When Governments Go Insolvent, Should Others Absorb their Retirement Plans’ Costs and Risks?

When San Francisco voters head to the polls on March 3 they’ll see a seemingly innocuous measure on the ballot that raises a big question:  If a local government becomes insolvent, should another public entity take on its employee retirement obligations?

The matter at hand involves Housing Authority employees hoping to vest in retiree health benefits. Public housing authorities (PHAs) are independent governmental entities, operating separately from the municipal and county governments in their jurisdiction and under the supervision of the U.S. Department of Housing and Urban Development (HUD). Nationally, there are about 3,300 PHAs overseeing 1.2 million units of public housing. HUD provides federal funding to and conducts active oversight of PHAs, intervening when these agencies encounter management or financial difficulties.

In October 2018, HUD published an adverse audit of the San Francisco Housing Authority (SFHA), and in March 2019, it declared that the Housing Authority was in default on two of its federal contracts. As the authority’s regulator and primary source of funding, HUD had the option of placing SFHA into receivership. But, instead, the federal agency agreed to let the city and county of San Francisco take over SFHA’s operations.

As a result of this municipal takeover, the city has hired many former Housing Authority employees. These employees were covered by an SFHA retiree healthcare plan for which they are now no longer eligible. The city also offers retiree healthcare benefits, but it can take employees up to 20 years of service to vest in this benefit.

In March, San Francisco voters are being asked to vote for Proposition C, which would amend the city’s charter to count the service time that workers hired by the city and county previously earned as Housing Authority employees and put it toward their new city or county retiree health care vesting requirement.

The charter amendment redefines the term “credited service” to include “years of employment with the Housing Authority of the City and County of San Francisco (the ‘Housing Authority’), provided that for any employee of the Housing Authority, the employee became an employee of the Housing Authority before March 7, 2019 and became an employee of the City and County without a break in service on or after March 7, 2019 and before March 1, 2021.”

If the ballot measure passes, former Housing Authority employees would have accelerated eligibility to a retirement plan that covers medical, dental and vision coverage for them and their dependents upon retirement. The city’s —taxpayers’— contributions to this retiree/dependent care range up to $2,071 per month for a Blue Shield Plan. San Francisco’s other post-employment benefit (OPEB) plans are funded on a pay-as-you-go basis and the city recently reported a net OPEB liability—the money it owes for benefits promised—of $3.6 billion.

If the measure passes, newly hired SFHA employees would add to this liability. Some would argue the increase would be relatively small since the authority only had 112 active employees in 2018.

Since San Francisco’s Proposition C is relatively technical in nature and has a limited fiscal impact, it is unlikely to receive much analysis. Further, media confusion over the nature of the measure may result in voters being misinformed. For example, a recent ballot summary published by the San Francisco Chronicle stated: “Prop. C seeks to ensure that employees of the San Francisco Housing Authority can access their city retirement medical benefits if they found another city job following the agency’s collapse in March. The measure has to go before voters because it’s technically an amendment of the City Charter.”

This summary reflects the inaccurate view that SFHA has been part of the city government, when, in fact, it has been a separate entity. Voters are being asked to assume liabilities that are not currently on the city’s books in order to provide a group of employees retiree medical benefits that are rarely available to private-sector workers. If the measure passes, future taxpayers would be obligated to cover large medical insurance premiums for retirees who did not vest in them through service to the city.

Some argue that while San Francisco’s municipal government already has $3.6 billion in unfunded OPEB liabilities, it has the substantial fiscal capacity, with over $12 billion in annual revenues and over $2 billion of unrestricted general fund reserves, to be capable of taking on new liabilities such as those associated with the SFHA employees.

But that isn’t and shouldn’t be the only consideration. Although San Francisco can assume SFHA retirement liabilities with somewhat limited taxpayer impact, the action could set a precedent for burden-shifting among larger public retirement systems.

Consider that California has numerous distressed cities and special districts that might eventually go bankrupt and/or be absorbed by county or state governments. If that happens, those governments would be facing this same question of whether the larger government would be expected to take on the acquired entity’s pension and OPEB obligations.

This issue has arisen elsewhere, most notably in Illinois. That state is in the process of consolidating over 600 local public safety plans into a statewide system, but without any burden-shifting thus far. Chicago Mayor Lori Lightfoot has suggested that her city’s pension funds also be consolidated.  Given the relatively low funded ratios and large size of the Chicago pension systems, a state takeover would likely require a major infusion of cash from the state.

In Colorado, the Denver Public Schools (DPS) pension fund was merged into the state’s Public Employee Retirement Association (PERA) in 2009.  But the enabling legislation forbade any transfer of obligations. DPS is operated as a discrete division of PERA, with its assets and liabilities presented separately.

While DPS and Chicago retirement systems have not received bailouts yet, the interest in transferring financial burdens onto larger or different groups of taxpayers may increase as pension crowd-out worsens. When such a policy is considered, decisionmakers, like San Francisco voters, should receive detailed information about the short- and long-term fiscal impacts the bailout would have on affected governments, services, and taxes.