Supervisor's Report

Proposition A: A solution to San Francisco’s $4.4 billion unfunded retiree health care liability

We have an opportunity this November to solve one of San Francisco’s last structural financial issues through the passage of Proposition A, a charter amendment I introduced to solve San Francisco’s $4.4 billion unfunded retiree health care liability.

As we’re all acutely aware, rising health care costs and the ability for individuals and employers to pay for these costs has been a growing issue across our country and here in San Francisco for decades. Health care spending in the United States alone is over $3 trillion a year and rising. These rising costs affect the private sector and public sector alike, because we are all consumers of health care.

In November of 2012, our controller’s office issued a report that benchmarked San Francisco’s current unfunded retiree health care liability at $4.4 billion. Like many major cities, San Francisco’s liability, which breaks down to $13,487 per household, is funded on a pay-as-you-go basis, much like federal Social Security, and less than 1 percent of the $4.4 billion tab has been saved.

The crux of Proposition A deals with the Retiree Health Care Trust Fund (RHCTF), which was established when San Francisco voters overwhelmingly supported Proposition B in 2008, to create a long-term funding model for retiree health care costs. Proposition B in 2008 not only established the RHCTF, but also mandated new city employees contribute 2 percent of their salaries into the RHCTF to save for future health care liabilities.

However, for no apparent reason, Proposition B in 2008 also allowed the RHCTF to be completely drained beginning in the year 2020. If we allowed this to happen, not only would the RHCTF savings be depleted, but we would lose any hope of establishing a long-term funding model for retiree health care.

To provide some context on what San Francisco currently pays for retiree health care costs: The city contributed $151 million out of our General Fund in 2013, and that number is set to rise to over $500 million a year within 20 years if no action is taken by the city.

We have a growing problem – both financially as a city, and also within our retiree community, where many retirees live in fear the city of San Francisco will not be able to afford to pay for their health care down the road.

The goals of Proposition A are simple and straightforward. First, Proposition A keeps the city’s commitment to its workers, including our police officers, firefighters, and nurses by putting the RHCTF in a “lock box,” so the assets of the fund continue to grow over time and will completely cover annual retiree health care costs in 30 years. Second, Proposition A provides greater certainty in the city’s budgeting process by capping employer expenses to cover health care costs at no more than 10 percent of the city’s payroll. More certainty in the city’s budgeting process provides for greater flexibility to enhance and potentially expand city services that we all care about. Last, Proposition A uses an independent expert panel to oversee the withdrawals and assets in the fund that is comprised of the controller, the treasurer, the executive director of the Employee’s Retirement System, and one current and one former city employee.

The passage of Proposition A has multiple positive implications for our city and our taxpayers. With its passage, we will successfully transition the way we pay for retiree health care costs from a pay-as-you-go system to a fully funded model that wipes out the $4.4 billion liability within 30 years. The passage of Proposition A will result in major cost savings for San Francisco, current and future taxpayers, and employees, as prefunded assets earn investment income over time that will be used to pay for health care costs. As an added benefit, the city’s ability to effectively manage this liability is a major factor in credit rating agencies’ reviews of a city’s bond rating. Strong bond ratings mean low borrowing costs, which saves taxpayers millions on voter-approved debt.

We are able to accomplish all of this through the passage of Proposition A without requiring any additional concessions from employees, without requiring any reduction in benefits — we’re simply requiring strict fiscal discipline at city Hall, so that we responsibly manage and plan for our city’s financial future.

I’m extremely proud to report that Proposition A has garnered the full support of Mayor Ed Lee, all 11 members of our city’s Board of Supervisors, and a diverse mix of labor, business, retiree, and community organizations, as well as both the Democratic and Republican parties here in San Francisco. Prop A is a win-win for everyone. For a full list of endorsements, please visit Proposition A’s website at www.yesonaforsfretirees.com.

With your help at the ballot this November, we can solve one of San Francisco’s last structural financial issues and put our city on further stable financial ground for years to come. Please vote Yes on Prop A on Nov. 5.

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Mark Farrell is the District 2 supervisor and can be reached at 415-554-7752 or mark.farrell@sfgov.org

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