From well-funded pensions to basket case, San Francisco’s voters are to blame

WORKERS OF THE WORLD: San Francisco Mayor Ed Lee, bottom center, walks with protesters during a march in San Francisco, May 1, 2017. Despite San Francisco’s pension disaster, Lee was one of several local officials who recently received a massive salary bump.

By Steven Greenhut and David Schwartzman

Sacramento — Pension reformers had for years pointed to the irony that big-spending, liberal San Francisco ran one of the best-funded major pension systems in the state, while fiscally conservative Orange and San Diego counties had systems that were underfunded and the subject of controversy. The reason dates back more than a century, to a city charter that requires voters to approve any increases in pension payments for San Francisco’s public employees.

“A decade ago the San Francisco public pension system was known for being well-funded, winning good management awards and going eight years with no annual payments from the city,” explained reporter Ed Mendel, in a July article on the CalPensions website.

But that’s all history. A civil grand jury in June released a troubling report about the current dire condition of the city’s pension fund. Because of the staggering pension liability, San Francisco will need to increase contributions to its retirement system by 36 percent over the next five years – five times faster than its projected increase in revenues.

What happened?

The same rule that had strengthened the city’s pension system has, in the last decade, been its undoing. San Franciscans have repeatedly voted to expand pay and benefits for local government workers. Voters approved retroactive pension increases 10 times between 1996 and 2008, thus leaving the San Francisco Retirement System underfunded and a drain on the operating budget.

The city and county of San Francisco owes the retirement system a massive $5.8 billion – more than half the city’s entire general-fund budget, according to the grand jury report. The report points to various reasons for the increased debt, including investment losses, an unfavorable court decision on cost-of-living adjustments, and changes in demographic assumptions.

But according to the report, “the principal underlying cause is the estimated $3.5 billion in retroactive retirement benefit increases implemented by voter-approved propositions.” Pension increases usually are touted as a way to retain valuable employees, but retroactive rewards do nothing to keep employees from leaving. Those retroactive increases amounted to “very expensive gifts to employees and retirees from taxpayers, paid for with money borrowed at a high interest rate from the retirement system and paid back over 20 years by taxpayers,” the report notes.

While voters ultimately are to blame for the city’s current predicament, city officials also played a large role. The grand jury found that voter information pamphlets for the various pension initiatives did not provide complete estimates of pension costs, thus leading voters to believe the increases would have few negative effects on the city budget.

The report pointed to specific voter information that was provided by the San Francisco Board of Supervisors for several of the pension-hiking initiatives. In 2000, voters approved Proposition C, increasing retirement benefits for the city’s “miscellaneous” employees hired after 1976. The official voter information explained, “Even with this proposal, the city does not have to make a contribution to the retirement system for at least the next 15 years.”

Then in 2002, the board placed on the ballot a measure that boosted the retirement formula for police and firefighters. The city controller’s statement predicted no employer contributions to the retirement system for at least 10 years and promised the “the city will negotiate a cost-sharing agreement with police and firefighters to cover all or part of the cost of providing additional retirement benefits through employee contributions.”

But as the report noted, “the city had to commence contributions to the retirement system in 2005, and for FY 2016 the city had to make a $526.8 million contribution, $377.1 million of which was payment towards the unfunded pension liability.”

This situation brings to mind the 1999 passage of Senate Bill 400, in which state officials – including the California Public Employees’ Retirement System (CalPERS) – promised Californians that the 50 percent retroactive pension increase for California Highway Patrol officers would not cost taxpayers a dime because investment earnings would pay for all the additional costs.

“They were off – by billions of dollars – and taxpayers will bear the consequences for decades to come,” reported the Los Angeles Times in a 2016 article about the debacle. The S.B. 400 pension increases were mirrored in public agencies across the state, which quickly adopted these new formulas for public safety officials. Taxpayers last year paid “more than 30 times what the state paid for retirement benefits in 2000 before the effects of the new pension law … had kicked in,” the Times added.

As a result, the state’s main pension fund went from a well-funded system to one that’s funded at only around 68 percent today. Likewise, these voter-approved pension increases took San Francisco’s system from a model for the state to one that’s now only 78 percent funded, according to the number provided by the grand jury report.

But state and San Francisco officials don’t appear to have gotten the message. Only weeks after the grand jury report release, and without any apparent irony, the San Francisco civil service commission gave massive salary bumps to seven of the city’s highest-paid officials. Mayor Ed Lee, already the highest-paid mayor in California, got a $24,000 raise, to $326,000 a year. Those seven officials now are paid a combined $1.76 million a year, which will cost the pension system $1.45 million a year when they retire. That’s a drop in the bucket for the system, but it shows how tone deaf officials are to the pension problem.

And the San Francisco Chronicle’s Matier & Ross reported that “the cost of city salaries and pensions … has grown by 33 percent over the past decade – and it’s expected to keep up that pace for at least five more years.” The columnist noted that increase “will add another $698 million to the public tab.”

The grand jury recommends that, among other things, “the mayor and board of supervisors fully disclose the financial details of any future retirement benefit increases or decreases to the public.” That’s reasonable, as far as it goes. But we need to realize the obvious: Requirements for voter approval of pension hikes, sometimes sought by those trying to control pension obligations, are only as reliable as a city’s voters. It’s long past time to consider more far-reaching solutions.

Steven Greenhut is a contributing editor for California Policy Center. He is Western region director for the R Street Institute. David Schwartzman is a policy research fellow at the California Policy Center and a senior at Hillsdale College.