the director from the retirement system is here with the director from the health services system, and they can interrupt me. i was hoping to talk to a brief history of protection and benefit costs and provide a handful of facts, and then a conversation about retirement benefits and health benefits. starting at the highest level, three key points that will probably roll through everything it will talk about today. i think it is most important to start with a couple of points about performance, and to highlight the fact that the san francisco employee retirement system is healthier than most if not all of our peers in california.

the health service system has taken significant steps in recent years to control employer-paid health and benefit -- health and dental benefit costs. you'll see that in some of the numbers here. if we have problems in the future, it is not for the lack of these things. our current projections to indicate the city is in the midst of a fairly rapid ramp up in terms of our projected costs for benefits, in particular over the next three to five years. it is most heavily influenced by the market downturn in 2008.

health benefit inflation is an issue that employers nationwide are grappling with. when we talk about, and i know there are a lot of conversations at the moment regarding what the city can do to mitigate cost increases in the future -- a high-level financial point. pension benefit changes that apply to new employees hired after a change is an active can generate significant savings over time, but those savings accrue as the worth -- as the work force turns over. therefore, the horizon is typically very long. changes that apply or would apply to current either active employees or prior employees would yield more savings in the shorter term. looking at the past decade, when

we talk about our bundle of benefit costs, starting in 2001 and ending in 2011, our combined benefit cost load has grown approximately 9% annually, with cpi during that decade of approximately 2.5%. this is driven by cost increases in each of the benefit buckets, which will highlight on the next page. this decade began with an abnormal or a typical situation -- or atypical situation with a pension holiday, where we did not have to make any contributions to the pension fund at that moment in time. chairperson chu: primarily when we are talking about benefit costs, we are talking about pension contributions as well as health insurance costs. what you have laid out is that we have seen over the past 10

years and annual increases averaging around 9% for our pensions and health insurance combined cost. we've seen the cpi grew by 2.5%. how does that compare to our revenue? is cpi a good measure for revenue? >> revenue grew more quickly than cpi as well. average annual revenue growth was probably in excess of 5%. i can get that number for you. chairperson chu: even if look at revenue growth, which is higher than cpi for the past decade -- use of 5% or 6%? >> tax revenues during that decade grew more quickly. chairperson chu: we are seeing that our pension and health insurance costs growing at 9% is outpacing our revenue growth? >> i think that is fair to say.

the expectation trend continues for the next several years. in terms of what benefits the city provides, this is a high level chart that shows this as colors. the bottom line on this chart is in blue. it is our contributions toward pension funds. it is important to note here that we have employees covered by two different pension plans or pension systems, with the san francisco employee retirement system, but also some employees that are in the state plan. that is predominantly the deputy sheriffs and smaller miscellaneous groups. you can see the trend here picking up in recent years during this decade. this is showing the employer- required contribution for pensions and also includes the negotiated employer pickup of the employee share of pension,

which is phasing out as we speak. it does account for these costs, in particular early in the decade. the dark red or rust-colored bar represents health insurance costs for active employees of the city and county. the light green bar is health benefit costs paid for a retired city employees. we do have other benefits we offer that make up this larger number, predominantly social security contributions we make as an employer. the you can see on this chart that depiction of growth at a faster clip than cpi, which is shown as the blue line. looking ahead for the next decade, we start the financial year with approximately $1 billion in employee benefit

costs out of the his $6 billion operating budget. we then, in projecting forward, our offices used a handful of different economic scenarios. that is critical to point out when we talk about looks forward over the horizon like this. no one knows what the world is going to hold 10 years from now. we do have to make planning and modeling assumptions. we base fees on three different sets of assumptions -- moderate positive, moderate, and moderate negative scenarios. it is possible the actual economic performance will exceed this and possibly be lower in future years. it is also possible that we have a more immediate downturn that would affect these numbers the other way. we see cost increases looking ahead to financial year 15 between $400 million and $300

million. that is driven by contributions that will be required from us as an employer for pension benefits. the second half of the decade is likely to show a lower rate of growth, or even decline. the majority of those cost increases are likely driven by health inflation, which we can talk about later. this is a graphical depiction of those three scenarios, again moderate cases. these are in current dollars. we have adjusted this for inflation to give a sense of what costs would look like in today's costs. again, you can see that the slope of the chart at the beginning, during the first half of the decade, is likely steeper and leveling or growing during the second half of the decade. it always strikes me when

looking at these charts that the differences in our economic assumptions, while they greatly affect projections out in years five through 10, have less impact during the shorter term. i think that is predominantly driven by the market's losses in the pension fund in 2008. they are an order of magnitude higher than gains we have modeled here. the different scenarios truck or closely in the shorter term. chairperson chu: can you elaborate on this? many of us have had conversations about the assumptions with each of the scenario. just quickly, for members of the public to understand fully what the moderate, a base case, and more negative outlooks assume. "see the three different scenarios the smuggling is based upon.

the variants we are modeling here is the return receipt in the investment in the san francisco employee retirement system during this time. the actuarial assumption that our own retirement system employees is that over a long horizon we will employ -- we will acquire a 7.75% rate of return. that is a more moderate scenario here, that we simply need that actuarial assumption every year. the moderate positive assumes that coming off of market losses the couple of years ago we see more robust growth for the coming five years, in this scenario, at 10.5%. the moderate-says economic growth could be somewhere during the next five years -- could be slower during the next five years, 4.5% growth. investment returns to date this

year have exceeded the optimistic scenario here. that will have an effect again on the shape of the curve in future years if we do not see a corresponding loss. chairperson chu: we do have assumptions about going from 4.5% for five years for your moderately negative case, 7.75% assumed growth for your base case, and an almost 11% growth in the value of our fund for the moderately positive. even given that discrepancy of almost 6.4%, the curve in the beginning, in the more current years -- we are still going to bear the cost of paying higher costs in the short term. >> that is correct. turning to retirement, for a bit

of a high-level walk through, the san francisco retirement program has been in place for many years now. the sea several charts showing the asset market value of the fund over time. i will highlight a couple here. we really reached a peak toward the end of fiscal year 07. we then had losses occurring predominantly in 08 that took us down to a low of $11.90 billion. we have been growing at a substantial cut coming back from that. $13.10 billion at the end of the most recent fiscal year. unaudited current year, $15.20 billion. we have seen growth. we are just got back to the prior peak. it will take some time for us to get there. we talked a little bit about the

actuarial rate of return, the 7.75%, the moderate case here on which the core projections of costs are based. you can see here with the actuals have looked like overtime. the 2000 decade, from 2002 to 2010, slightly lower than 7.75%. that was a decade that began and ended with a downturn here. that certainly affected it. if you look back over a 20-year horizon, we are in excess of 7.75%, 9.35%. there has been a lot of conversation nationally about whether we can really expect these sorts of investment returns on long-term. i can say that the 7.75% sign that san francisco has adopted at the retirement board is moderate to conservative

compared with our peers. in california, the median is slightly higher than that. you do see other large employers that are using assumptions of 8.25% and the like. we are comparatively conservative in our assumptions compared with most of our peers. we do it employed five-year smoothing gains and losses to smoot dramatic year-to-year changes, given changes in the market value. absence moving, we would've seen a faster increase a few years ago when the pension form lost value and seen a rapid declines as the fund began to grow back. this moving does stabilize our contribution rates over time. it serves our benefit. it will serve in our benefit in the short term. it will also mean that if the fund picks up the value we will

not see the benefit of those gains fully realized for five years forward. we talked about the different scenarios. this is taking a look at just the employer contribution rates for the retirement system that underlie the earlier projections of cost. this is the projection of payroll the city is required to contribute to the pension fund. we are at 13.5% in the current fiscal year. rates are set for the next year to increase to 18.1%. you can see again the expected increases in the years beyond that as we continue to smooth the losses from prior years. the backside of this hill, the rates of decline after that are heavily dependent on what we see in the shorter-term, with the blue line being the more positive, moderate scenario, the

green line being moderate negative, and the red line being the 7.75% return. in the shorter-term, the lines pretty closely track. we can expect to see fairly large year-to-year increases in our pension contributions as an employer regardless of what used to assume here. that was a very quick went through. spurs, i don't know. i can take any questions you have on the pension side before shifting to help. chairperson chu: while we are on sled 11, what we are seeing here is that even if we assume that in the next five years we will earn close to 11% in returns in our pension fund, which i certainly do not get on my savings account, but pensions

are different and how we invest is different. >> you do not have $13 billion in your savings account. chairperson chu: i definitely don't. [laughter] we still don't expect that the percentage of our dollars -- they are going to inclined in the coming budget year. >> this is not the best and worst case scenario. we could see returns that are better than this. we could see the recovery extended, where me -- where we may be to the more positive scenario here. that would affect the 28%. it would not affect as dramatically the years before. it would have the most dramatic impact on the rate of decline after the peak. i do not want to say that we are certain we will rise to a 28%

contribution right -- late, but it is going to be dramatic. chairperson chu: with 10% increase, what is the value for us? >> that is approximately $300 million. chairperson chu: approximately $300 million in all funds? >> shifting to health very quickly, our current year budget includes $319 million in payments for active employee health, vision, and dental plans. the growth rate would only adopted -- recently adopted brings our race increase -- our

rate increase to 3.1%, which is much lower than the 8% average for large employers in california. the health service system has piloted some pioneering efforts to control costs in future years, including accountable care and employee wellness approaches, which we hope will have impact on future-year costs. in terms of mechanics, our health system and the with plans are designed and improved -- the way it plans are designed and approved works differently than our pension system.

while the pension benefits and cost sharing in san francisco are determined in our charter, and this is not the norm for many jurisdictions in california -- generally, our retirement benefits are determined by the charter. it is more complicated by our health benefit packages. health benefit plans are determined by the health service system board and approved by the board of supervisors. you've recently seen the health benefit plans for the coming year and approved them. the total cost and total plan -- we have more control over it without an action of the voters. the cost sharing is determined through a complex mechanism for active employees. the charter sets a floor, which is based on a 10-county survey of other jurisdictions. above that, we collectively bargained through our labor negotiation process to establish a mix of the total cost borne by the employer and employee.

that effectively means that for the most part how we share our cost with employees is determined by bargaining, not by the charter. for retirees, it is even more complicated. the charter formulas determine how costs are shared with retirees. those formulas have been built up over many charter amendments overtime. there are multiple components to them. generally, cost sharing is determined by the charter, with some indexes back to what we are paying our electives. very complicated formulas, in particular on the retiree side. we have really three basic plans for health for our employees at the moment. we have two hmos with kaiser and blue shield that make up 87% of

enrollees. city plan is a smaller plant making up 13% of enrollees, which allows more choice of doctor with higher copays and premiums. generally a more service-rich, higher-cost plan to both the employee and the city. the city also provides dental and vision benefits as fully employer-paid benefits. chairperson chu: on that point, 87% of our enrollees -- we are talking about active as well as retired, correct? i believe city college, school board, etc.. >> i believe these percentages, yes. if you want to look at how the city subsidy is to strip it did

among different groups and plans, this table is trying to depict that. $448 million in total employer paid health benefit subsidy. $400 million of that providing a subsidy to the vast majority of employees or retirees that are in either kaiser or blue shield. you can see again kind of the makeup of where that subsidy goes, in terms of subsidizing the active employees, dependents, or retirees. chairperson chu: for this slide, what we are seeing is $448 million in terms of total city costs for the active employees, dependents, as well as retiree members independence. you know what portion the employee cost is? this is our employer cost.

what is the employee contribution? >> i do not know of the top of my head the break down. if memory serves, about 90% of costs arps paid by the employer. there are differences in different groups. chairperson chu: but ball park is about 90% of health care premium costs are paid by the employer and 10% by employees, correct? >> that is correct. looking ahead again over the horizon, and just to give you a feel for the comprehensive chart with produced earlier -- this is showing projections of health benefit costs over the coming 10 years. this is in current dollars. the red line at the bottom is projections of costs for

retirees. the blue line is actives. the green line is a rollup. there are implications for us as an employer, as they're all for -- as there are for all employers given federal health reform. i think kathryn can probably talk through those in some more depth. chairperson chu: think you. if there are no questions for our controller, i would like to invite our department heads to say a few words or supplement the presentation if they like. >> thank you, madam chair and supervisors. i will be very brief. i wish to amplify two points to follow up the controller's report. i like to make publicly, because of the perceptions being formed about the pension system and its costs -- today, it seems to be

front-page news. our system is very soundly funded, perhaps the best-funded system in the state and one of the best large systems in the nation. we are running over a five-year smoothing period, as the controller adequately defined. that's moving for major market losses that occurred in 20009. that is due to extend through its smoothing course by the end of fiscal year 2013. what that says is yes, the employer's contribution costs are going to continue to rise through the end of that smoothing. next year's cost is 18. 09% at the employer rate. when the chair mentioned 28%,

that is not a one-year increase. that is through the end of 2013. that is not guaranteed, but we have every reason to believe thawe believe, based on how the fund as been managed, that we realistically believe in the charge on page 11 that the blue line is most accurate. after the year 2013, if the employer rate gets up to 28%, we believe all things being equal the rates will start to come down again because we have gotten through that smoothing and passed that huge $777 million a year that we have to overcome each year to get to the end of this moving.

-- the smoothing. i know you are addressing the budget. fringe benefit costs are going up. my obligation is to protect san francisco employees. when we talk about the costs of the pension, one thing i would like to point out is you are looking at these numbers. these are overall numbers. they include a variety of factors. the employer's required contribution is the rate that you hear is now 13.5%. if you look back in the years that were known affectionately as the holiday. and saw an earlier draft from 1996, the city was not required to make any required employer contributions and did not. that does not mean the city did not spend any money. it did, through its negotiations

with the unions and other circumstances. the city was paying into the pension the employee portion, the employee pickup. it is a cost, but not the employer cost. the city would have still made those payments to the employees in terms of salary dollars rather than fringe benefits through raises. i want to make sure we keep everything in balance when we look at these costs. some of the other costs included in here -- we see this every time you read an article on costs. the pension and the costs go up. but one sentence after the talk about the pension, you see health care costs and retiree health. they are separate legal entities independent of each other, unrelated to the pension cost itself. you have some