Potentially precedent setting ruling opens the door for governments statewide to slash worker benefits.
By Andy Cohen
Last month, a state appeals court confirmed a lower court ruling that retiree health benefits are not vested benefits, as are employee pensions, and therefore are not subject to the same rules that apply to pension benefits.
The original lawsuit was filed on behalf of a retired police officer who sued the city because the it placed a cap on the premiums it would pay on her retiree health benefits. The cap, she said, fell $600 short per year of covering the full premium. Her attorneys argued that, according to the city’s agreement with the San Diego City Employees Retirement System (SDCERS), the city had to pay the full premium on medical benefits for all eligible retired city workers.
The courts disagreed, noting that, according to the city’s municipal code, “Health plan coverage for retirees and eligible dependents is subject to modification by the City and the provider of health care services, and may be modified periodically as deemed necessary and appropriate.”
The City could make the changes to retiree health benefits it deemed necessary without the approval of the SDCERS board if they were not successful via collective bargaining.
It’s all rather complicated, when really it didn’t need to be. In 1981 the City proposed that city employees withdraw from the Social Security system. The City would then create a new comprehensive pension plan for all city workers. The City’s workers voted, and decided to leave Social Security for what they figured would be a more secure plan managed at the local level. In 1982 the City Council approved the new pension system and the City withdrew from Social Security.
As part of the new agreement, the city also agreed to provide retiree health benefits, fully paid for. But they did not make it an actual part of the pension system. Instead, according to the language of the City Municipal Code, pension benefits and retiree health benefits were treated separately. Still, the City treated them the same in the way they were implemented.
In 1996, voters approved Prop D, moving retiree health benefits to the purview of SDCERS, with funding coming out of the retirement system’s investment funds instead of the City’s general fund. Sounded logical. It’s a retiree benefit and should be paid for out of the retiree investment fund.
Except that the health benefits were never legally a part of the pension system. Recall that the language in the municipal code treated them separately.
In 2006, SDCERS voluntarily submitted to an IRS review, which upon completion in 2008 determined that the health benefits had been illegally paid for by pension fund assets, and that they must be kept separately and paid for via employer (City) contributions (out of the general fund) and not pension fund assets. The City was then required to reimburse SDCERS nearly $34 million for past health benefit payments.
Which leads us to last month’s ruling. The City is trying to control costs, particularly in light of increasing health care costs (although that concern has been mitigated somewhat by changes to federal law, as the health care cost curve nationally has leveled off), and since it is directly responsible for funding those benefits, they want to amend their commitment. The State Appeals court agrees that they are entitled to do so.
So where does this leave city employees? They are not eligible for Social Security upon retirement because they receive pensions and the City withdrew from the Social Security system. And if City employees retire before age 65 (as many police officers do, such as the plaintiff in this case) they are not yet eligible for Medicare, and typically have no other health care options. The retiree health benefits were supposed to close that gap.
Interestingly, SDCERS members hired between July 1, 2005, and July 1, 2009 are not eligible for retirement benefits, presumably due to the dispute with some of the City’s public employee unions.
So where does that leave retirees? As part of the collective bargaining agreement, those eligible for retiree benefits are required to make a partial contribution toward their healthcare. And though they are not eligible for Social Security, they are eligible for Medicare. And if they do enroll in Medicare at age 65, their city retiree health plan they pay a premium for then becomes a supplemental insurance plan that will help cover what Medicare does not.
The danger here is that it sets a bad precedent for future retirees. A lot has been made recently about the CBO finding that 2.5 million workers will choose to leave the workforce—voluntarily—by 2025. Obamacare gives them that option. No longer will people have to stay in jobs they don’t like and would rather leave just to keep their health coverage. They have the freedom to do something else that they did not have before.
Similarly, a 62 year old city employee who’s been on the job for 20 plus years has the option of retiring early and taking her pension, secure in the knowledge that they will have good health benefits if they do, even if they have to pay part of the premium.
But what if the City suddenly decided that it can’t afford to pay for retiree healthcare anymore and, after several rounds at the negotiating table, decided to drop it altogether? There would surely be lawsuits to follow, but the court’s ruling in this case would seem to give the City the freedom to make that call, since health benefits are not vested, and not part of the SDCERS fund. There are collective bargaining agreements in place establishing the health benefits, but there are political actors who would just LOVE to see them go away, because they’re just “lazy” city workers, after all.
It’s surely not a crime to want to save the city’s taxpayers money. But to do so at the expense of vulnerable people is unconscionable. And there are clearly those within our government who do not believe in the collective bargaining process, and do not respect the contracts that are a product of that process.
In this particular case, the decision is not unreasonable, and the City Attorney’s actions are not unreasonable. In this particular case. What is troubling is that this could be just the beginning of an even greater erosion of public worker rights and benefits; that workers who are already a maligned lot will bear an inordinate amount of the brunt of municipal cutbacks simply because it’s politically expedient and because they’ve become easy pickins’.
Andy Cohen
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Andy, Interesting article. Your article is only the tip of the iceberg. Private companies are also limiting or eliminating health care benefits. Some have even monetized the pension plans, essentially leaving retired workers on their own.
I read somewhere that the average savings of the baby boomers is US$60,000. If this figure is true (or even close) it implies — taking into consideration the rollback of health care benefits and pension plans — that the U.S. is facing a serious old age poverty crisis.
Now if the city employees had been Lockheed Martin workers, they could have had their pension AND social security. I believe this holds throughout the military-industrial complex. It didn’t have to be either/or.