Skyrocketing retiree health care costs threaten to drain San Francisco budget

By Elizabeth Pfeffer

August 2, 2006

Newly projected health care costs for retired City workers are expected to approach $5 billion over the next 30 years, with no monies set aside to cover their openhanded benefits packages.

As it stands now, persons employed by the City and County of San Francisco for five consecutive years receive the same coverage as during employment, full individual and half spousal coverage at age 50.

What makes the package especially generous is that the work term can occur at any point in life. In other words, a person can serve the City in their early 20s, move on to financial success in the private sector, and still cash in on full health care upon retirement.

"This is something that is going to be crippling to the City if we don't begin to address it now," warned Supervisor Sean Elsbernd at the July 11 Board of Supervisors meeting.

As a member of the Health Services Board he called for hearings before that body and the Board of Supervisors.

"There are a lot of difficult choices that are going to need to be made to address this - things that a lot of people are going to have a knee-jerk reaction to," Elsbernd said. "We need to move beyond that, if we don't we're going to have serious problems."

One of the changes Elsbernd will propose after the Board's August hiatus is to stratify the benefit infrastructure so it models the State's.

State workers vest in their retirement benefits based on how long they're employed. Eligibility for health care begins after 10 years, at which point a person receives partial coverage, but they would have to stay on longer to receive full benefits at retirement.

It's probably going to be highly controversial and highly contested, said Rebekah Krell, legislative aide to Elsbernd.

Under a relatively new Governmental Accounting Standards Board rule, state and local governments are required to report on postemployment benefits plans so they can address these types of obstacles.

This is the first year the Controller's Office has issued a report on retiree health care packages.

The report showed that the existing policy costs retired workers less than $600 a year, while the City pays anywhere from $734 to $935 a month per individual, and the rates are increasing exponentially.

Another idea to be discussed in September is a recommendation by the Controller's Office to replicate the structure for pension benefits.

Currently health care is paid on a month-to-month basis, but if the City and its employees paid into a retiree health care fund earlier on, it would generate about $2 billion in interest over 30 years, thus taking a bite out of the $5 billion unfunded liability anticipated by the Controller's Office.

San Francisco isn't alone in their struggle to balance budgets and benefits, said Jason Dickerson, principal fiscal and policy analyst for the California legislative analyst's office.

According to a recent study by the California State Association of Counties, full coverage after five years is not unusual for California counties, said Dickerson, whose expertise are in retirement and public employer - employee relations

"This is all relatively new," Dickerson said. "Keep in mind that when you go back 20 or more years, employer health care costs for employees were much less than they are now."

Indeed, health care was not a major driver of costs in the 1960s. The state of California first enacted legislation to specify the number of years required to receive postemployment health benefits in 1984.

"Government efforts to reign in interests only occurred, in earnest, in the last 15-20 years," Dickerson said.

It's become difficult to manage in the last few years because the cost of health care has been growing faster than inflation.

The reasons are in the many with advanced technology and expensive pharmaceuticals topping the list.

Unlike a lot of counties dealing with staggering health care costs, San Francisco has an exceptionally well-funded pension plan, Dickerson said.

"So compared to some other cities, San Francisco might not be that bad off."

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