San Francisco's Unfunded Health Liability: $4.36 Billion

​After a lengthy analysis, San Francisco has finally determined its unfunded retiree health care liability, the amount of benefits city workers have earned that San Francisco is mandated to pay out, no matter what: $4.36 billion.

That's a $360 million jump from just two years ago, the last time the city controller's office calculated how much we were going to owe down the line.

"These are very large numbers," says Ben Rosenfield, the city's controller. But wait -- they get larger. By 2033, the liability is expected to grow to $9.7 billion. "Money will be spent well into the future to meet that liability and it'll come from the city's operating budget."

What does this mean?

It means the city is facing a number of difficult choices, all of them expensive. The cost of doing nothing is expensive, too -- the eventual price tag for retiree's health care is going up and up, and we're not paying it down.

​As SF Weekly noted in a recent cover story, the yearly cost of city workers' benefits -- not salaries, just benefits -- are already just shy of $1 billion. And because of a mind-bogglingly generous provision in which workers earned health care for life after only five years on the city payroll, a small army of aging employees and retirees are owed billions worth of health care in the present and future.

Retiree health care this year cost the city $138 million. That cost is expected to rise by 8 percent every year. And, unlike pension costs, which could at least theoretically go down when the economy improves, retiree health care costs will not. They will all but certainly increase year after year.

As noted above, while the city spent nearly $1 billion on worker benefits this year, not one cent went to paying down the unfunded retiree health care liability. That is a looming debt -- and one that, contractually, must be paid. Money will be allocated to retiree health care and pensions before it goes to salaries, maintenance, playgrounds, or anything else city residents want to see paid for in the here and now. In short, what money there is will go to pay people to not work before it goes to make the city work.

Proposition B of 2008 did away with five-year fully vested health care. Now workers must toil for 20 years to earn lifetime care. Workers hired after Jan. 9, 2009 also put aside a portion of their money, along with the city, to fund their retiree health care costs.

​But the 90 percent of city employees hired before that time don't do that. While the city is legally mandated to cough up hundreds of millions of dollars in yearly pension costs, it still funds its retiree health care system on the "pay as you go" system -- which is every bit as cavalier as that name would lead you to believe. You pay a hell of a lot more when you pay as you go -- and you can easily put off the suffering onto future generations.

If the city put away money every year toward retiree health care the way it is mandated to do with pensions, Rosenfield says, that would require setting aside an amount equivalent to 15.4 percent of payroll yearly. That's 15.4 percent of $2.39 billion or $368 million.

That would be on top of an equal or greater amount the city spends on pensions each year, by the way. And, here's the kicker. Putting away $368 million -- or more, as payroll increases -- every year will still only reduce the unfunded liability from $4.36 billion to $2.79 billion. Amazing!  

Since the city doesn't have a spare $368 million lying in a mattress, odds are the easy choice will be to do nothing. Fair enough. But that still means you have to "pay as you go" down the line -- and that comes out to hundreds and hundreds of millions of dollars every year, and the numbers just get higher and higher.

If there is a silver lining to be had, it's that Prop. B of 2008 will save the city billions (though, in order to be properly lubricated to slip through the Board of Supervisors, Prop. B was stuffed with generous pension giveaways that cost the city billions in order to save it billions more).

If not for Prop. B's ending the five-year vesting and mandating employee and city contributions, the $9.7 billion liability in year 2033 would be $13.9 billion. Two decades down the road, virtually all of our city's massive, unfunded health care costs will be due to workers hired before Prop. B was enacted.

Even still, the takeaway is that the city is facing nightmarish financial obligations to keep the promises it has made to its workforce. And this nightmare moves quickly, as evidenced by the $360 million augmentation in two short years. When the baby boomers retire -- what then?

"Our liability continues to rise, absent the city making significant changes to how we plan and fund these requirements," says Rosenfield.

Good luck with that.

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