recent national report found that states have a combined $604 billion unfunded health care liability.
Still, other cities recently have gone further than San Diego. Vallejo, a northern California city, is attempting to emerge from bankruptcy and has proposed to reduce its health care benefits for already retired workers to $3,600 a year.
Rob Davis contributed to this report.