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Pros & Cons Guide - November 8, 2011 Election
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PROPOSITION C - CITY RETIREMENT AND
HEALTH CARE BENEFITS

Charter Amendment
Placed on the ballot by Mayor Edwin Lee and Supervisors: Campos, Chiu, Chu, Cohen, Elsbernd, Farrell, and Wiener

video link Video Summary of Proposition C

THE QUESTION:

Should the City amend its Charter to adjust pension contribution rates for most current and future City employees based on the City's costs; reduce pension benefits for future City employees; limit cost-of-living adjustments to pension benefits; decrease City contributions to retiree health care costs for certain former employees; require all current and future employees to contribute toward their retiree health care costs; change the composition and voting requirements of the Health Service Board; and make other changes to the City's retirement and health benefits systems?

BACKGROUND:

The City provides defined retirement benefits for most employees. The cost of these benefits is funded through a combination of employee contributions, City contributions and investment earnings from the retirement fund. Most employees pay 7.5% of their compensation into the retirement fund.

Between 2007 and 2009, the Dow Jones Industrial Average declined 40%. This historic decline and subsequent great recession has harmed the City’s Budget in two ways. First, it caused the City’s tax and fee revenues to be significantly lower than expected. Second, it caused the retirement fund to drop from being fully funded (based on the value of its assets and contributions) to being partially funded.

THE PROPOSAL:

This Charter Amendment would change the way the City’s current and future employees and elected officials share in funding the Retirement System pension and retiree health benefits.

Employees’ contribution rates would fluctuate as the percent of the City’s payroll that is contributed to these benefits changes, as follows:

  • When the City’s contribution rate is between 11%-12% of City payroll, most employees would continue to pay 7.5%. • When the City contribution rate is over 12% of City payroll, employees making at least $50,000 would pay an additional amount up to 6% of compensation
  • When the City contribution rate is below 11% of City payroll, employee contributions would decrease proportionately.

Elected officials would be required to pay the same contribution rates as City employees. The City and unions representing City employees who receive retirement benefits from CalPERS would be required to negotiate so that these employees would share costs or receive benefits comparable in value to the adjustments for employees not enrolled in CalPERS.

This proposition would create new retirement plans for individuals hired after January 7, 2012 that would change benefits in the following ways:

  • All employees’ covered compensation would be limited and their final compensation would be calculated based on a three-year average.
  • While the minimum retirement age for safety employees would remain at 50 with 5 years of service, the age for maximum benefits would increase to 58.
  • Miscellaneous employees’ minimum retirement age would increase to 53 with 20 years of service or 65 with 10 years. For these employees, the minimum age to be eligible for vesting allowances would rise to 53 and the City’s contribution to vesting allowances would be cut in half.

Proposition C would also limit cost-of-living adjustments for retirees. This proposition would also impact City retirees’ health benefits in the following ways:

  • Employees and elected officials hired on or before January 9, 2009 would contribute up to 1% of compensation toward retiree healthcare with a matching contribution from the City.
  • Employees and elected officials who left the City workforce before June 30, 2001 and retire after January 6, 2012, would receive the same level of City contributions toward retiree health benefits as they were when the employee left the City.

The proposition would also change the Health Service System and Health Service Board by:

  • Replacing one elected member of the Board with a member nominated by the City Controller and approved by the Board;
  • Changing the Board’s voting requirement for approving member health plans from two-thirds to a simple majority;
  • Removing the requirement for plans to permit the member to choose any licensed medical provider;
  • Allowing the Board to spend money on ways to limit healthcare costs.

If both Proposition C and Proposition D (“Retirement Benefits for City Employees”) pass, only the one with the higher number of votes would take effect.

FISCAL EFFECTS:

The Controller states:
Should the proposed Charter amendment be approved by the voters and implemented, in my opinion, the City's costs to fund employee retirement benefits would be reduced by approximately $40 to $50 million in fiscal year (FY) 2012-13. City costs would be reduced by approximately $1 billion to$1.3 billion cumulatively over the ten years between FY 2012-13 and FY 2021-22, of which $85 million is attributable to retiree health benefit savings, and the balance to pension contribution savings.

For context, the 10-year City savings from the measure represent approximately 18% - 20% of the City's projected pension plan contributions expected during that time frame. In the long term, after most City staff are subject to the new pension formulas established by this measure, City savings are projected to be approximately $100 million annually. These savings projections are estimates; actual savings would depend on the future funding status of the pension fund, the size of the City’s workforce, and other demographic trends. Savings estimates are provided in terms of constant FY 2011-12 dollars, and therefore control for potential impacts of inflation on future dollar values.

Approximately 60% of these savings would benefit the City's General Fund, with the balance benefiting enterprise .and other special fund departments, including the Municipal Transportation Agency, Public Utilities Commission, Airport and Port. Savings would also accrue to non-City employers that participate in the San Francisco Employees' Retirement System.

Approximately $575 to $860 million of the ten-year savings would result from increased contributions by City employees earning over $24 per hour that would be required on a sliding scale when the pension system is underfunded. These estimates assume ratification of proposed safety employee labor agreement amendments currently pending before the Board of Supervisors.

Approximately $355 million of savings would result from a revision to the cost-of-living increase formula for current and future pension recipients and pension plan changes for new employees hired after January 7, 2012. An additional $75 million of the savings would result from increased employee contributions to a Retiree Health Care Trust Fund beginning in FY 2016-17 that would offset retiree health insurance subsidy costs. The remaining $10 million of estimated savings would result from a change to health insurance subsidy formulas for new retirees who ended City employment prior to June 2001 with vested rights to post-retirement health benefits, to reflect formulas in place at the time they separated from the City.

Additional Costs or Savings
Factors that could cause additional costs or savings include: First, to the extent that Retirement System investment returns are outside the range assumed in this analysis, both the required employer contributions and the range of savings provided by this measure would be greater or smaller. Second, projected City savings might be reduced if future labor negotiations or arbitration awards result in any salary increases to offset higher employee retirement contributions. Third, to the extent that changes to pension formulas in this measure cause employees to delay or speed up retirement dates, this could provide additional City savings or costs related to retiree pensions and health insurance subsidies. Fourth, to the extent that changes in the composition of the Health Service System Board result in changes to approved health benefit programs, costs could be higher or lower.  

ARGUMENTS IN FAVOR OF PROPOSITION C

  • Prop C would provide pension reform through broad consensus.
  • Prop C would reform funding of pensions and health care, and generate $1.3 billion in savings over a 10 year period. Provisions would include raising the retirement age, banning pension spiking, capping benefits, and increasing pension contributions based on income.
  • Prop C would stand up to legal challenge, and is fiscally sound and would be effective.
  • Prop C would require the City Controller to appoint a financial expert to the Health Service Board.

ARGUMENTS AGAINST PROPOSITION C

  • Prop C would not solve the problem with unfunded pension liabilities.
  • Prop C would cause harm to seniors because it removes the cost of living adjustment from the pension benefit.
  • Prop C would cause a shift in the Health Service Board balance from labor to City Hall appointees, and it would allow the Board to make major fiscal decisions by a simple majority vote.
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