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To hear from those who support it, everything about the Otay Water District’s plan to boost employees’ retirement benefits makes the move sound like a no-brainer.
It would increase employee recruitment and retention, they say. It wouldn’t cost a penny — it would save money, every year.
The district’s board is poised Wednesday to grant lifetime health care to its union employees, mirroring a boost it gave senior executives in mid-July. Employees would pay more toward their pensions. In return, the district would eliminate limits on its contribution to employees’ retirement health care. Employees’ health care costs would be covered after they retire. Most of their spouses’ care would be covered, too.
The proposal stands out. It has been advertised by district leaders as saving money each year, even though it wouldn’t save anything until 2018. It was proposed not by union employees during a salary negotiation but by senior district officials. And it was first approved without at least one board member being able to see the underlying financial analysis that justifies the whole thing.
The benefits aren’t unprecedented. The district’s current retirees receive similar perks. But the move has attracted scrutiny because it adds a liability, retiree health care, to the district’s books at a time when governments here and around the country are trying to trim it.
Mark Watton, the district’s general manager, acknowledged in an interview that the benefit boost comes with some risk. But he and other district leaders haven’t described it that way in making their case publicly. They’ve focused on the deal’s potential savings, not its potential costs.
Watton says the plan will enhance recruitment and retention at the agency that employs 156. But there’s no evidence the district has any trouble recruiting or retaining its employees today. It has cut almost 20 positions from its $78 million budget in recent years. The last time it struggled to hire an employee was in 2006-2007, Watton said.
Four years later, the economy is weak. Unemployment is above 10 percent. Fears of a second recession loom. Watton said that could change quickly and make hiring hard. But a Union-Tribune analysis found many of the district’s peers don’t offer similar benefits.
District officials say employees wanted assurances about their health care in retirement and were willing to pay for the benefit increase. Non-union employees will contribute 8 percent of their salaries toward their pensions (up from 1 percent today). Union employees will do that and contribute an extra .75 percent to their health care.
The increase in effect nullifies cost-of-living salary increases for employees this year and next. The district says that will pay for the benefit boost and save as much as $5 million total during the next 35 years.
Whether the district ends up saving those millions depends largely on whether it has accurately projected health care costs. If they end up being higher than expected, the district will be on the hook. If they aren’t, the district could save.
Watton and the district’s union president say that employees are paying for the benefit increase. By agreeing to pay more toward their pensions, employees are underwriting the costs of their health care in retirement, they said.
But whether that happens or not is a risk — and it doesn’t have to be. If health care costs stay within the district’s projections, employees will underwrite the new benefit. If costs rise rapidly, the district could wind up with an unexpected bill.
Employees wouldn’t be on the hook. Water ratepayers would. Those ratepayers have seen their rates jump 42 percent since 2008 and face another 7.7 percent increase in January.
The district could limit health care spending to however much employees contribute, said Bill Sheffler, an actuary and former city retirement board member. It hasn’t, instead trusting its projections are accurate.
“If they’re making the argument that they have savings in the first year, that’s all well and good,” said Sheffler, a board member of the San Diego County Taxpayers Association, a lead critic. “That doesn’t mean it won’t quickly turn into a deficit.”
Workers won’t commit now to paying for health care costs if they ever exceed their contributions.
“If the district wanted to negotiate, we would have to sit down and talk about it,” said Patrick Newman, president of the district’s union. “We would have to vote on it as an association.”
Watton says his district is taking a long-term view of the deal and trusts that it has conservatively calculated the savings and future health care costs. The district expects health care costs to increase 9.5 percent in the first year and drop a half-percent annually for the next decade.
“We’re confident in the numbers, and we think they’re cautious numbers,” he said. “If we’re wrong on that, it can be a subject of further collective bargaining.”
Mark Robak, the lone board member to oppose last month’s increase, said health care costs fueled his concern. A few years ago, he said, the district didn’t expect water rates to jump as much as they have. How then, he asked, can it be sure about health care costs?
Robak said he was troubled that he was asked to vote without the aid of a key underlying financial analysis that details the district’s financial assumptions. The analysis didn’t arrive until July 19 — four days after the vote. He said he was taken aback that he didn’t have the supporting information for a plan offered by senior staffers.
“I’m not sure how anybody could make an educated decision on something as complex as it is without the benefit of that,” Robak said. “I would think anybody in my position would want that. I know when I heard about it, I thought: ‘Senior management is proposing this?’ It struck me as kind of odd. In this brutal, near depression, you just don’t expect to hear this.”
The Taxpayers Association has been the deal’s most outspoken critic. Its president, Lani Lutar, said she found it troubling that the district’s management — not its union — first offered the proposal. (Watton, the general manager, was already promised full coverage of health care costs, but many other top employees were not.)
Lutar said the district’s decision amounts to a giveaway, one done without the long-term analysis needed to accurately project the deal’s financial impact. If health care costs do rise quickly, she said, the district will have unnecessarily given its employees a bargaining chip if it tries to trim benefits later.
“The question really is: ‘Why does management, already receiving generous compensation, need to provide lifetime retiree health care?’” Lutar said. “It’s outrageous, and it’s unfair to the ratepayers in that district that are already being hit hard with rate increases year after year.”
Rob Davis is a senior reporter at voiceofsandiego.org. You can contact him directly at rob.davis@voiceofsandiego.org or 619.325.0529.
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