Supervisor's Report

The City’s $4.42 billion unfunded health care liability

The elephant in City Hall

Aside from addressing quality of life issues that affect all San Franciscans, one of the main reasons I ran for supervisor was to bring my financial experience to City Hall. Over the past two years, I have focused on ways to strengthen our City’s economy, create more jobs, and, most important, bring fiscal responsibility to the forefront of all our discussions at the Board of Supervisors.

As I’ve stated in a previous column about the state of our economy in San Francisco, our budget outlook has vastly improved compared to previous years. Last year’s budget shortfall projected a $375 million deficit for the 2013-14 fiscal year. However, we are now only looking at a shortfall of $134 million in the $7.5 billion annual budget. San Francisco’s greater financial stability hasn’t happened out of thin air. We are experiencing this stability through measures such as pension reform and more disciplined financial policies at City Hall, all of which I have strongly supported. Also, the last budget we passed marked the first time we have been required to submit a two-year budget, which encourages long-term planning and better fiscal health for our City.
However, there’s an elephant in the room at City Hall that must be dealt with immediately: the City’s unfunded health-care liability. The Controller’s Office recently released its most recent report on postemployment medical benefit costs, and the City’s current unfunded health-care liability totaled $4.42 billion – representing the future cost of providing health benefits earned by City employees and retirees as of July 2010. The City’s liability will continue to increase in future years absent significant changes in how we plan for and fund long-term health-care costs.

Right now, San Francisco’s $4.42 billion health care liability represents the largest threat to our financial future as a city. We owe it to all San Franciscans to be financially responsible now by planning ahead for the next generation – I don’t want my children paying for my health care. As public officials, we cannot ethically and morally avoid this issue. We have a duty and obligation to protect our current and retired city employees, preserve our city’s economic recovery prospects, and responsibly plan for our financial future.

Until Proposition B passed in 2008, the City paid strictly for post-employment medical benefits on a pay-as-you-go basis similar to how Congress handles Social Security – meaning, we pay benefits from our current operating budget while not allocating funds for future payments. For fiscal year 2012, the City’s pay-as-you-go expense was $151 million and is projected to grow to approximately $500 million within 20 years. This “pay-as-you-go” system is extremely flawed, and a prime example of kicking the financial can down the road.

As a result of Proposition B in 2008 and Proposition C in 2011 addressing pension reform, the City has taken important steps in recent years to slow the rate of growth of the City’s unfunded liability in coming years. In 2009, the City and newly hired employees began contributing to a Retiree Health Care Trust Fund, which will be used to pay for future costs of post-employment health benefits. However, given the scale of the overall benefit costs and previously accumulated liability, those pre-funded contributions are modest and will phase in gradually as the workforce changes over many years.

Across the United States, recent studies have shown that health-care costs are the largest portion of city operating budgets. Those same reports show that costs aren’t likely to decrease, because people are living longer and fees for medical services are rising. According to the Controller’s Office, since 2008 employee benefit costs have increased by 36.8 percent, and it
is only going higher.

Thus, just like we did for Proposition C, the city family must come together to tackle yet another issue. I have started to spearhead this issue at City Hall, and have already been in discussions with the Mayor’s Office and several of our union leaders to see if there is a solution palatable for everyone. I am under no illusions this is going to be a popular issue, but it is the biggest structural issue facing our city’s financial future, and an issue I will not allow to go unaddressed.

Over the next few months, I will be holding hearings at City Hall and continue the negotiations that have already begun. I am confident that we can address our unfunded liability just as we did pension reform, and as always, I look forward to any input you may have in the process. As the newly appointed chair of the Budget and Finance Committee at the Board of Supervisors, it is going to be a unique opportunity to lead these discussions and drive toward a solution that is not only fair in its application, but, most important, protects the next generation of San Franciscans.

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Supervisor Mark E. Farrell is the District 2 supervisor and can be reached at 415-554-7752 or [email protected].