The Public Eye

Sac City trustees struggle to fill huge gap in retirees’ medical fund

Jay Hansen
Jay Hansen Sacramento

The Sacramento City Unified School District provides its longtime teachers, plant managers and office workers an increasingly rare benefit: lifetime medical coverage upon retirement.

It’s a hugely expensive commitment, and the district and its employees have relatively little money set aside to cover the cost.

District officials estimate that Sacramento City Unified needs another $611 million – nearly 1.5 times its annual budget – to fully pay for the health benefits promised to its workers and retirees, based on the latest actuarial data. That number represents the gap between projected health care costs and what its investments are expected to cover.

Trustee Jay Hansen said he wants that outsized liability to be reined in with the district’s upcoming budget hearings.

Trustee Diana Rodriguez, chairwoman of the district’s newly formed budget committee, said she has been researching options for doing just that. The three-member committee, which also includes trustees Darrel Woo and recently elected Jessie Ryan, will schedule its first meeting in the coming weeks.

After previously serving as an appointee, Hansen won his first trustee election in November despite drawing fierce opposition from the Sacramento City Teachers Association, which represents more than half the district’s 4,000 workers. He said employees and the district will have to contribute more toward future health care benefits to reduce the unfunded liability.

“Everyone needs to make a financial commitment, the district and our employees, to solve this problem,” Hansen said Thursday. “There is no way around that.”

Rodriguez, however, said it’s too soon to know what mix of contributions is required to stem the growth of liability. “These have been ongoing conversations,” she said.

The Sacramento City Teachers Association says it has already begun contributing more, citing a 2010 contract in which members agreed to contribute $200 annually to retiree health benefits. Union leaders questioned why Hansen has called for immediate action.

“Raising alarms about this school district may not be the best way to address the issue,” said SCTA Executive Director John Borsos. “In terms of financing it, most school districts do pay-as-you-go.”

Pay-as-you-go in Sacramento City Unified means when a retiree is ready to collect the benefit, the district pulls money from its general fund, which also covers salaries and operating costs.

In a survey last year of California’s 300 largest K-12 districts, California Common Sense found that 87 percent had no funding set aside for promised retiree health benefits. The Mountain View-based nonprofit has called on state and local governments to tackle pension costs.

In the Sacramento district, the unfunded health benefit liability amounts to nearly $13,300 per student, the group said. That puts Sacramento behind only the Los Angeles and Fresno unified school districts in the per-student cost comparison.

In each of the last two years, Sacramento City Unified spent more than $18 million from the general fund on health benefits for current retirees.

Another large local district, San Juan Unified School District, does not provide health care benefits for life. Instead, retirees continue to receive health and dental benefits until they reach 65 and become eligible for Medicare. The district’s unfunded liability is $88 million.

In contrast, when Sacramento City Unified retirees reach 65, the district picks up the cost of supplemental policy premiums for life.

SCTA representatives say the district has other priorities that take precedence over saving for future health care costs.

“It’s much more important to get class sizes where they should be,” Borsos said.

Though Sacramento City Unified has the largest K-3 class sizes in the region, the district agreed in September to begin lowering them at about three dozen elementary schools that serve low-income students. Borsos said it needs to pick up the pace to attract more students and counter falling enrollment.

Five years ago, the Sacramento County grand jury estimated the district’s unfunded liability for health care at $560 million. Since then, the obligation has increased another $74 million.

Rodriguez said she and other trustees since 2008 have addressed the liability. The 2010 contract between the district and SCTA created a trust fund to set aside money for retiree health care. Today, district and SCTA member contributions have pushed that trust to $5 million.

Around the same time, teachers and the district agreed to double the amount of time required to qualify for retiree health benefits, up to 20 years from 10, Rodriguez said.

Gerardo Castillo, Sacramento City Unified’s interim chief business officer, said his staff is recommending that the district contribute another $6 million on behalf of all district employees, including those who receive benefits until age 65.

David Gordon, chief of the Sacramento County Office of Education, said SCOE’s retiree health benefit was unfunded by close to $50 million when he took office more than a decade ago.

“We went to the employees and said, ‘Look, this is not sustainable. If we want this benefit, we have to begin to pay into it like we would a pension,’” Gordon said.

As a result of those efforts, SCOE put $8.5 million in a restricted account for CalPERS to administer. SCOE’s two unions agreed that employees would contribute a portion of negotiated raises, generating another $1.5 million a year.

To help control future costs, workers hired after Nov. 1, 2006, were required to work 15 years at the agency to receive the lifetime health benefit. Previously, new hires were vested immediately. Within eight years, Gordon said, the liability went from largely unfunded to 60 percent funded.

He said he’s had less success in persuading Sacramento City Unified to take substantive action. Gordon, in regular letters about the district’s interim budgets, began offering to help address its growing unfunded liability as early as 2007.

Two years ago, he devoted entire letters to the problem, asking Superintendent Jonathan Raymond in 2013 and interim Superintendent Sara Noguchi in 2014 to provide his office with a funding plan for systematically reducing the deficit.

“I don’t have the ability to tell them what to spend their money on,” he said. “If they want to keep running this unfunded liability, that’s their prerogative.”

Gordon said continuing to pay retiree benefits from the district’s general fund ultimately will intrude on money available for student programs, he said.

Big health care liabilities arose in California’s school districts largely because medical benefits in the 1970s and 1980s were relatively cheap, Gordon said. That made retiree coverage a nice perquisite that districts could offer in lieu of salary hikes.

“As health care costs started to rise though the late ’80s and into the ’90s, many districts realized this benefit would sink them in the long run,” Gordon said. “So they negotiated their way out of it, or they prefunded the benefit.”

Finding a fix won’t be easy. Castillo said addressing the liability just for teachers, counselors and nurses would require $47 million a year for the next 20 years.

Hansen said he knows the district can’t start by paying that amount. “It would be too big a jolt,” he said.

But, he said, the district needs to “start paying as much as we can this upcoming budget. Then we need to be increasing that for the next two to three years until we’re funding at an appropriate level” for the next two decades.

“Previous school boards made a deal to have today’s board pay for yesterday’s promises,” Hansen said. “I don’t want to do that anymore.”

Editor’s note: An earlier version of this story misstated the size of the Sacramento City Unified School District’s unfunded obligation for retiree health benefits. The correct figure is $611 million. The earlier information was provided by the district.

Editor’s note (April 6): This story was updated to clarify that Sacramento City Unified officials are recommending that the district contribute another $6 million on behalf of all district employees, including those who receive benefits until age 65. A previous version suggested the contribution would only benefit employees of two unions.

Call The Bee’s Loretta Kalb, (916) 321-1073. Follow her on Twitter @LorettaSacBee.

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