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San Diego Retiree Health Benefits Heading For Negotiation

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Aired 9/8/10

San Diego faces a $1.3 billion unfunded retiree health liability. Do you think the city should have the right to change benefits promised to workers? Why do you think the city has let this problem go on for so long?

MAUREEN CAVANAUGH (Host): I'm Maureen Cavanaugh, and you're listening to These Days on KPBS. A benefit that looked like a good deal for the city of San Diego years ago now looms as a billion dollar liability. It's a retirement healthcare benefit offered to city employees hired before 2005. This week, the San Diego City Council is reviewing the results of a new study, commissioned by the city, which gives the council some options on possibly trimming the retiree health care benefits. The study also claims, if nothing is done, this one benefit will cost San Diego more than $120 million a year for the next 25 years. Joining me to talk about how this good idea became such a problem and what San Diego can do about it are my guests. San Diego City Attorney Jan Goldsmith is here, and good morning, Jan.

JAN GOLDSMITH (San Diego City Attorney): Good morning. A pleasure to be with you.

CAVANAUGH: And Michael Zucchet, general manager of the Municipal Employees Association, the city’s largest union. Good morning, Michael.

MICHAEL ZUCCHET (General Manager, Municipal Employees Association): Good morning.

CAVANAUGH: Now I want to invite our listeners to join the conversation. Do you think the city should have the right to change benefits promised to workers? Why do you think the city has let this problem go on for so long? Give us a call with your questions and your comments. Our number here is 1-888-895-5727, that’s 1-888-895-KPBS. I want to ask you both first, if I may, some background on this issue. Let me go to you first, Mike. Can you give us an idea as how city employees came to have this benefit that’s this retirement health benefit?

ZUCCHET: Well, it started back in 1981 when then Mayor Pete Wilson was looking to save money, as it seems like we always do in this city, looking to plug some last minute holes in the budget, and his idea was to have the city not have its obligation to pay the social security contribution to its employees and save money. And so his idea to do that was to entice the city employees to vote themselves out of the social security system and in exchange—and it was an explicit agreement—they would have, quote, city funded healthcare, unquote, for their life after they retired from the city. So it was a specific inducement and the goal, as stated by Mayor Wilson and the council, with its unanimous support at the time, was to save the city money. And that’s how the benefit was born and then over the 30 years since that time, it has gone through various enhancements by almost every mayor since then, Mayor Hedgecock, Mayor Golding, and so on and so forth. So it’s got a long and rich legislative history that began 30 years ago, and the goal was to save money.

CAVANAUGH: And Jan Goldsmith, anything you want to add to that little history?

GOLDSMITH: Yeah, and they never planned for it. What they did is they decided it was going to be a pay as you go system. Most systems like this that promise something in the future after you retire will have an ongoing fund that’s created and then you invest and part of the returns is – helps pay for the future. By paying as you go, nothing was planned for the future and so they’ve been building an unfunded liability for future retirees who get health benefits and right now it’s at $1.4 billion with nothing really there to pay for it. In 1996, it looked like it was becoming a problem to pay for retiree health out of the general fund of the city and so they came up with a brilliant idea of let’s pay it out of the retirement funds. And a charter amendment was actually proposed and placed on the ballot and approved that would have retiree health be paid out of the retirement funds rather than the general fund. That was going to, again, save money. As Mike said, that’s always been a common theme. It turned out, later on they found out that the IRS had a rule against doing that. It would jeopardize the tax qualification of the entire retirement system and so they had to take it out of that. And now we’re left with a $1.4 billion future liability if it continues and we really don’t have the money to pay for it. And we did eliminate retiree health benefits for those hired after 2005, and after 2009 there’s a contribution plan that was established. But for the first time in many, many years I think we’re taking a realistic look at this. But there are some hurdles and we’ll get to that as you ask about what options are.

CAVANAUGH: Well, I just want to be clear. When you say that the city did – funded this on a pay as you go plan, it’s kind of like paying the minimum balance on your credit card and never addressing the real cost of the program.

GOLDSMITH: I guess it’s like having a mortgage that – where you have a negative amortization and the interest keeps building and you just pay for what you can this month to cover it and the interest keeps building and it’s – your mortgage gets larger and larger and larger and you just kind of say, well, some future time we’ll deal with it. In this case, it’s some future council, city council, city attorney and community and taxpayers that have to deal with it.

CAVANAUGH: Now, Michael, let’s be clear on who exactly this benefit covers. As we said, it cut off in 2005. Employees hired after 2005 don’t get this retiree health benefit. And we’re – whatever changes are being proposed, not changes that – to affect already retired city workers, is that right?

ZUCCHET: Well, just to be clear.

CAVANAUGH: Umm-hmm.

ZUCCHET: I’m not aware of specific changes being proposed by the city. That’s what our upcoming negotiations are about.

CAVANAUGH: Certainly.

ZUCCHET: What was put on the table in this report yesterday was a suite of options from at least the city’s point of view, who commissioned the study, as to ways you could cut the benefit. It’s not clear what’s – how they’re going to propose that. But the city, and I don’t want to speak for the city attorney, but in his opinion he distinguished between already retired people and active city employees. And it’s my understanding that the city believes that they can lawfully and apparently they’re going to attempt to go after the benefit of existing employees but not of already retired people. So we are talking about a limited fixed group of people, people hired who are actively working for the city who are not retired and who were hired before 2005. But if I could just add one point to the previous point by the city attorney, which is a good one, back in 1996, this charter amendment. The discussion back then wasn’t even should we do more than our minimum payment on our credit card, as you analogized, which is a good analogy, it was we don’t even want to make that minimum payment out of the general fund. And the ballot line, which in 1996 said, and this was sponsored by the San Diego Taxpayers Association, which was the main proponent of it along with Susan Golding, it was let’s save tax dollars, was the big headline. And we shift these payments from city taxpayers and the general fund to the retirement fund and just pay for it with investment earnings and assets as if the money would, you know, appear out of thin air. And I mention that not to, you know, question the motives or judgment of the people who made those decisions but there’s this notion in the city that these horrible labor unions and their bought-and-paid-for city council members are behind all of this, and these decisions were not only made but were specifically pushed by mayors like Mayor Wilson and Mayor Golding, not exactly friends of labor, San Diego Taxpayers Association, the Union-Tribune editorial page at the time. So, you know, this debate in this community has been – has a long and rich history on this benefit and only in the last couple of years some have tried to rewrite the history that somehow these are the labor unions and these horrible employees doing all this and, in fact, the opposite is true.

CAVANAUGH: I’m speaking with…

GOLDSMITH: Well, let me – Oh.

CAVANAUGH: I just want to reidentify you so the listeners know who we’re – who I’m speaking with. Michael Zucchet is general manager of the Municipal Employees Association, the city’s largest union. And I’m also here with San Diego City Attorney Jan Goldsmith. And we’re talking about the new report that’s been commissioned by the city reviewing the retiree healthcare benefits for city employees and possible negotiations that may be underway examining options to possibly trim that benefit. And you wanted to add something.

GOLDSMITH: Yeah, I’ve reviewed the history of this as well as the overall pension plan, which we’re facing a $2.1 billion unfunded liability. And what Mike says is correct from the standpoint that it wasn’t just one segment of our community that caused these problems. Our Union-Tribune newspaper was not paying attention. Where was the financial editor? Where was the public? Where were the city council members? In 1996, they were a piece of work, I will tell you. I reviewed that history. That’s the ones who created this MP1 that started the pension problem. I think the community, looking back, all participated in ignoring what we needed to do. Where was the city attorney’s office sitting in that chair at the city council meetings? So looking back, I don’t think it’s really productive to point fingers because I think it’s the entire community and we just should never let that happen again, give attention to it. Now we’ve got to look forward. We’ve got to play with the cards we’re dealt. There’s going to be some tough negotiating and there’s some tough hurdles. And we have huge differences of opinion, labor and my office, over the legal options we have, and I will battle them. But I will tell you, I respect them and they – they, alone, did not cause this problem. But we have to solve it and it’s going to require some tough, perhaps some more battles in court.

CAVANAUGH: We’re taking your calls at 1-888-895-5727. I want to take a call from Bijon. He’s been waiting on the line. He’s calling from Encinitas. Good morning and welcome to These Days.

BIJON (Caller, Encinitas): Thank you for taking my call, the honorable former council member and the city attorney. I’m calling not so much regarding the legal aspects of this, which is a very serious aspect of the – these benefits to the current employees as well as the retirees, I’m calling regarding the ethical and integrity of the system. To maintain integrity of the system, it is important to remember our obligations and responsibilities that if we made a decision to these people, particularly in case of retirees, we cannot backpedal. We cannot go back and say, well, yeah for – now we don’t have the money, we cannot do this. Well, these decisions are made many other ways to save money for the city than try to go back and try to deal with the people who have earned their retirement benefits. So when you start cutting this back or even considering it or putting it on the table, it’s highly unethical, in my opinion, to even be considered.

CAVANAUGH: Bijon, thank you for the call.

GOLDSMITH: Well, if I can respond to that because I think, you know, the law does follow ethics and sometimes good sense. It does go into the legal issue. Vested pension benefits that were legally granted cannot be touched by the employer, the city, unless you give the retiree something of equal value. So if you’re trying to save money it ain’t gonna work if they’re vested pension benefits. If they are terms and conditions of employment, they can be changed subject to negotiations with your labor organizations. Retiree health benefits, we’ve given the opinion that retiree health benefits for those who are already retired are likely vested because they’re already retired, their pension benefit was promised. How can you have a term and condition of employment when they’re already retired? However, for existing employees, and we’re talking about those hired before 2005, it is a term and condition of employment that can be negotiated. And if you take a position it’s vested, which the labor organizations have taken, then you can’t negotiate it. We can’t do anything really. We’ve taken a position that it is terms and condition of employment and we’re supported by a Ninth Circuit court decision that we achieved last year. The Ninth Circuit Court of Appeal is the second highest court in the country. The appeal from that is U.S. Supreme Court. And they reviewed our own retiree health plan in San Diego in a case involving the Police Officers Association and we battled it out and they concluded that it was a term and condition of employment and can be negotiated. Now I want to go forward and negotiate. I want to deal with this problem. But it is a term and condition of employment. If it’s deemed a vested benefit, we’re stuck with $1.4 billion unfunded liability.

CAVANAUGH: We have to take a break but I know this question about whether or not these benefits are vested is huge and I want to get your response, Michael, when we come back. You’re listening to These Days on KPBS.


CAVANAUGH: Welcome back. I'm Maureen Cavanaugh. You're listening to These Days on KPBS. We’re talking about the City of San Diego’s retirement healthcare benefit for city employees that a new study claims now looms as a billion dollar liability for the city. And my guests are San Diego City Attorney Jan Goldsmith and Michael Zucchet, who’s general manager of the Municipal Employees Association. And, Michael, we just heard Jan Goldsmith talk about whether or not these benefits are vested like the city pension benefits are. And I would like to get your take on that because I know this question really, really is at the heart of whether negotiations can be made about whether to tweak these benefits in one way or another.

ZUCCHET: Yeah, I think that’s fair to say that this is a pretty important point and one of the benefits of this 40-page report that was produced by both the city and the labor organizations that was released yesterday and is available on the city’s website for anybody to look at, is it lays out the rather detailed factual history of this benefit and it also lays out the city attorney’s arguments that it’s not a vested benefit, that it’s simply an employment benefit and the union’s take on that. And without, you know, having that debate today, I don’t think either the city attorney or I are prepared to do that, there are some facts in there that are pretty striking. For instance, the city, until very recently, the city itself has always acknowledged that this is a vested retirement benefit. That’s why they’ve put these changes not just in the contracts to the labor unions but in the retirement system legislation. And that’s why as recently as 2007, when it put a proposition on the ballot that said that the voters should have the ability to approve any future retirement system benefit enhancements, included in that definition by the city was a change to any retiree health benefit. So the city has always squarely considered this benefit as a vested retirement benefit. It has quacked like that duck and now all of a sudden it’s not a duck. But that’ll be a case, if we get there, for litigation. I think the caller’s point, though, is an important one, which is no matter whether the city attorney or somebody else is correct about the precise legal nature of this, does the city have some moral, ethical or other obligation to honor its commitments that it’s made to its employees for 30 years and, as a sort of outshoot from that is that city employees have bargained away things to get this benefit. That cannot be undone. And so it’s not exactly ethical or fair or any other, you know, slice of justice to simply try and undo one side of the bargain. It goes back to the very beginning of the show where we talked about how this benefit came about. The city employees gave up something. They gave up social security and Medicare for years. And is the city prepared to go back and undo that for 30 years as they also attempt to undo its promises to these employees? And so our ask is one thing and one thing only. Let’s spend a little more time figuring out how the city can honor its commitments rather than spending so much time, as the city tends to do, figuring out how it can get out of its commitments.

CAVANAUGH: We’re taking your calls at 1-888-895-5727. Let’s hear from Catherine calling us from San Marcos. Good morning, Catherine. Welcome to These Days.

CATHERINE (Caller, San Marcos): Oh, good morning, Maureen. The comment that I had was just this, that oftentimes you’ll find that people who work for a municipality or, in this case, the City of San Diego are doing the job that they are paid less for than they would be if they were working for a private entity or someone in the private sector. And so one of the things that’s touted upon hiring for these kinds of jobs is that they have a very good benefit system, they have a very good pension system. And so the city, at that juncture, pays less in salary to these kinds of, you know, for these kinds of jobs to their employees with the promise of that additional benefit of lifetime medical or…

CAVANAUGH: Right.

CATHERINE: …better health benefits.

CAVANAUGH: I understand your point. Thank you, Catherine. And let me go to you, Jan Goldsmith. The idea that – Catherine’s point, that city employees get lower salaries than they might in the public – in the private sector, and Michael’s point that our city employees have already negotiated away a certain amount of their rightful social security and Medicare, although I believe some of that has been reinstated, in order – because they were promised these benefits. What – Where does that leave it in terms of vested or not vested or how much leeway the city has to manipulate this particular benefit?

GOLDSMITH: Let me just say as far as the salary structure, I’m not familiar. I haven’t done a study on the salary structure as compared to the private sector. I am very familiar with salaries of lawyers and I will tell you that it is – that, generally, the lawyers – that is true with regard to lawyers. I have lawyers who are work – I have hired who were making over $200,000 in the private sector who have – we hired for less than half of that. It’s also a tough job market for them, so you can put that into the mix. As far as the – I deal in the law. And the Ninth Circuit decision considered the history of this and stated in its holding, and I have a copy here and it just very briefly says that our retiree health benefits continue only insofar as they’re renegotiated as part of a new agreement and are not protected contract rights. That’s for current employees. Now I understand what Mike is saying and I understand what employees are saying, hey, we made decisions on these. Many of these people who made those decisions with regard to social security, they’re retired, many of them, because it was many years ago. What the Ninth Circuit looked at was that this is regularly negotiated. Once it’s in the retirement system, it’s out of the retirement system. It goes up, it changes, it – there’s delays on the increases. It is negotiated every year and so it changes and is treated as a term and condition of employment. That’s the threshold legal issue. I will tell you, if the position is that you’re – that it’s vested, I’m not sure what we have to negotiate because under the law if it’s vested, it’s not protected. We don’t think it is. And the court of appeal for the Ninth Circuit federal court agrees with us. We think it’s more productive to sit down and try to figure out how do we cut that $1.4 billion nut we’re facing and face up to it with reality and with an overall plan. I will say that one of the things that we lack in the city is an overall plan to deal with – a workout plan to deal with our pension and retiree health problem, the big scheme. How is it that we’re going to deal with this over a period of the next 30 years? It hasn’t been done in this city and it ought to be done.

CAVANAUGH: We’re taking your calls at 1-888-895-5727. Tami’s on the line from Encinitas. Good morning, Tami, and welcome to These Days.

TAMI (Caller, Encinitas): Hi. Good morning. Yes, my question is, if social security and Medicare benefits were bargained away in exchange for these health benefits that the city now wants to undo, how do people make up for that? They haven’t been contributing to social security or Medicare all these years so they’re left with nothing then upon retirement. What are the plans for that to deal with that situation?

GOLDSMITH: Well…

TAMI: That’s not fair either.

CAVANAUGH: Tami, thank you very much. And we have another caller on the line with a very similar question about her husband worked for the city, didn’t pay into Medicare, if this goes through what does he get when he retires?

GOLDSMITH: Medicare. It was reinstated. The city does pay – actually does pay into Medicare. People are not denied Medicare. As far as social security, that has to do with the pension obligation.

CAVANAUGH: Which is a separate…

GOLDSMITH: It’s a separate idea. There’s some people, as I – winding back, the 1980s, that have a little different scenario than our current employees. I also point out from the standpoint of Mike’s comment and, frankly, one of our council members made that comment, that despite the law, we have a responsibility, that’s up – to do this. And that’s up to the policymakers. That’s up to the council and the mayor, that’s not up to me. I just state the law, and I am an advocate and my – my – I’m quite firm on that, the law, that we can change it if we want to.

CAVANAUGH: Michael, let me get your reaction to some of the things we’ve been saying here.

ZUCCHET: Well, yeah, I just think we need to go back and correct a few inaccuracies. It’s true that Medicare was reinstated for employees hired after 1986 but it’s those employees hired between 1982 and 1986—and there’s hundreds of them, I believe close to a thousand—that do not have Medicare. The reinstatement in 1986 did not apply to them. And the caller is correct that if, and I assume the quote of the city employee you’re referring to also on the line, there are employees, a substantial amount, that will have nothing, including no Medicare, as a result of whatever the city may try and do. And while, you know, I’ve tried as hard as I can to resist the legal argument both because I don’t think this is the forum nor am I the lawyer, but this constant reference to the Ninth Circuit decision, I think is just off base and specifically the notion that the Ninth Circuit had the full record and the rich history of this benefit before it in the record is just not true, and I think the city attorney knows it. It was a very limited almost afterthought in a case that only is binding and applies to the Police Officers Association. The other 8,500 city employees were not before the court in that case and while that, of course, is one thread in this quilt, it is – it doesn’t begin to, I don’t think, correctly characterize the legal, ethical, moral, factual, whatever spin you want to put on it, what’s happened. I would, again, invite readers not to listen to me or, with respect, the city attorney or anybody else but it’s laid out in this report, of the undisputed, factual history of this report, what was traded off to get this benefit, what was given up by employees. How did the city go about codifying it? How did the city explain what they were doing? Forget about – Don’t listen to the unions, what did the city say they were doing? Those are the things that a court is going to look at if we get to it. The one thing I will agree with the city attorney is that this focus, while it’s, of course, an important issue, if both sides are going to dig their heels in on this, we’re probably not going to get very far in negotiations.

CAVANAUGH: Right, and that would be my point to you, Michael Zucchet. If, indeed, it’s found either legally or morally that these – this retiree health benefit is a vested – what – where can you go in – Where can the two sides go in talking about this? Because as one of our city councilmen commented recently, an unfunded benefit is really no benefit at all. If there’s no money there, there’s no way to pay out these benefits. So is there room for negotiation, do you think, Michael?

ZUCCHET: We think there is. And the Municipal Employees Association has never taken the position on anything of, well, that’s the way it is, too bad, you figure it out. We’ve always been willing to partner with the city when it faces tough problems. You know, with that said, there are limits and, again, if the city can take the perspective and work with us and anybody else who wants to work with it as to how to about funding this promise, how to go about honoring its commitment and not the opposite, we think the unions can play a role and we certainly intend to do that in negotiations. You know, to paraphrase Councilmember Lightner yesterday at the council hearing, and I don’t want to assume where she was going but what I heard her say in her single question which is, when is this going to closed session was sort of let’s get on with it, let’s figure it out, let’s get into negotiations. And we agree with her and we think, without getting into specifics, we will have something to offer in the way of working with the city toward a solution to manage this issue. I can tell you now, that’s not going to be to give up the benefit. And if that’s going to be the city’s position, it will be a short negotiation. But, hopefully, we can work together and figure something out.

CAVANAUGH: We’re taking your calls at 1-888-895-5727. Lynelle is on the line. I don’t know if I’m pronouncing that correctly. Lyn, welcome to These Days.

LYNELLE (Caller): Good morning.

CAVANAUGH: Good morning.

LYNELLE: I just wanted to mention something that I have not heard mentioned at all is the fact that in 1996 when the Republican National Convention was held here, the money that funded that convention was taken from the employee pension fund and promising that they would refund it and, well, we see things like the city’s Standard & Poor – the bond rating, where we’re at there, and I just thought the hearing was comment about that. That’s it. Thanks a lot.

CAVANAUGH: Thank you.

ZUCCHET: You know, it’s not a – I don’t believe that’s directly factually true. In other words, that they literally took money from the retirement fund and funded some other priority. But the way it worked for a couple of decades was, you know, the labor unions would come to the city and say we’d like a pay raise. And the mayor at the time would say, you know, I don’t want to give you pay raise, I’d rather fund a ballpark or a convention center or a national political convention or anything else, so what I’m going to do for you is give you a pension benefit or a retiree health benefit or – or something else that will be – come in the form of deferred compensation so I don’t have to pay it today. I’ll leave that to my predecessors (sic), you know, a decade or two down the road, and it’s all good. And we can do it all, and we don’t have to raise taxes and we can keep telling the public that everything’s cool and everybody’s happy. And so that’s the way it went for a long time. So effectively, those were the funding decisions made by elected officials in this city for several decades, not at the behest necessarily of the employees but that’s the way the politicians wanted the game played and that’s the way it was played. So I think it’s absolutely correct that we are here today because of explicit fiscal decisions by elected officials for 30 years and now all of a sudden there are some in the city who just want to undo that, and it can’t be undone legally, morally or any other way. We need to work, as the city attorney said, with the cards we were dealt and that’s what we need to do. And the productive way to do that is to respect that history and know that it can’t be undone, you know, with the flip of a coin.

GOLDSMITH: And let me add to that a little different perspective. I’ve been in this office for nearly two years and I have yet to look at something back in 1996 era and say, gee, they did a good job on that. In other words, they were sloppy, very sloppy. For 20 years, they ignored the charter provision that said that the pension contributions under our system is supposed to be substantially equal between the employees and the employer. They completely ignored it. They did things that, yes, they put it into MOUs with regard to retiree health but they made it so that it was a term and condition of employment. Ninth Circuit, maybe some other court, will have to deal with that, too. The bottom line is that everybody was sloppy and everybody participated, whether it be labor, whether it be the employer, whether it be the community, everybody helped cause this problem and they did it in a way that it has to be undone. The cards that we were dealt with also is the fact that it was sloppy and it can be undone. These are terms and condition of employment and can be negotiated. I will tell you that if Mike is correct, that this is part of the retirement system and, wow, can’t be changed and all that. Our retirement system on our charter is contributory. That means that we both contribute, employees and employers. Up to this point for retiree health, it’s only been the employer who’s paid. So you can’t have it both ways. You can’t say, gee, this is part of the retirement system, can’t be touched as far as the benefits, yet we’ll ignore the obligation under the charter for it to be contributory. So, partner, step up to the plate and pay half.

CAVANAUGH: My final question to you, Jan Goldsmith, I don’t want to leave this subject without mentioning the fact that resolving this retiree healthcare benefit or at least attempting to come to a resolution couldn’t – the stakes couldn’t be higher because it is part and parcel of the contingency – it’s a contingent on this half cent sales tax increase that is on the ballot this November. Is that correct?

GOLDSMITH: The – there is one of the conditions has to do with retiree health.

CAVANAUGH: And what is that condition?

GOLDSMITH: As I recall, I don’t have it in front of me, but I believe it says it would have to be – the city’s contribution has to be reduced from its contribution level in – as of June 30, 2010. Am I correct, Mike?

ZUCCHET: It’s the unfunded liability…

GOLDSMITH: The unfunded liability.

ZUCCHET: …is reduced.

GOLDSMITH: Yeah, the unfunded liability would be reduced. It’s – What we’re talking about here as far as addressing the issue in more substance goes beyond what is in prompte.

CAVANAUGH: Right. I want to – We are out of time and this is such a complicated issue. But thank you so much. I think we’ve given at least a grounding in it. Thank you. I want to thank my guests. Michael Zucchet and Jan Goldsmith, thank you for coming in and speaking with us.

GOLDSMITH: A pleasure.

ZUCCHET: Thank you, Maureen.

CAVANAUGH: And if you would like to comment, please go online, KPBS.org/thesedays. Coming up, a preview of the Alt Picture Shows downtown, that’s as These Days continues here on KPBS.

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