San Francisco's public pension system is drowning in red ink 

There was a time when San Francisco was fortunate enough to have a healthy and thriving pension investment fund that covered its annual pension contribution tab. The fund had been performing so well that The City even decided in 1996 to begin paying the pension contributions of its employees. Times were good.

For a chart detailing the steadily increasing costs of San Francisco retiree benefits since fiscal year 2001-2002, click on the photo to the right.

But then, things took a turn for the worse in the mid-2000s, culminating in the economic collapse of 2008, which sent San Francisco’s portfolio into a tailspin. The pension investment fund took a $4 billion hit, and The City was forced to start contributing hundreds of millions of dollars to pension costs using its annual revenues that pay for basic services such as police, fire, parks and roads. In 2004, The City began negotiating with unions for their members to begin contributing to their pensions again.

With projections showing pension costs could double to nearly $800 million in 2014 — or about 31 percent of its payroll — the entire system has come under scrutiny as two pension-reform measures head to the ballot in November. Among the factors leading to skyrocketing costs is a political culture that routinely rewards public employee unions with little thought about the future.

“The one thing at City Hall no one ever really looked at was the implications,” said Craig Weber, who sat on the grand jury that sounded the alarm bell about pension costs in a June 2010 report titled “Pension Tsunami.” “At the end of the day, if that’s the type of way you deal with the special interest groups, then the taxpayers will always be the fall guy. That’s just the way negotiations have taken place.”

The negotiations typically involve politicians who were elected with the backing of public employee unions.

Back in 2007, then-Mayor Gavin Newsom struck a 24 percent, four-year pay raise labor contract with the Police Officers Association, as well as the firefighters and nurses unions. Critics said it was nothing more than a deal to secure political backing during his re-election. The raises came amid budget deficits, and The City would end up having to negotiate with labor groups to defer their raises. The 2007 contract had a long-lasting impact. Mayor Ed Lee had to convince fire and police to pay more into their pensions this fiscal year in exchange for funding the overdue pay bumps.

“Many factors caused us to be in this [pension] mess,” said Gabriel Metcalf, executive director of the San Francisco Planning and Urban Research Association, a public policy think tank.

“It’s been incredibly tempting for a succession of elected officials to offer very rich pension benefits to city employees,” Metcalf said. Doing so gains those officials the support of unions in a “labor town,” and “you don’t have to pay for it on your watch,” he said.

The more left-leaning members on the Board of Supervisors find their political strength from Service Employees International Union Local 1021, the largest city employee union. SEIU’s influence was exhibited this budget year when it was able to sink a proposal to contract out security positions at city hospitals that would have saved about $4 million a year. The labor group also exerted political pressure in 2010 to get the Board of Supervisors to change a ballot measure provision that would have calculated pensions based on the pay of an employee’s final three years to two years instead.

Pension payments range widely, from as little as a few hundred dollars a month to as high of about $22,600 a month, which is $271,200 a year. According to July 2010 pension data, 7,266 retirees were receiving monthly checks between $2,000 and $4,999. More than 600 retired workers earned more than $108,000 a year as of July 2010.

But not all the blame can be pinned on politicians. Voters have played the role of enabler in The City’s pension crisis, although they were often misled about the consequences of their actions.

In the late 1990s and early 2000s, voters approved a number of ballot measures backed by politicians and labor groups that enriched workers’ benefits during the flush times.

For instance, in 2000, non-public safety workers had voters improve their pension benefits by 5 percent, from 70 percent of their salary to 75 percent. The city controller’s analysis at the time said it would increase costs by $34 million annually for 20 years but the pension fund “would still have a significant surplus.”

In 2002, police and fire were handed another pension benefit increase after voters had given cops a retirement boost four years earlier. Voters approved increasing their allowable pension to 90 percent of their salary, up from 75 percent, and once again the pension fund “surplus” was used to argue in favor of the bump.

But when the market crashed, The City was on the hook, and the fiscal reality of those benefits came crashing down.

“We need to design a pension system that doesn’t depend on the stock market always going up,” Metcalf said.

While the economy has rebounded somewhat since the 2008 crash, increased revenues are not covering the costs of government, mostly for salaries and benefits — nor will they for years to come, budget officials concede.

Tim Paulson, head of the San Francisco Labor Council, dismissed suggestions that the benefits were too rich and emphasized labor has worked with The City to cut costs.

“The American dream since World War II is that if you work hard you will get a living wage, you will get health benefits and you will have security when you retire,” Paulson said. “Why should American workers give up what the American dream is?”

Voters to have their say in fixing the broken system

This November, voters will have two pension-reform measures to choose from on the ballot. But even if either of the two dueling measures pass, The City will still have to contribute hundreds of millions of dollars annually into employees’ pensions.

Public Defender Jeff Adachi’s pension measure on the November ballot saves more money than the pension measure put on the ballot by Mayor Ed Lee, whose proposal has the support of labor leaders and the Board of Supervisors. Adachi’s measure, which is being backed by millionaires Michael Moritz and George Hume, would impose higher floating pension rates than Lee’s.

If both measures pass, the one that received the most votes would go into effect.

During the next 10 years, Lee’s measure would save $1.29 billion, and Adachi’s $1.6 billion, according to a July 19 report by the city controller.

But those savings wouldn’t cover the escalating costs in the coming years. The City’s pension contribution is projected to increase rapidly — doubling to $800 million by 2014 — before beginning to decline after reaching a possible peak of $981 million, according to the most recent estimates from the retirement system.

Over the next decade, The City’s contribution to its pension fund could total $6.57 billion.

One mayoral candidate is sending the message that both measures do not go far enough. Tony Hall, a former member of the Board of Supervisors, said in a recent statement that the Lee measure is “a quick fix designed to head off real pension reform, and it barely scrapes the surface of our pension crisis.

“Mark my words that if we don’t get the parties back to the table for a stronger deal, this crisis will continue to grow much worse,” Hall said.

jsabatini@sfexaminer.com

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