San Diego Faces Funding Challenge For Retiree Health Benefits
Friday, August 20, 2010
In San Diego, salaries in cities around the region don’t appear to be excessive, but they are the tip of the iceberg in terms of the city liabilities. Pension deficits have been in the headlines for years. Retiree health benefits are the other shoe waiting to drop.
The scandal over salaries in the city of Bell has lifted the lid on a Pandora’s Box of pay and benefits for public employees. In San Diego, salaries at cities around the region don’t appear to be excessive, but they are the tip of the iceberg in terms of the city liabilities. Pension deficits have been in the headlines for years, retiree health benefits are the other shoe waiting to drop.
Fifty-one-year-old Al Williams has been a grounds maintenance worker for the parks and recreation department in the City of San Diego for 16 years. He’s planning to retire in four years, at the age of 55.
Williams has already had a bout with cancer and he’s relying on his city health care benefits to continue once he retires.
Unlike many San Diego cities, the city of San Diego does continue paying health benefits after employees retire. Williams currently gets a lump sum of $5,000 a year to cover health care.
“You get to chose what type of health care you would like,” Williams says. “Even with that, I can’t chose the one I really like, because I couldn’t afford it.”
But after Williams retires, under the city’s current plan he would get a bigger lump sum: $8,880 a year for the rest of his life to cover health care costs.
That applies to all employees and elected officials, even if they have only served the city for four years. It’s a defined benefit, like the city’s pension plan, and the city covers the costs.
Does the city have a fund to pay for these benefits? I asked the CEO of the city’s pension system, Mark Hovey.
“The city and members put contributions into our system and we invest those,” Hovey said, describing the pension fund he administers, “so we are controlling $4.5 billion of investments for pension benefits. But we don’t control any money pertaining to the retiree health care program.”
Hovey says the city used to pay into the pension fund to cover retiree health benefits, but that stopped in 2005 after an IRS investigation.
Scott Chadwick is the Human Resources Director for the city of San Diego. He acknowledges the city’s retiree health program is a pretty good deal.
“Once they leave,” he said, “the employees have a health care benefit for life.”
Chadwick says every year the city pays what it owes to cover current retirees. That came to about $32 million this year. But, what about the liability building up for employees who will retire in the future? There are currently more than 10,000 of them. Chadwick says the city has hired an actuary to estimate the liability, which currently stands at $1.3 billion
“The city has a retiree health trust to address the growing liability,” he says, “but I think that fund only contains about $57 million.”
That still leaves an unfunded liability of more than $1.2 billion.
Chadwick says the city council will be presented with a retiree health report next month, and the pressure is on find ways to reduce the liability. Retiree health reform is one of the reforms the city has put on the November ballot as a condition for raising the sales tax. Already the city has stopped offering new hires the same retiree health benefits, but that doesn’t solve the looming liability for existing employees and retirees.
Many San Diego County cities, like Oceanside, Vista and San Marcos do not pay for retiree health, though Jim Sandoval, Chula Vista’s city manager, says city retirees do benefit from lower rates from the city’s group health plans.
“Our employees, because they can use our system, their costs are a little bit cheaper than they might be if they were on their own,” he said.
Cities like Coronado and La Mesa, which are signed up with the CALPERS state retiree health plan, have to pay just over $100 a month for each retiree’s premiums.
The city of Santee offers its executive management a retiree health plan that’s almost as generous as the city of San Diego’s.
San Diego County also offers health benefits for life to long time employees. Their plan is more generous than most cities, but the benefit for people who have worked for the County for 20 years is only about half what the city of San Diego offers.
Douglas Johnson of the Rose Institute of State and Local Government says cities, counties and school districts are all waking up to the implications of promises they made without calculating the long term liabilities.
“The problem is, we know it’s big but we don’t know how big.” Johnson said, “My suspicion is in many jurisdictions this will actually be a larger liability than the pension liability because in the few jurisdictions we’ve looked at, it’s not as well funded -and because health care costs are increasing so fast.”
The city of San Diego was increasing its retiree health benefits by 10 percent a year to meet the rising cost of health care. By freezing that so-called “escalator,” the city has saved $200 million.
Public employees like maintenance worker Al Williams can no longer rely on the promises made years ago. Retiree health benefits, unlike pensions, aren’t guaranteed, and that means they’re likely to be some of the first benefits to go.
To view PDF documents, Download Acrobat Reader.