again, the people who have to be housed by themselves for their own and the safety of the other prisoners, or psychiatric care. and i'm sure that it's obvious why you would not want to combine psychiatric patients with patients who don't have special psychiatric needs. so, really what this slide is telling us is that because we have a special population with special housing needs, they're very spread out among the system which means it's very difficult to consolidate housing and therefore consolidate staffing. so, now, let's talk about the solutions. what do we need to do to close this expenditure gap? when the sheriff's department realized after six months that we were headed towards an over expenditure, staff started to hold back on material supply spending and we were able to identify $2 77,000 in materials and supply spending that could be deferred until the next fiscal year. also, we significantly held back on our hiring in the

nonsworn staff and we with able to safe $905,000. in addition, there is a small piece of revenue that's coming from the state which is back payments for salaries that we've already paid out to sworn staff who are on disability and, of course, there's a $3.5 million from the general fund reserve. and this slide goes into a little bit more detail about some of the actions the department took when they realized we were over expended. at the sheriff's direction, we made operational changes that resulted in $75,000 worth of efficiencies and we also consolidated prisoner housing which resulted in $60,000 worth of efficiencies. and finally, we really concentrated on accelerating the hiring of 8 lateral deputies which allowed us to reduce overtime being used in the system. and as a preview for fiscal year 13-14, we will be planning to hold an academy class of 20

to 30 deputies in november 2013 so you can expect 10 month after november 2013 to see a significant drop in our overtime. we'll also be prioritizing the allocation of sworn staff to cut to the field service post which is where overtime is generated. we would like to, of course, for the mayor and board approval hire permanent civilian ftes to do the work that is currently being done by as-needed sworn staff. and we'd also like to align our budgetary appropriations for permanent and salaried and overtime to reflect real hiring timelines. and lastly, a personal goal of mine as the cfo is to implement stronger internal overtime controls in the next fiscal year. and i'd be happy to answer any questions. >> thanks very much. colleagues, any questions at this point in time? okay. and again, i think as a summary in terms of the supplemental,

this is two factors. one, increased workers' comp is foreseeable as well as filling additional hours because of lack of ability to hire additional staff. is that a fair summary? >> yes. >> okay. colleagues, any other questions? all right, thank you both very much. at this point we will turn to the budget analyst report. mr. rose? >> madam chair and members of the committee, on page -- mr. chairman and members of the committee. excuse me, mr. chairman. >> madam rose. [laughter] >> sorry about that. we note in table 1 on page 3 of our report that this general fund request of $3.5 million is 78.7% of the total requested budgetary shortfall of $4,3 93,505.

so, our recommendations are on ~ page 9 of our report. and this is based on a detailed analysis that ms. newman did of this request. we recommend that you amend the proposed ordinance to increase the sources of funding from the sheriff's permanent salaries by $38,998. material and supplies by 50,000 for a total increase of 88,988. reduce the supplemental appropriation for over time by 88,5 56, and workers' compensation by 8,51 1. so that's a total reduction of 92,067 with offsetting savings of $181,0 65 dollar [speaker not understood]. we recommend do you approve this supplemental appropriation as amend and ms. newman, i would be happy to respond to any questions. >> okay. colleagues, any questions for

mr. rose? seeing none, thank you very much. ~ at this point we'll open up to public comment. anybody would like to publicly comment on item number 1, please step forward. okay. seeing none, public comment is closed. colleagues, we have before us our supplemental from the sheriff's office as well as some suggested amendments. sheriff mirkarimi. >> [speaker not understood] 7 years on the outside as well, brings back good memories. i want to thank mr. rose, budget analyst staff. one correction. we can do online or off line -- not correction, but modification we see. we want to keep the integrity of our overtime intact and as a department we realize we have much greater control over materials and supplies. we agree with the bottom line figure with the budget analyst. it was well done, but we ask that if we can combine where the total of the overtime and materials and supplies can be

put under the materials and supply column, the exact same dollar figure, that still gives us greater control in unforeseen overtime. >> mr. rose? >> and, mr. chairman and members of the committee, as long as the bottom line is the $181,000 savings, we have no objection to what the sheriff is proposing. certainly it's up to the committee, but from our standpoint there should be a savings of this $181,000. and if it gives the department more flexibility, we have no objection at that. >> we concur. >> thank you. >> thank you. >> colleagues, we have this before us. i'll just say we don't -- this is our second supplemental here recently, and obviously we don't like having them in front of us. these are for issues that happen during the fiscal year. we're going to have to deal with them and handle them. i will just say i know i spoke with the sheriff yesterday and his staff. we focused on next year making sure we don't have supplementals next year. i appreciate the comments about what will be worked on during

budget season together. colleagues, i would make a motion to accept mr. rose's amendments as suggested the amendment by sheriff mirkarimi. second that without opposition? [gavel] >> and then to move the item forward as amended to the full byrd. -- board. with recommendation, we can do that without opposition, so moved. [gavel] >> thank you very much. mr. clerk, i'd like to please call one item out of order. if we could call item number *6, please. , first. ~ >> item number 6, hearing to receive an update concerning a liability totaling $4,360,000,000 which represents the future cost of providing health benefits earned by city employees as of july 2008; the continued increase in the city's liability in future years absent significant changes in planning for and funding long-term health care cost; the controller's office update on the liability based on 2010 data; and the budget and legislative analyst's office report on what other municipalities are doing to address the health care liability issue.

>> thank you, mr. clerk. colleagues, today with co-sponsorses supervisor david chiu and scott wiener, we're having hearing on our city's unfunded health care liability or opab as we call it, it currently sits at over $4 billion. the goal i want to be very explicit today of this hearing is to hear and discuss the magnitude of the problem, really to identify the issue, the controller issued a report out of his office last year as mandated by gasbe as they have to do every two years. but today the purpose is to understand the magnitude of the issue and the issue with the financial perspectives. from my point of view, this remains as we tackle pension reform a number of years ago, this remains one of the last structural issues that we face as a city and county of san francisco in terms of our

finances. and something that we hope to solve to put our city on stable ground going forward. historically our city's retiree health care plan has been funded on a pay as you go basis with a current generation of tax payers pays for the prior generation's benefits. 2009 prop b as well as 2011 prop c there is some pre-funding of these benefits. and after this hearing today, i look forward to working, continuing to work with our mayor's office, the controller's office as well as in particular with the members of labor who are here today. i want to thank you for already meeting with me a number of times on this issue and very much look forward to working together to find a common ground solution. i will solve this issue for our city. ~ and solve it forever our employees and retirees as well. with that we have ben rosenfield, our controller here to present on the study. >> good afternoon, supervisors. ben rosenfield, controller. i'll provide just a very brief walk through of some of the numbers contained in the valuation that we issued last

november. and there are copies of my presentation on the podium for members of the public that are interested. you're probably aware the governmental accounting standards board now requires governments every two years to conduct a valuation of kind of what your projections, future liabilities are associated with retiree health care and we're required to report those on our financial statement, a portion of that liability on our financial statement. so, this is a relatively recent change. i believe this is our fourth valuation. one was conducted two years prior and we will continue to do this every two years going forward. the results of the most recent valuation which represents a snapshot of a moment in time at the very end or the very beginning of fiscal 10-11 is an accumulated unfunded actuarial liability associated with future retiree health benefit costs for the city. of approximately $4.2 billion. this is a projection of many

years, so, just for perspective, this bill will not come due all at once. but it is an accumulated projection of the future. that number is largely unchanged from the valuation that we produced two years prior. the reason it actually generally speaking in absence of change in the city's approach to this section, we expect the number to rise every two years. just given the interest in a simple world, interest on the liability with will drive the number up every year. it's actually good news comparatively that the $4.4 billion is largely unchanged versus the $4.4 billion two years prior. and the reason for that is that during that two-year period, medical inflation was less than expected. so, a host of changes during that two-year period and this really is an actuarial exercise without future assumptions. medical inflation during that two-year period was lower than expected and since that result the number hasn't grown since our last valuation.

this number represents the kind of nonintuitive, at least for me, estimate of the future and so just to spend a minute about what this number represents. so, this is the future cost of providing retiree health care benefits that have been earned as of that date by current employees and retirees so, it doesn't represent future hires that will enter the system, but will ultimately result in some costs during this period that we're talking about here. and it doesn't represent the portion of your benefit that a current employee hasn't yet, quote-unquote, earned because they haven't completed their cycle in their work. so, it's a snapshot of a very specific metric projected into the future and then compared against the assets that you have on hand to meet that liability. which for us at this point, while we take in some meaningful steps as a city in recent years, those are largely going to take time to phase in. and as a result we have very few assets on hand.

we have about $3.2 million in assets in our trust which has been recently established to meet this liability. so, it's the net of those two numbers is the 4.42 billion. ~ the city's current approach to paying retiree health bills is to make payments as they become due. so, to pay these costs on a pay as you go basis. essentially this means that each year retiree are incurring medical costs they have earned in their prior service with the city, and that's the basis that we make the payment. so, in the last five years these costs have increased fairly substantially for the city, up from about $115 million five years ago to $151 million today, just to give you a sense. as always with these numbers, bear in mind that about 60% of these costs fall on the city's

general fund and 40% are falling on enterprise funds like the airport, the port, the puc and for that purpose the mta. >> and, so, for planner [speaker not understood], this is similar to what our federal government paying for social security, something on a pay as you go basis? >> exactly. and it differs from the way we and most governments in california handle pensions and we can talk about that at the end of the presentation, mr. chair, if that's helpful. part of the work the actuary chiron has done in this case for the city, they prepare a future projection of pay as you go costs associated again with just the employees and retirees on payroll as of the date of evaluation. you can see that snapshot of pay as you go costs here on this slide. so, this is a noninflation adjusted dollars, but it's providing a sense of what

absent a shift the city will be on the hook for in future years if we continue to pay these bills on a pay as you go basis as they come in. it's expected to pay as you go costs will roughly double during the 10-year period rising from approximately 151 million to approximately 332 million in about 10 years, and that's an average annual increase of 8% during this period, so faster than [speaker not understood], for example. if we look out, of course, this is not inflation adjusted. and, so, we often talk about these kinds of costs as a percentage of revenue. so, if we imagine what this cost is as a percentage of our overall payroll in the city, we would expect, given the projections and the assumptions in the report, that this cost would go from about 6% of our current payroll today to about 10% in about 10 to 15 years. so, we would expect it to be a larger and larger share of the

city's operating budget just given the dynamics of the demographicses of the retired versus active population and medical inflation. >> so, just to frame the issue as well on a different way, compared to pension the other year when we face that crisis, it wasn't as if we took the late hit in the retirement board therefore we had hundreds of millions of dollars liability the next year. ~ mr. this was sort of an emergency basis. this is more of a gradual we know where it's going to go, what's going to raise -- obviously dove into these numbers and know the charts, from about $150 million out of our budget right now to about $500 million on our budget on a pretty linear growth curve over the next 20 years. >> right. this has a very different shape and it has a very different kind of -- it's going to create a very different kind of financial challenge for the city than the stock market crash and our pension crisis created for us several years ago where we really saw year

over year increases that were very, very significant and created a very significant short-term pressure on the budget that you really -- was acute. this is more of we expect this to be more of a long-term, more gradual increase that will over time crowd other expenses out of the budget, but it's not going to have the same sort of year over year crunch on the budget. now, looking back in 30 years, it will still be significant, but the year over year changes would be less significant. >> the reality is that we have to -- this 4.3 billion number right now, this is current employees who are hired post 2009 prop b employees, myself, supervisor breed, i think. in essence, we're paying for our self-in terms of health care. it's really the current retirees and the current employees that were hired pre-'09, not their fault.

but those are the ones -- at a certain point we're going to have to make up that 4.4 billion number within the time span of their lives. ~ is that correct? >> that's exactly correct. and there's different ways that we can employ the approach how we want to pay those bills and plan for those bills which we know are coming. but that's exactly true. the cost of the benefit before proposition b in 2009 is significantly higher than the cost of the benefit after or the new tier of hires post 2009. the normal cost which is kind of the usual annual contribution that would have to happen if we were setting aside money to pay for this, something like 6% of payroll for those of us that were here before 2009 is something like 2% or 3% for employees after 2009. >> because i think it's an interesting way to frame this as we talk about it so much. it's not the same as pension in that this is a gradual increase over time. however, it's a big number and we know the bills are coming

due. so, at some point we need to tackle the issue and the question is how we're going to go about doing that. >> and it's helpful, the last slide i provided here is just a simple reminder of the steps, the city, our voters, our workers have taken over the last five years because there have been incremental changes during this period of time to how we approach this question. mr. chair, you referenced proposition b in 2009 which provided a set of significant changes. it created for employees hired after that date a lower benefit level which is less -- will ultimately be less costly. and it also for the first time began to shift how we approach, how we want to plan and pay these bills. so, that same proposition, prop b, created a trust fund board similar to our pension board, created a trust fund itself into which employees hired after 2009 pay 2% of pay as they're working, as the benefit

is being earned, and the city match he it with a 1% contribution. and, you know, the big picture goal in the pre-funding approach to this takes a long view and notes that it will be cheaper in the long run for the city if we set aside money for these benefits as they're earned, that that trust earns interest and that those assets grow and they're available to make payment on bills when they come due later. so, rather than pay as you go, we approach the question more like we do with pension and set aside money as benefits are earned to pay the bill. it significantly reduces these costs in the long term and for the first time in prop b in 2009 the city began doing that for employees hired after that date. if we imagine those employees as a stand alone group, they're roughly self-supporting. they're roughly paying in the amount we would expect ultimately would be paid out of the trust on their behalf. and as you're saying, mr. chair, that leaves really the population before 2009 as kind of the most significant

challenge and that shift to pre-funding proposition c, which the voters approved in 2011, took an initial step on this front. it requires after 2016 and phasing into 20 19 a gradual increase, our employees will contribute 1% into the trust, the employer will match it. ~ but as you've noted, those contributions don't equal the ultimate liability for that benefit level before 2009. >> and again, i frame it that way because, you know, there isn't an emergency today, but we know that in a generation or two this is all going to come due. so, how we fix this financially and however financially responsible we are going forward is the key question here. >> one way to look at it from a very high level perspective, if we expect in about 2020 to be paying about 10% of our payroll base, we'll be consumed by pay as you go retiree health costs f. we were ever able to get to a fully pre-funded health care plan and that would happen over time.

and as the workforce turns over, more and more employees are post-2009, that cost would be something more like 2 to 3%. and it would take a long time to get there, but that's a very significant difference in what the city would have to budget and account on an annual basis. there are significant financial benefits to pre-funding. but the city really has taken a set of steps turnover the last several years challenges remain, but it begins to kind of bite into this issue. and those benefits will be gradually felt as the workforce turns over, new hires are covered by new provisions in the trust fund for us. >> supervisor wiener. >> thank you. i just want to make sure that everyone, the public, understands the distinction between the 2009 forward employees and pre-2009. so, we can use numbers of the panel as examples that i've

been a city employee since 2002, so i vested my full retiree health care for 100% for me and 50% for a future theoretical spouse or domestic partner after five years. and i pay currently zero into the retiree health care trust fund. i will start with i think a quarter of a percent in 2016 going on. supervisor farrell who started as a city employee in 2011, will take 20 years of that and pay 2% into the retiree health care trust fund. did i get that all right? >> you got that exactly right. >> okay. i personally find that to be incredibly unfair and i think we need to really take a look at, including myself and those of us who have been city employees for a while in terms of having better equity of all of us in terms of making sure that retiree health fund is stable because it's all of our

benefits that will be stable and that we are able to meet our commitments to current and future retirees. >> if i can briefly add, too, we talked a little about pre-funding here today. i should stress, as is the case with any projection and certainly actuarial projections that run out this far, are heavily dependent on the assumptions we're using to build them. the driving assumption here is what you assume medical inflation will look like in the future. so, this, roughly speaking, assumes a 4-1/2% rate of medical inflation in the long term. and that's the most powerful cost driver here. so, when we're talking about pension funds, we talk about the investment return is the thing that matters the most here. here it's what you assume for medical inflation. to the extent that the city or employees or retirees, our health service system can control medical inflation to the extent that's within our control, it has a significant impact on these costs.

a 1% change in that long-term medical inflation assumption drives roughly a 9% change in the overall liability that we're talking about here. so, 1% equals about $400 million in this current number. so, and obviously that's a very long and much larger conversation about the host of tactics the city and our workers and others can employ to kind of manage health care costs going forward. but it's the sing the most impactful driver here. >> and i think that certainly recalling a lot of involvement in our cpmc negotiations lately, i mean that, the medical cost of inflation is a big deal for everyone and i know we're going to be working very hard as a city to drive that down as much as we can in the future. but to be clear, though, for purposes of this report, we are where we are and these projections are what they are and they're their best guess at this point in time. >> it's our best estimates. they match the assumptions we use for pension.

and, of course, for a 1% reduction in medical inflation is lower reduces the liability of 1% increase in medical inflation because what we are assuming longer term is what is lower than what we've seen in the recent past [speaker not understood]. >> okay. and lastly, one thing i wanted to ask you about that we've talked about is how this impacts our rating agency dialogue with moody's and fitch and so forth. i know that, once again, we got a bump from whats was it, moody's last week or two weeks ago? >> fitch about two weeks ago. >> but one of the things they continue to mention is this big opab liability. can you maybe give a little contact for that in terms of how they look at it? >> sure. certainly looking at our other post employment benefit liability or opab liability is an important part of the review that rate agencies are using for local and state governments. it's not a bill as we talked

about earlier that is going to all come due at one moment in time and stretch the budget, but it is an indicator of future costs in a longer picture view of the world. san francisco's liability on a per capita basis is higher than many because of the comparatively rich benefit that supervisor wiener mentioned earlier. prior to 2009 you weren't required to retire from the city prior to earning it. this number is comparatively large for us per capita. and that's been a rating weakness for the city. it's certainly offset by a lot of phenomenalv, but it is one of the things that structures our rating. ~ strengths. the steps the city has taken has played an important role in that conversation with rating agencies in recent years, but they continue to note in their reports even when they're upgrading our bonds that our large outstanding liability is a remaining concern and they expect the city to continue to take steps to address it.

>> okay. thank you, mr. rose. any other questions? okay, much appreciated. at this point we'll open up to public comment. if anybody would like to step up and talk in public comment, please step forward. mr. muscat. mr. chairman, members of the committee, i'm here today representing the labor council's public employee committee as well as local 21. i want to start out briefly by thanking the controller for his report and for his comments. and as usual, we have little to disagree with in terms of the fairness of his presentation and how he was described the problem. i think people know that city employees through their unions over the last few years have tackled a variety of problems that really don't lend themselves to resolution unit by bargaining unit or union by union, but the nature of these

problems such as the furlough agreement, definitely reached saving the city over $240 million, the pension agreement we reached to put ballot measure c together. all those things really require cooperation of a lot of different unions, a lot of different city employee leaders, and that's the only way that you can tackle long-range structural problems as complex as pension and as complex as the issue that is before you today. so, we have another one of those situations. i think people are prepared to have discussions about it and that's why i say i do appreciate the way the controller has presented the problem to you this afternoon. we think it's important that people's perspective on this number, which can be alarming, be realistic and that we go deeper on the problem to understand it a little bit more thoroughly. and the threat to the t