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 extent it is a threat that is presented to the city. it is beyond a doubt for us that the long-term financial health of the city is in the interest of city employees as well as the people that live and count on the services in san francisco. that is the perspective that we bring to the work that we do. so, we have our everyday concerns about the problems [inaudible] now, but long-term problems like this are of equal if not more concern to us representing career city employees. we have a couple of people that are going to speak today that go a little deeper on this than i do that will give you a little bit more detail about our perspective. so, thank you very much. >> thank you, mr. muscat. any other speakers, please? if anyone wants to line up on this, you're welcome to do. so. thank you, mr. chair, members of the committee.

peter salts man, council for iftpt local 21. i just wanted to speak very briefly to encourage members of the committee to genuinely study this issue and study it carefully before adding to or responding to the what are often misleading media headlines on the subject. as the controller i think very accurately and fairly emphasized, retiree health liabilities are unlike any other labor related liabilities that you deal with. they are not like pension liabilities. they are very dramatic differences. they are not like workman's compensation liabilities, vacation liabilities and so forth. they are not subject to the same statutes, the same regulations, and they do not i pact the city's cash flow and finances and financial projections in anything like the same manner as those other labor-related liabilities.

in particular, as the controller mentioned, ~ the kinds of liabilities you're dealing with depend more than anything else on health care trends, health care costs. in fact, they really depend and are really most sensitive not just to health care -- not really to health karin flation itself, but to the difference between health care inflation and ordinary inflation, the spread. that's what they're really sensitive to. and it's a very different kind of long-term calculation than you deal with in any other setting. ~ we think that the good news with the recent valuation and the bond rating company, fitch, shows that you -- the city is moving in the right direction with the assistance and really initiative of labor and encourage you to -- and the other members of the board -- to move forward with that process. all the gsbe and bond rating areas look for in the area is a

responsible approach, long-term approach to funding. and we believe that the city has already done that to a substantial extent and is on the way to improving that situation even more. that part -- i'm almost done. that process must include not just the city and labor, but also in the same room and meeting with them the actuary, the controller, and the health care providers, kaiser, blue shield, because -- >> thank you, sr. sir. thank you very much. thank you. next speaker, please. ~ good afternoon, supervisors. thank you so much for the opportunity to comment. my name is sally covington and i am the executive director of community campaigns for quality care. we're a nonprofit public charity working with unionses and purchasers on health care cost control as opposed to cutting benefits, and i'm

speaking briefly today on behalf of both seiu local 10 21 and the public employees committee. and i guess really what we wanted to say and just to try and broaden the perspective and acknowledge some of the comments that relate to that broader perspective, you know, 4.4, 4.3 billion is obviously a big number and as many have said, the thing that is most going to determine if that number goes up or down is the rate of medical inflation which a we -- almost all of us know is far surpassed the rate of general inflation economy and also workers wages. and, so, that's going to be the key issue here. so, from the standpoint of defining the problem, we must ask what's driving this medical inflation rate so high. and on that there's not a lot of dispute. experts widely agree that, first of all, health care spending is so high because provider prices are high.

just a reality in this country, we have to address it, those market it disfunctions contribute tog that. second, unsafe and ineffective services according to the institute of medicine comprise 30% of total u.s. healthcare spending, 30%. so, from our perspective, we go to employers and to unions and say, let's join together to address these problems with city officials rather than continue to fight over who is going to pay for those costs. we must find ways to identify and reduce unsafe and ineffective care in the system. actuarial projections, it's worth noting, are [inaudible] don't take into account what portion of those costs relate to waste in the system. and if we reduce that, then that actuarial projection gets -- becomes very difficult. >> thanks. i'm going to wrap up here. everyone has two minutes. okay. just the last point, then, is that we can't control health

costs unless we establish greater transparency in the health care market. we lack information on provider quality and cost and we also lack payer collaboration to drive costs down. and, so, on behalf of public employees, we look forward to working with the city on solutions to a medical inflation rate that is causing the city, its public employees and taxpayers significant problems today and into the future both for active as well as retired. thank you very much. >> thank you. next speaker, please. good afternoon, supervisors. my name is kiersten [speaker not understood]. i want to follow sally's comments the focus of our conversation related to health care costs needs to begin with the actual core of the problem, which is the rising -- the current state of health care costs and the rising inflation rate as has been previously mentioned. we believe the best way to do this is to focus on

transparency and accountability measures which will require all providers to release the data necessary so that we can accurately assess cost drivers and work together to actually bringing costs down rather than just shift them. and we look forward to continuing this discussion with you and hopefully finding solutions that work for everyone. thank you. >> thank you. next speaker, please. good afternoon, supervisors. my name is [speaker not understood], i'm a retired city employee. i put in my 39 years here. you might think that retirees don't have a dog in this race, but we are interested in the financial well-being of the city and provision of services. what has been said before and if the controller [speaker not understood], yes, there is a problem, but i think it's important that we not get caught up in how much it is, whether it's 4.2, 4.4 or 2.5 billion. the issue is it's a problem that needs to be solved and the issue, part of the resolution

is the city has already taken steps to start to address the problem. and if the city will resist the urge to capitate the retiree health care trust, let it build up until there is sufficient funds in it to take care of the current city employees, not withdraw money early, then i think you would have a fully funded plan that will be of benefit both to the city and also to future retirees. i think if you look at the cost curve as the -- as [speaker not understood] parts go away, then the new folks come in and there is a lessened curve to the contribution for the retirement. so, i would urge you to keep doing what the city has already been doing and work to solve the problem. thank you. >> thank you very much. any other members of the public wish to comment on this item? all right. seeing none, public comment is closed. [gavel] >> supervisor wiener? >> thank you.

and, mr. chairman, i just want to thank you for your leadership on this issue. you have really i think taken the bull by the horns and i am very appreciative of that. i think a lot of people were nervous when supervisor elsbernd [speaker not understood] there would be less focus on these unsexy but critical issue, and i appreciate your work. i also think that even though i think as someone noted some of the press headlines can be rather dramatic and $4.3 billion is a rather sizeable amount of money. it is, of course, a pretty long period of time. i am actually -- i'm optimistic because we know that there is a path forward. this is not one of those, you know, you get a horrible number, this horrible situation and there's no real way of solving it. this is an absolutely solvable challenge. and one thing that i think we've shown as a city over and

over again, the pension reform was the most recent example, is that we do take a responsible approach when faced with these challenges. our partners in labor are incredibly collaborative as we saw with prop b and with the other prop b before that. and i am optimistic that we're going to be able to work together and come up with a solution and move forward together. so, i look forward to participating in that. >> thank you, supervisor wiener, and thank you for your co-sponsorship today and working on the issue together. and i want to thank all those who spoke, members of labor, to our controller, and certain to our mayor's office as well. you know, i think, again, the purpose of today was to identify the issue and to talk about the and really layout the financial terms based upon the report that was issued last year. you know, we do have an issue here. this is unlike pension as was mentioned. this is a longer term problem.