Even as San Diego City Hall tries to claw out of the swamp of its employee-pension deficit, the deep mud clinging to the city's feet has another name: the rising cost of healthcare. Traditionally, government employees, at every level, have enjoyed top-of-the-line benefits as an incentive to keep them from fleeing to the private sector. Over the years, San Diego has offered numerous benefit programs to retain quality employees, but none has become more onerous than healthcare.
The benefit must look pretty sweet to the average wage slave. City employees receive $5,500 annually to cover healthcare costs. If the employee doesn't use all of that money on premiums, he or she can use the money in a number of ways, including putting it into a retirement account or taking it as a check. The goals of the city in negotiations with its labor unions are to find a way to lower that number and to change the overall system-in particular, the employees' ability to collect any extra cash from the health benefit.
“You need to shift the paradigm and not think of the model in the way it was offered in the past,” said Fred Sainz, Mayor Jerry Sanders' spokesperson. “Simply put, just because it was done that way in the past doesn't mean it has to be done that way in the future.”
Sainz had to speak in hypotheticals because of ongoing negotiations, but when it comes to paying out unspent money for health insurance, he told CityBeat, “Maybe it's time to change the way that works.”
The unions certainly see some irony in such a remark, given that it was the city that came to them in the 1980s to institute flexible spending.
“We fought it at the time because we figured if the city wanted it, they must be up to something,” said Judie Italiano, president of the San Diego Municipal Employees Association (MEA), which represents the city's white-collar workers.
Now that the employees have the flexible spending system, they want to keep it.
The second prong in Sanders' strategy involves reducing the number of health plans available to city employees. At the moment, retirees and active employees can choose from a menu of 16 health plans, some of which have as few as 300 members. Six of them are provided by the city, the rest by the five unions. The union plans are paid for by the city, but the municipal check goes directly to the unions, which then pay the healthcare provider.
In a show of unanimity so rare we should all keep an eye out for flying pigs, City Council President Scott Peters, City Attorney Mike Aguirre and Sanders would prefer to eliminate all the union plans. Sainz said the mayor's ideal would include three plans for employees: a Kaiser Permanente plan, a non-Kaiser HMO and a PPO. By putting the combined bargaining power of the city's 12,000 employees onto one plan, they hope to force a single provider to dramatically lower prices.
Union leaders are not so keen. The MEA, the largest city-employee union, and also the one that represents City Council members, offers what Italiano says is the cheapest health plan aside from bargain-basement Kaiser Permanente. She said some council members select her union's plan over city offerings.
“I think it is so interesting and almost funny,” Italiano said. “This is a mayor that says competition is good for taxpayers, and yet he wants to get rid of competition.”
Her theory is that the more plans in the system, the more the plans will compete against each other to acquire new members.
The health benefit is one of several won by unions for their members that might seem outlandish to private-sector employees. Among other programs, the city offered the Deferred Retirement Option (DROP), which allowed employees to “retire” while still working. Under the DROP program, an employee stops accruing years in the retirement system and starts drawing pension checks along with their paychecks. Employees can also purchase credits toward an early retirement at what Aguirre says is “an artificially low price.” The same program lets employees purchase years toward becoming fully vested in the pension system. And they have the Pick Up program, under which the city pays a substantial percentage of the employee's pension contribution.
In July 2005, the city closed several of these gravy-train options to new hires, including DROP and the guaranteed retiree health benefit. But to reduce the benefits or eliminate them for current employees, the city will need to strike a deal with the unions.
The retiree benefits are particularly intractable. Right now, the city's healthcare fund for retirees is $1.4 billion short. At the moment, there is no money going to fill that hole, and every time healthcare premiums rise, it gets a little deeper. Sanders proposes creating a trust fund to help the city get a handle on the problem.
“Normally, city investments have to be on a short-term basis, which forces us to assume a lower interest rate,” Sainz said. By creating a trust fund for the pool of money set aside to cover retiree healthcare, the city can then invest that money long-term and count on an 8 percent annual return. That reduces the unfunded liability to roughly $800 million. By ramping up payments from the city's general fund into the healthcare trust over the next five years, Sanders hopes to tackle the liability.
“But every time healthcare costs go up, the city's liability goes up,” Aguirre told CityBeat. “That's how you end up with a retiree getting $7,000 and an active employee getting $5,500. The whole thing is just a Ponzi scheme.”
Aguirre has spent nearly all of his two-year tenure as city attorney trying to overturn what he considers illegally granted pension benefits. While he has no plans to sue to get retiree medical benefits overturned, his court case exposed another challenge for the city: A judge ruled that retired employees are no longer represented by the unions. If the city wants to reduce or renegotiate retiree benefits, they have no one to negotiate with. Aguirre and the rest of us will have to rely on the mayor's trust-fund plan. Apparently, it's all we got.