The Morning Report
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San Diego’s City Council is scheduled Friday morning to make one of the most momentous decisions it has faced since the city’s financial crisis began almost a decade ago. On the table is a 15-year deal with labor organizations to cut retiree health care costs for current employees, one of the three billion-dollar bills the city hasn’t paid in full.
Three decades of twisting health care promises has made the deal to unwind them complicated. Here is what we can tell you about the package:
What’s the deal?
The deal provides three options for current city employees hired before the city eliminated the benefit in 2005. Benefits for already retired workers will not be touched.
• The first option is available to about 1,500 city employees close to retirement. They will receive $8,880 annually to pay for a health care plan plus a cost-of-living increase and contribute about $1,200 a year while they’re working.
• Two other options are available to younger workers. These employees can choose a plan that gives them $5,500 annually for health care with no cost-of-living increase and pay about $600 a year while they’re working. The third option gives employees about a $100,000 lump sum for health care upon retirement, or the equivalent of $8,500 a year. This option requires no employee contributions.
How much money does it save?
Mayor Jerry Sanders has said the deal will save $323 million off the city’s $1.1 billion unfunded retiree health care liability. That translates to $713 million in cash savings over 25 years. It means the city will pay its full bill for the first time, helping keep costs from further increasing.
Sanders has called the deal, “easily the largest cost-savings measure ever implemented by the city.”
Half the city’s unfunded liability is for people already retired and can’t be touched. The deal cuts the remaining piece in half.
Could the city have saved more money?
Probably. But it’s not that simple. Had the city eliminated the benefit entirely for all current workers, it estimates that deal could have saved an additional $365 million more in cash savings over 25 years.
So far courts have ruled the benefit isn’t guaranteed, but Sanders ridiculed the idea of doing away with it entirely.
“I could propose that all of them give me a rainbow-colored balloon and take me on a balloon ride,” Sanders said.
Sanders said he wanted to avoid lawsuits and take care of employees whose health care was at risk. Also, he didn’t think the council would support eliminating the benefit.
Why is the city concerned about lawsuits? Hasn’t it won its health care lawsuits?
Yes. Two court rulings have said the benefit wasn’t guaranteed, or vested, for current workers. But City Attorney Jan Goldsmith he couldn’t promise how a future judge might rule.
“For my client, it’s a very good deal,” Goldsmith said of the package. He added the council could reopen the agreement in two years if it wanted to reduce the benefit further.
Why isn’t the police union part of the deal?
The police union has been involved in the health care lawsuits against the city so their legal status is different.
The union expects to resume negotiating with the city once everyone else is finished, a police union vice president said. The current deal says the police union’s benefits cannot be greater than those given to all the other unions.
Are these sorts of retiree health care benefits common in the private sector?
No. Nationwide, just 17 percent of private sector retirees under 65 receive retiree health care benefits, and it drops to 15 percent for those older than 65, according to the U.S. Bureau of Labor Statistics.
“Private employers when health care costs started going up, they just said, ‘Well we ain’t going to do this anymore,” said Daniel Mitchell, a faculty associate at the University of California, Los Angeles’ Center for Health Policy Research.
How about the public sector?
State and local government retirees are much more likely to receive health care benefits, according to the BLS.
But those benefits vary wildly, said Girard Miller, a senior strategist for PFM, a national financial advisory firm for city and state governments. About a third of government employers don’t provide them, a third provide a modest benefit and the remaining third provide what Miller called “Cadillac” benefits. Governments in the last group, Miller said, typically include large cities like San Diego.
What are other cities doing about retiree health care?
About half of local governments changed their health care or retiree health care benefits last year, according to a recent survey from the nonpartisan Center for State and Local Government Excellence. Of that group, one of the most common changes for retiree health care was shifting costs to retirees.
Miller believed San Diego’s success in court and ability to negotiate a reduction in benefits outside of court put it ahead of other California cities.
The city could have pushed for greater employee contributions and more cost savings in its lump sum plan, he said.
How good of a deal is this for taxpayers?
This question isn’t simple to answer.
The deal does little for the city’s immediate budget problems, meaning savings won’t help pay for the libraries, recreation centers, fire and police services now under threat. It’s also a benefit that, so far, courts have decided the city doesn’t have to provide, and by experts’ standards, remains moderate to generous. It also makes retiree health care benefits hard to renegotiate for the foreseeable future, even if the city’s financial situation takes a turn for the worse.
“Why are we agreeing to a 15-year contract to give away what’s not a vested benefit?” asked Lani Lutar, president of the San Diego County Taxpayers Association.
But any way you slice it, the package represents a huge savings. The deal takes a massive chunk out of a bill that was never paid in full, takes care of employees who were promised health care and might not otherwise have it, and avoids costly litigation that might not go the city’s way.
“If you asked me to say, if this is your deal, take it or leave it,” Miller said, “I would take it.”
Still, David Matkin, a Florida State University professor who has researched public sector retiree health benefits, called the deal a “bitter pill” for San Diego taxpayers. They’re now stuck with a bill that should have been paid by the generations before them.
“It’s no fun to be the one where you finally stop kicking the can, but you also start dealing with a problem that needs to be dealt with,” Matkin said.