Breaking News from Ann M. Smith, Mike Zucchet & MEA’s Negotiating Team: Tentative Agreement Reached on Retiree Health Benefits

Dear MEA-Represented Employees:

As most of you know, MEA’s Negotiating Team has been working round-the-clock on retiree health benefits as required by MEA’s current MOU, Article 22. We made progress and suffered multiple setbacks over the past several weeks while you have all been holding your breath.

It’s time to exhale. MEA has reached a Tentative Agreement with the City subject to your approval through the customary ratification process. This Tentative Agreement affects the retiree health benefit of those hired before July 1, 2005 – the group referred to as “Health Eligible Retirees” – and also paves the way for the parties to establish a tax-deferred vehicle for those hired after July 1, 2005, to begin deferring pre-tax income into an account to cover qualified medical expenses upon retirement. This Tentative Agreement does not affect employees who retired from the City on or before June 30, 2009.

MEA took the lead in negotiating the terms of this Tentative Agreement with the City. It is our understanding that this Tentative Agreement will be offered to other City employee unions and each will decide whether to accept it and recommend it to their members for ratification. MEA’s ability to proceed with this Tentative Agreement does not depend on what any other union does or does not do regarding it.

Your elected Negotiating Team will be recommending a “yes” vote at the upcoming ratification.

Tentative Agreement versus City’s “Last, Best & Final Offer”

On April 27, 2011, the City’s Negotiating Team presented MEA’s Negotiating Team with the City’s “last, best & final” offer (“LBFO”). As you know from past experiences, this LBFO becomes subject to an Impasse Hearing before the City Council and, if five (5) City Councilmembers vote to approve it, this LBFO will be imposed, over MEA’s objections and without MEA’s agreement, effective July 1, 2011.

By reaching a Tentative Agreement with the City—subject to your ratification—we avoid the prospect of the City Council imposing the City’s LBFO. But it is useful to know what this “alternative” could be: The City’s LBFO establishes a new $5,500 annual retiree health benefit allowance (with no annual escalator) and raises the eligibility age for General Members to age 60 and Safety Members to age 55. Under the City’s LBFO, this means that a retiree health benefit would not be available when you are otherwise eligible to retire with twenty (20) years of service; this $5,500 flat annual allowance would only become available when you turn age 60 (General) or 55 (Safety) even if you retire at age 55 (General) or 50 (Safety). However, the City’s LBFO does carve out an exception for those who will be eligible to retire on or before June 30, 2012, or who were hired before April 1, 1986. This “exception” group would be eligible for an annual retiree health allowance frozen (with no annual escalator) at the amount in effect for fiscal year 2009 – i.e., $8,880 a year. There would be no increase in this annual amount during an eligible employee’s remaining years of employment or after retirement.

Again, the City’s LBFO described above will be avoided if MEA’s membership ratifies the Tentative Agreement reached with the City.

The Deal Points: If the Tentative Agreement Is Ratified

The Tentative Agreement reached by MEA’s Negotiating Team is multi-faceted (the summary write-up of the Tentative Agreement is more than 20 pages) and provides for employee choice. We have provided a more detailed summary below, but the short version of the Tentative Agreement is that—for employees who retire after April 1, 2012—it replaces the current retiree health benefit available to employees hired before July 1, 2005, with a choice of three options. In general terms, the options are:

1) The current allowance of $8,880 a year with a 2% annual escalator. This option requires a monthly contribution by the employee and is only available to employees who are at or near retirement eligibility.

2) An allowance of $5,500 a year with no annual escalator. This option requires a smaller monthly contribution by the employee and is available to all health-eligible employees.

3) A “defined contribution” retiree health benefit that is meant to approximate $8,500 annually during retirement. There will be no cost to the employee for this option.

The Tentative Agreement calls for these options to be memorialized in a new, long-term 15-year MOU with MEA. Again, more details on these options are provided below.

Positive Impacts on City’s Budget

Over the next few days, you will hear much about the positive impact this Tentative Agreement will have on the City’s fiscal health by easing the strain on the City’s annual cash flows due to the current benefit level because the City’s annual required “pay as you go” expenditures and total unfunded accrued liability are both reduced. The Mayor and City Council have every reason to trumpet these accomplishments because the long-term impact of the City’s prior failure to pre-fund this benefit continues to take a toll on the City’s capacity to provide needed services to the public and to make improvements in employee compensation as prices rise at the pump and in the stores. In the long run, the budget relief which this Tentative Agreement brings is thus a positive development for you, too, because each annual budget gap results in more layoffs, impossible demands on you to do more with less, and painful reductions, not improvements, in your compensation.

Elimination of Litigation Uncertainties

Many of you have followed the debate over the legal character of your retiree health benefit and know how big our disagreement with the City is on this. We will not reiterate the parameters of that debate here as much has already been written about our views – both in MEA’s Viewpoint and in the Joint Study Report published last September. Suffice to say that, for the City and for many employees, certainty is more valuable than continuing legal debate and protracted litigation. Uncertainty for the City simply means that it can act aggressively to eliminate or drastically reduce your retiree health benefit and then wonder if the courts will later reverse its aggression such that the “savings” evaporate. Uncertainty for MEA simply means that we can act aggressively in refusing to find any appropriate compromise, let the City impose its LBFO, and leave you in limbo while we litigate over the next few years.

To illustrate this point, while MEA remains adamant about the legal significance of the legislative history related to this retiree health benefit since its initial establishment in 1982, the City prefers to point to recent litigation outcomes related to this benefit which involve the San Diego Police Officers Association (POA) and its members. When the POA sued the City in federal court back in 2005-2006 – while MEA was busy defending your pension benefits in state court against former City Attorney Mike Aguirre’s roll-back plans – POA’s attorneys “threw in” a claim related to retiree health benefits and then failed to introduce any evidence demonstrating that this benefit is “vested” under the relevant case law due to its 30-year legislative history. However, despite this inexcusable failure in the trial court, POA’s attorneys compounded their negligence by including this issue in their appeal to the Ninth Circuit – later conceding in its briefing that the benefit is not vested! Such a performance is absolutely outrageous under the circumstances where the record so clearly supported the opposite conclusion because of the legal status the City gave this benefit by its own legislative actions which were separate and apart from any one MOU for a specified term. In fact, POA has a legal malpractice claim presently pending against the attorneys who handled this case. Although this decision is not binding on MEA-represented employees, it is cited by many as if it were.

More recently, in a separate case filed by the POA, two police officers who were adversely affected by the frozen retiree health benefit which the City imposed on POA-represented employees and on Local 127-represented employees in 2009 (when, unlike MEA, they did not agree on a new MOU), asked the court to declare that the ordinance amending the San Diego Municipal Code, Article 4, “City Employees Retirement System,” to freeze their retiree health benefit, was unlawful since no vote under Charter section 143.1 had occurred. Last Thursday, the trial court ruled in the City’s favor – inexplicably concluding that the retiree health benefit was not “under the retirement system” (even though the City Council directed the City Attorney to amend the retirement system to add this benefit back in 1982) and thus no Charter section 143.1 vote was needed. The trial court went on to cite the POA’s Ninth Circuit case in support of its statement that “courts have held this benefit is not vested.” While this ruling is clearly wrong based on the indisputable record of legislation and prior votes on the retiree health benefit under Charter section 143.1 – and will undoubtedly be appealed – this case underscores the point about the uncertainty of continuing litigation for all concerned.

Transition Period from Current Benefit to New Benefit Options

The City and MEA have agreed that, in addition to the time needed for a proper ratification vote to take place, a transition period will be needed for (1) conforming documents to be prepared, and (2) proper education to occur regarding the new benefit options before an employee will be asked to make an irrevocable election. Moreover, we have also agreed that, after this education process takes place and before you make a benefit election, a second vote will occur under Charter section 143.1. This will be in addition to a membership ratification vote and it will occur despite the City’s assertion that no such a vote is legally necessary. Thus, the new benefit options set forth in this Tentative Agreement will not become effective until April 1, 2012 – assuming it is approved by a ratification vote and a Charter section 143.1 vote. Here are the STEPS:

(1) Tentative Agreement signed (done this morning, May 6);

(2) Membership ratification vote (date to be announced);

(3) Ordinance amending SDMC to conform to our agreement re those who retire before July 1, 2011, and between July 1, 2011, and April 1, 2012 (to be docketed 5/13);

(4) 15-year MOU to be approved by MEA and adopted by City Council;

(5) New documents to be prepared;

(6) Education re new benefit options to occur;

(7) Charter section 143.1 vote;

(8) Irrevocable benefit elections to be made before February 1, 2012;

(9) Implementation on April 1, 2012;

(10) Employee contributions (where applicable) to begin for payroll period on or near April 1, 2012.

15-Year MOU With Right to Modify

The new retiree health benefit will be memorialized in a 15-year MOU with an implementing ordinance. The City does have the power to propose amendments to retiree health benefits after July 1, 2014 under strict procedural conditions, including a 2/3rds vote of the City Council both to propose and to impose any change. This 15-year MOU is intended to provide protection for employees in consideration for the budget-saving benefit changes being made. However, it must be understood that changes to this benefit could occur during the 15-year period but not before July 1, 2014.

The Retiree Health Benefit: How Does the Tentative Agreement Change It and For Whom?

MEA-represented employees have certain protections related to this “transition period” to a new benefit which are not available to all other employees. This is because MEA negotiated those protections into the 2-year MOU it signed in 2009, and recently extended another year. The Firefighters and DCAA included MEA’s language in their MOUs, and the Teamsters inherited that beneficial language from MEA for lifeguards. The City also extended that same beneficial language to unrepresented employees. However, in contrast, POA and Local 127 did not reach agreement with the City in 2009, and they did not get and do not have that beneficial language. As a result, if this Tentative Agreement is approved by the City’s other five unions, there will be a different result for employees during the period July 1, 2009, through April 1, 2012, depending on which union represents them, as follows:

MEA, Firefighters, DCAA & Teamsters: Retiring Before April 1, 2012

(1) Employees who retired after July 1, 2009, or who retire before July 1, 2011: the suspended escalator on their retiree health benefit of $8,880/year will resume for FY 2012 (this is the National Health Expenditures escalator up to a maximum of 10% annually); and,

(2) Employees who retire on or after July 1, 2011, and before April 1, 2012: the suspended escalator on their retiree health benefit of $8,880/year will resume for FY 2013 (this is the National Health Expenditures escalator up to a maximum of 10% annually);

(3) Employees who retire on or after April 1, 2012, will have one of the three benefits described below depending on each employee’s irrevocable option selected by February 1, 2012.

POA and AFSCME, Local 127: Retiring Before April 1, 2012

(1) Employees who retired after July 1, 2009, or who retire before April 1, 2012, will continue to have a frozen $8,880/year retiree health benefit allowance with no escalator.

(2) Employees who retire on or after April 1, 2012, will have one of the three benefits described below depending on each employee’s irrevocable option selected by February 1, 2012; however, those POA-represented and Local 127-represented employees who select Options A or B must make payments covering at least one full year before being eligible for the Option A or B retiree health benefit.

Options A, B and C: Retiring On or After April 1, 2012

(1) Option A: Defined Benefit

a. An annual retiree health benefit allowance starting at $8,880 for FY 2013 with a 2% annual escalator. The terms and conditions related to this annual health allowance will otherwise remain the same as they are for the current benefit; this allowance may only be used for the retiree during his or her lifetime and may not be used by his/her spouse or dependents before or after the retiree’s death.

b. Limited Eligibility: Only available to those employees who will be eligible to retire before April 1, 2012, or who will have twenty-five (25) years of creditable service before April 1, 2012. Employees who are eligible for Option A are not required to select it; they may select Option B or C instead.

c. Mandatory Employee Contribution: $98 a month for General ($45.23/pay period); $103 a month for Safety ($47.54/pay period) only during the course of his/her employment. Contributions will be deducted on a pre-tax basis beginning in the pay period closest to April 1, 2012, and may not be refunded regardless of the employee’s change in circumstances.

(2) Option B: Defined Benefit

a. An annual retiree health benefit allowance of $5,500 for FY 2013 with no annual escalator. The terms and conditions related to this annual health allowance will otherwise remain the same as they are for the current benefit; this allowance may only be used for the retiree during his or her lifetime and may not be used by his/her spouse or dependents before or after the retiree’s death.

b. Mandatory Employee Contribution: $49 a month for General ($22.61/pay period); $52 a month for Safety ($24.00/pay period) only during the course of his/her employment. Contributions will be deducted on a pre-tax basis beginning in the pay period closest to April 1, 2012, and may not be refunded regardless of the employee’s change in circumstances.

(3) Option C: Defined Contribution

a. When an employee becomes eligible to retire, the City will make a defined contribution to his/her retiree health account in an amount which is projected to yield $8,500 a year for his/her lifetime. This projection will be based on his or her life expectancy at the time of retirement eligibility based on the general mortality tables for men and women and will assume that a 6% rate of return will be earned on this lump sum once made available to the employee for investment management within the retiree health trust fund (to be established). An employee need not retire when this lump sum payment is made; he or she may continue to work while the amount of money in this account grows without withdrawals. Once retired, an employee may make withdrawals from this account in amounts which are greater during the pre-Medicare-eligibility years and which are thereafter reduced after Medicare-eligibility begins. Under the IRS rules applicable to this type of account, withdrawals for qualified medical expenses may be made for the retiree himself or herself, as well as for his or her spouse or other tax dependents. Upon the retiree’s death, withdrawals for qualified medical expenses may continue to be made from any remaining funds until the retiree’s spouse or other tax dependents have all died; thereafter, any remaining funds revert back to the trust.

b. There is no mandatory employee contribution. Each bargaining group/unit will continue to meet and confer with the City regarding employee contributions which may be added to enhance this benefit beyond the projected $8,500 annual benefit which the City will fund.

Employees Hired After July 1, 2005

MEA and the City will establish a program for these employees to make tax-deferred contributions to a retiree health benefit trust in order to build a health savings account which will earn interest from investments during an employee’s active years of service and from which the employee can make withdrawals for qualified medical expenses for himself/herself, any spouse or other tax dependents once retired.

Time to Digest . . .

While MEA’s Negotiating Team has been living and breathing these issues and details for several weeks now, we all know that you will need time to digest this information and to ask questions in order to understand more fully what it all means for you. We remain confident that, once you do, the merits of this Tentative Agreement will be clear and you will be ready to give it your favorable vote at ratification.

In solidarity,

Ann Smith, Mike Zucchet, and MEA’s Negotiating Team