labor, and that is a $50 million disincentive that, as i said, will be spread across different industries. because this increase is a benefit, the corporate market, the labor market would react to essentially share the cost between employers and employees. essentially, if an employer offers a benefit, and in this case, this would be enhanced hra that does not expire each year, employees -- workers would rather work there then at alternative businesses that do not offer that. it is important to keep in mind, for example, that businesses with less than 20 employees are not required to offer this benefit, and we can assume that many of them did not. some of the impact in industries like restaurant -- for example, the vast majority are not impacted by the legislation, and only the largest art. because of that reason, the businesses that do apply to offer the benefit or are required to offer the benefit,

and could expect greater demand for workers. in a perfect labor market, workers would accept lower wages in exchange for the greater benefit. in our analysis, we do not project that much of the cost of the benefit will be borne by workers. the main reason is the city's minimum wage ordinance, which limits the amount basically how far down employee wages can go in response to the higher benefit costs. the heavily impacted industries -- restaurants and retail trade in particular -- many workers are already at or near the minimum wage, and therefore, even if the benefits are enhanced, that cannot be offset by lower wages. in our analysis, we project that approximately 80% of the cost of the benefit will be borne by employers, particularly in the industries that i mentioned. when i sit one by employers, that is a direct bearing, and of lawyers can choose to react in different ways. they can choose to have their profits lower or to try to pass that on to consumers. if they choose to pass it on to

consumers in the form of higher prices, they put themselves at a competitive disadvantage, and is the source of the competitive disadvantage that is the real negative economic impact or element of negative economic impact associated with the legislation. finally, the picture does change significantly on january 1, 2014, when employers with more than 50 employees are required to either provide insurance for their full-time workers or pay a fine under federal health care reform. the discussion earlier reflected the fact that it is not an exact overlap between those requirements and responsibilities under the htso, but there is significant uncertainty around exactly how many of the employers that are affected currently are full time and what their new responsibilities will be. without the data to further continue the projection beyond 2014, we have limited our analysis just to the two years of 2012 and 2013. as i indicated, there are also

spending benefits or benefits associated with the legislation, including benefits on spending. the covered employees will receive up to an additional $50 million for spending eventually on health care, and much of that we expect would be spent within san francisco, which would affect stimulus to the health care industry in the city. we have seen already that currently, the hra's are being expanded at an average rate of 20%. it is possible and in fact likely that if the legislation is enacted, the utilization might rise to something along the lines of what the city is experiencing with the medical reimbursement accounts it is managing on behalf of employers who adopt the city auctioned and his employees do not live in the city. that is 50% of allocation. we are projecting that the potential spending benefits that difference between 20% currently expended and 50%, which the city

is being with the mra's under its management. there is another 50% that would not be spent, but would accumulate and be spent at some point in the future. it is simply not considered within our analysis. in the same way that higher costs and reduced competitiveness on the employer side that are facing higher labor costs reduces their employment incentive and creates a negative ripple effect through of the economy, the increased health spending creates positive ripple effects throughout the economy. the model our office uses essentially accounts for both of these effects in an economic stimulation. supervisor chiu: could i ask one question, a follow-up on something you just said? getting to the board of the measure were put into place, we could likely see the expenditure going up from 20% to the% or 55%. the money not spent would sit in the employees' accounts

indefinitely, right? >> it is my understanding that is right. supervisor chiu: maybe i could ask the sponsor of the legislation exactly what happens to the money that is not used. supervisor campos: i do not know that it's it's in the account. it means it is available for the worker to access it in the event that something happens. so, depending on the worker, if that individual becomes ill, then they would access the account and spend it on their health care. supervisor chiu: but again, your economic model assumes that the legislation would lead to a comparatively used to what we see on the city side. >> that is right. certainly, there will be workers who need to and will use all of it, but on the other side, there are workers who will use less than 50%, and the aggregate average is 50%, reflecting the diversity of experiences people have with it. supervisor campos: one thing i would say is that because we're talking about a very small amount of money relative to what

actually is needed to provide health care, you have situations where workers to wait and actually try to accumulate some money until they have enough to be able to cover a significant portion of whatever procedure or illness they have. it is hard to know, and i think that's when you are talking about the remaining 50%, it really depends on the timing. depending on the worker, the money will be spent at some point, but i think it is really hard to gauge exactly when that will happen. supervisor farrell: to follow up along those questions, did you look at -- right now, the benefits days in an account, or wherever it sits in definitely. i would say that a concern -- i have concerns on both sides, but one concern is that the administrative costs of keeping track, if you will -- you can go

down the road of thinking so many assumptions about the company being sold, and contingent obligations and whether it is dead on the balance sheet. did you look at at all what that might entail going forward? >> no, those are all their points, but they were not things i quantified or included. supervisor campos: on that point, my understanding is that the administrative costs are covered by the accounts themselves. to the extent there is any additional money that has to be spent administering the accounts, that money does not come from the business. it actually comes from the actual money, so it is essentially the workers' money that comes from -- that it comes from. >> just to continue, there are another set of benefits associated with the legislation. that stand alongside the costs. those are benefits related to employee health and long-term productivity benefits. they are highly challenging to

quantify and are unlikely, frankly, to realize within two years, although, of course, the impacts will eventually be felt. in general, it is fair to say that health care spending has clear long-term benefits on worker productivity in terms of reducing absenteeism and improving overall performance on the job. there is a challenge in on the buying that. i think it is fair to say that this proposed legislation that would essentially take away any advantage an employer might have to choosing a stand-alone hra option from either private insurance or the city option, will lead some employers to choose those options, and we would see a higher take up of insurance in the city option than we see now. because hra's can cover a wide range of expenses but generally too small to pay for catastrophic costs, the more workers we see covered under insurance or under the city option will likely improve health outcomes overall in the

future. we are, however, unable to -- i'm sorry, an additional point -- this will also defray some of the city for the costs, and the higher participation level in the city option will defray costs that now fall to the city for taking care of uninsured workers, and it can also increase the amount that workers might pay out of their hra's if they need to reimburse the city for medical care. we are, however, unable to project, simply because of data limitations at this point, how employers will react in terms of changing their behavior, how many employees' plans to spending will exceed their allocations and therefore will benefit from the roll over in the next two years, and the impact on health and the impact on productivity, particularly in the near term. let me now describe what we did in our economic simulation, which is the source of the job estimates i will be sharing with you in a moment. as i imagine, we used a model

from a firm that has been in the business for 30 years, and it is the leading firm for doing this kind of worked up estimating the economic impact of policy changes at the state and local level. what we have assumed it is a maximum of $50 million in additional employer payments that will be required. i should stress that this is a maximum. the law currently allows employers to reclaim, and we see a difference between what is allocated and what is expended. we do not actually know how much that employers are currently reclaiming, compared to voluntarily allowing to roll over. because, as i indicated before, some industries are more impacted or utilize hra's far more than others, we are assuming for the purposes of this simulation that the payments are split by industry 50% to the food services industry, 25% to the accommodations industry, 25% retail trade industry. as i will say in a moment, we have done some sensitivity

analysis around the split, and it is really the victim million dollar number that drives the conclusion, not the split between different industries. although obviously, the more of the burden that falls on an individual industry, the worse it is for that industry. we assume, as i indicated before, that 20% of these expenditures will effectively be passed on to workers in these industries, no more than that because of the minimum wage issue, and because of the time it will take for the labor market to adjust. i indicated before that we would expect it to% utilization of the accounts in line with the city's experience, and we also need to take into account that only roughly about 70% of the workers who would benefit from this live in san francisco. those live in sanford cisco would presumably make the health care spending in san francisco and would benefit the local economy. the additional spending would not affect the city goes the economy.

thus, essentially what we're talking about is a net of $40 million in new labor costs. this next bullet is actually an error. it is actually $13 million in increased health care spending is. the calculation is correct. simply this bullet is not correct. we will also see a reduction in consumer spending from employees because their wages are projected to be reduced that 20%, and that total is to be $7 million of less consumer spending in the city on behalf of the local work force who would see slightly lower wages. supervisor campos: supervisor farrell had a question. supervisor farrell: thanks. $40 million in net new labor costs attributable to health care benefits. are you assuming a comparable decrease in payroll?

>> from the employer side, i am assuming an additional $50 million in health care responsibility. $10 million benefit in terms of reduced payroll, so a net $40 million increase payment for employers. >> ok, so, of the $50 million they will expend now, only $10 million of debt is reduced payroll? >>what i'm trying to get at is from the city's board of you, have not thought about this before, so sorry for rambling, if we are reducing payroll and headcount giving it to health care plans and taking it off payroll because we are employing less people or less hours, the city is capturing less taxes. analyst payroll taxes. supervisor farrell: correct. >> that is correct. you are right. the reduction in payroll taxes. supervisor farrell: so it is $10 million? thank you. supervisor campos: on that note,

another way of looking at the $50 million is to the extent that the money is not being accessed by the worker, that is $50 million worth of health care benefits back somehow someone has to cover, and that someone is going to be the tax payer. >> just to discuss the results of our economic simulation, essentially, what our simulation finds is that the impact of higher labor costs outweighs the benefits of higher health spending that we are -- over the two years we are looking at. again, it is a maximum because of the that the million dollars being a maximum number. a maximum of 290 fewer jobs in the first year an additional 190 fewer jobs in 2013. clearly, again, the industries where we feel the employer impact would be felt the worst, which is the accommodations, food services, and retail trade industry -- accommodations and food services together will lose

between 170 and 240 jobs over the next two years -- supervisor campos: my apologies. i wonder if you could speak up a little bit. i know that some folks are having -- the sound system is a little strange here. >> a cake, i will just reiterate that what we found was an excellent job loss of 290 fewer jobs citywide in the first year, 2012, and an additional 100 in 2013. among the specific industries we look at, we saw the job losses between 170 and 240 fewer jobs in retail trades and accommodations, and 50 to 70 fewer jobs in retail trade. because of health care spending, we expect health care to have about 15 jobs more. it is true that this legislation is occurring during a time of an accelerating economic recovery. based on the economic projections that we have, we are projecting the years 2012 and 2013 to be growth -- job growth

years for the city. this chart shows the dow declines associated with the legislation in the context of job growth that the city would expect to see during that time. the city under our projections will gain about 20,000 jobs in 2012 and 16,000 in 2013. the job losses attributable to the policy are about 1% to 3% of that, although, the differences are different for different industries, but that is the city wide net. we did some further sensitivity analysis because several of the elements in our simulation are subject to some uncertainty. we look at, as i indicated before, but splits of the $50 million between different industries. our assumption, the 20% of the cost was covered by employees might be low. we raised that to 50%, assuming that workers might be forced to pay for more of it. we also adjusted potentially if

the industries were changed, the percentage of the local work force was changed, and we tried different simulations at 50%. the net effect of these changes was not significant in terms of the ultimate findings of our analysis. annual and employment differences a tribute to the policy under six alternative scenarios range from 230 to 460 jobs in the year or around 1% to 3% of the city's projected job growth. just to conclude, the existing ordinance has created a situation where there is an imbalance between those who fund the stand-alone hra vs take other options available under the ordinance. the cost of addressing the loophole could range to as high as $50 million annually. most of that will be borne by employers. like any labor costs increase, that will discourage hiring and create fewer jobs in cities than would otherwise see. on the other hand, it will create benefits, but tangible

that are easily measurable in terms of increased health care spending, and also longer-term and less readily quantifiable benefits around improved health and worker productivity. the net employment impact of that which is measurable in the next two years is negative for the city as a whole. it is occurring in the context of an economic recovery for the city, and the losses in of associated with the policy represent a small fraction of what the city could expect to grow overall during this time, and i am happy to take any questions. supervisor campos: colleagues, chiu and the questions? chiu? -- colleagues, any questions? president chiu? supervisor chiu: i think what has been troubling me about the issue, and i want to thank supervisors campos for raising this, is that it does seem to be providing perverse incentives for employers to make sure they get health care costs.

this incident on usage and the tenants and notice. have you thought about other ways to kind of reverse this that may not be, i guess, the specific solution we have here. from my perspective, i think we all agree there's a problem we are trying to address. what i'm trying to address is the right solution that will make sure that employers are incentive to do the right thing but also have the most minimal impact we can on job loss. >> i am kind of constraint in writing the report in providing recommendations because of the legal issues that surround it. as a non-attorney, i am hesitant to even offer concrete suggestions in that context. again, in a closed session, i am happy to offer ideas on ways to do that. i agree with you that there are ways to address the concerns you had. >> i appreciate that statement. one thing i would say is that i know we have all had individual conversations with the city

attorney's office that we should not go into at this time, but it might be good for us to have the session so we can share the different ideas we have on how we can address this. a different question -- basing your -- based on your calculations, it seems as if assuming that there are, say, anywhere from 230 to 460 jobs lost in the year, and building on olse's presentation that there are about 700 companies affected by this, we are talking about job loss of about half an employee per company. is that accurate? >> i have not affected the number of employers into the analysis. it is not clear that the gap is evenly spread across the 700, but simply, i agree with your averaging. let's put it that way. supervisor chiu: 80 in number. i am just trying to get a sense of what the job loss is. i think it is a good thing for us to provide more health care, but on the other hand, it will lead to obviously some job loss. the last question i have is the

way the ordinance is currently drafted allows the money to sit in an employee's account indefinitely, including after the employee leaves the job, so it's it's in the account until it is used. again, i am just trying to think about other compare robles of how these types of systems work and whether that is the most efficient way to use those monies -- other comparables of how these types of systems work. >> the only thing i would say is that the reason we have health insurance is because individual savings is not a good way to pay for large health-care costs, which everyone inevitably has. hra's are helpful to pay out-of- pocket expenses that healthy people have. they are not the best solution for paying for catastrophic expenses that everyone eventually has. i guess i would simply make that point. that the insurance allows people to -- everyone contributes for the few that need it when they need it because everyone eventually will. supervisor chiu: i would

certainly agree with that point. i think we would all agree that health insurance is by far the better way to take care of send franciscans, as opposed to money to deal with the emergency after the fact. ok, thank you. supervisor campos: mr. egan, thank you very much for your hard work. i know that you had to spend a lot of time working on this, and we really appreciate your professionalism and the thoroughness with which you approach the task at hand. so, thank you very much. >> thank you, supervisors. i have to run to a meeting in five minutes, but i will come back if there are any further follow-up questions. supervisor campos: great, thank you. colleagues, unless you had any specific things to add, i do want to turn it over to public comment. but let me simply say this, and it is actually something that i was thinking about as we were

going into this meeting today. i see the office of labor standards enforcement, donna, and map -- matt, and i have to say that for me, my involvement around health care issues and the way in which the impact businesses and workers, came out of my interaction with the office of labor standards and, in fact, one of the first conversations i had as a supervisor was with the individual who was first charged with implementing the health care security ordinance, and i just want to mention her -- joannie chang, who is no longer with us. i was just thinking about the conversations i had with her and trying to understand the challenges of being the first city to doing something like this and what it meant for

someone in her position to be charged with implementing a piece of legislation that was so critical and so important, and anyway, i was just thinking about her because i know this is something that was important to her, and i think she is the one who, i think more than anyone else in city government, helped to educate me about the importance of these issues. so i just wanted to mention that. why don't we turn it over to public comment? i know there are many people who are here to speak today. because of the size of the crowd, i am going to limit public, to two minutes per individual. as i call your name, please come forward. [reading names]

if you could just line up in the center aisle so that we are not obstructing. good morning. >> i am professor of health economics at the university of california at berkeley. for the past three-plus years, i have been conducting a research investigation of the effects of the health care security ordinances -- order this's employer spending requirement -- ordinance's employer spending requirements. according to my research earlier, we have done analysis of how employment has been changing, before and after the ordinance was implemented, comparing employment changes in san francisco to employment in surrounding counties, comparing it to other cities around the country. the bottom line is that we have found no discernible adverse

employment impact of the ordinance in san francisco over the first two-plus years of implementation. that is true in the private sector overall, and it is true in a potentially higher impacted industries, such as the restaurant industry. there is, of course, a lot of concern about potential adverse employment effects due to the important types of models that mr. egan presented today, which attempt to project in advance what possible effect might be. what we are finding is that there has been, particularly in the restaurant sector, quite a bit pass through of the cost of this to consumers, as you have mentioned. approximately half of the cost of the increased spending in san francisco has been absorbed by the consumers, and that is one of the reasons why we have seen very small to know labor market impact.

mr. egan's analysis today suggested very tiny impact as well, impact well under 0.1% of employment of san francisco, so it is not really inconsistent with the overall analyses that we have found, and when you further factor in the potential price passed through is that we have been taking into account, they are not included in his analysis, but i believe we will not see serious impacts. supervisor campos: i wanted to just follow up -- i had a couple of follow-ups for you. i wonder if you could say a little more about -- i know you look at the issue of the surcharge that some of these restaurants, you know, how that works. can you expand a little bit more on that. what is that -- what did you see in terms of job creation because of that? >> what we are finding is that in the absence of surcharges, you would expect that the cost of this would eventually get

passed through to employees, but in certain industries such as the restaurant industry, it is possible to pass some of these costs on to consumers because of the demand for these types of products when it is affecting 2/3 of the employee is in the restaurant industry in san francisco, actually in restaurants with more than 20 employees. so the vast majority of employees are in restaurants which are competing against other restaurants which have the same ordinance, said they are able to pass this on. we found that about 25% of the restaurants we surveyed had instituted some type of surcharge. the median surcharge is about 4% of the bill. at thatat that level, a restaurt could fully fund the required employee's spending requirement for health care in san francisco. supervisor campos: you indicated that usurp businesses, in terms of their view of the

health care security ordinance. what did you find in surveying those businesses? >> we surveyed hundreds of businesses in san francisco in 2008 and 2009, and found in both years, two-thirds of the misses surveyed are in favor of the health care security ordinance. the same is true for the restaurant industry. two-thirds of restaurants tell us they are supportive of the ordinance. supervisor campos: finally, do you agree with the conclusions in mr. egan's impact report? >> my reading of it is that there would be potentially thousands of jobs lost in san francisco. supervisor campos: 270 the first year, 105 in the second year.