John Upton/The Bay Citizen

Mayor Ed Lee discusses pensions during a visit to The Bay Citizen Feb. 15, 2011

Updated Feb. 16, 2011 at 1:06 p.m. with an additional video clip

The financial plight of the city of San Francisco is so dire, says new Mayor Edwin M. Lee, that if around $300 million to $400 million in cuts to employee pension and health care costs are not achieved, the city could face bankruptcy as soon as five years from now.

Lee said that a $300 million to $400 million target for cuts is “probably not far off” from what needs to be done.

“We are not at bankruptcy yet. But it has to be out there in the five- or 10-year range of situations that we could lend ourselves to,” Lee said. While that prospect might seem absurd to people who see the city’s restaurants and San Francisco-based employers doing well, Lee points out that “I would never have believed five years ago that Vallejo would go under. Cities right across the bay are beginning to see these numbers.” (The city of Vallejo filed for bankruptcy protection in 2008. It filed a plan with the court in January to emerge from bankruptcy).

Mayor Lee visited The Bay Citizen Tuesday morning to discuss his priorities for the year during which he will serve as the city's appointed chief executive. It is shaping up to be a brutal period, with the long-term financial viability of the city hanging in the balance.

The city's swelling pension-fund payments are "the big leak, if you will, in our solvency right now,” he said. “It’s bleeding our whole general fund. That is as serious as it is becoming, because of the amount of money we have to spend to make" the pension fund solvent and able to meet its obligations to retirees.

The city will spend $820 million this year on pensions and employee and retiree health care, on top of a payroll of $2.4 billion. Next year, pension and benefits costs will total an estimated $914 million, and may reach $1.4 billion by 2014. The city’s budget is about $6.6 billion.

Lee is in the unenviable position of having — in a matter of weeks or a few months — to come up with a plan to close a $380 million budget gap for the coming year and to fix the drain on San Francisco's finances that pension and health care costs represent. 

Continued layoffs and cuts to city services are inevitable, and taxes or fees will have to rise, he said. “We’ve cut to the bone” in recent years of relentless budget deficits, he said, and “we keep cutting now.”

“If we don’t stop this leak, and don't find long-term solutions to mend it,” with the city paying hundreds of millions a year into the pension fund, Lee said, “there will be a question of whether or not pensions are things we can afford to have.”

In this video, Lee outlines some possible solutions:

Labor unrest if union leaders cannot persuade rank-and-file city employees to accept the changes could lead to strikes, he acknowledged, and concomitant chaos. Lee said that, if he is not able to construct a solution while he is in office, the financial situation of the city will be so painful that he may not want to continue as a city employee once his appointment ends in January 2012, when the mayor elected in November 2011 is sworn in. "It will be a decision for me whether I want to go back and work for the city after this," he said. "If I don't use this opportunity to fix it, it will be a [situation] that I don't think I want to be a part of."

Lee said that his status as a previously obscure, if very capable, bureaucrat actually serves him well in trying to hammer out a politically difficult fix for pensions and other financial issues. He is not running for election or re-election, and doesn't need to worry about alienating powerful interests. "Clearly, I have a little bit of an advantage in that I am not a politician, and I am going to definitely emphasize that I'm not looking for short-term solutions. I have to look for long-term solutions," he said. "I'm not running for any other office after this."

When Mayor Gavin Newsom visited The Bay Citizen in August, his human-resources chief in tow, he said the city would have trouble recruiting high-caliber employees if it sharply reduced the benefits it offered prospective hires. Lee quickly dismissed that notion Tuesday morning. “I don’t think that is true,” Lee said, nothing that other cities in the region are facing similar difficulties. “It’s not a recruitment challenge anymore,” he said. "It's survival. It is really the solvency of cities that is at stake.”

When asked if rank-and-file city employees understand how unpleasant this process will likely be, Lee responded: “At some point, they have to. There's no excuse. You can't hide," he said. "Everybody knows how hurtful this is.”

Lee has recently taken over hosting duties for a working group of labor leaders and city officials, including controller Ben Rosenfield and Supervisor Sean Elsbernd, the most fiscally conservative member of the Board of Supervisors. The group has been trying for months to come up with a consensus plan to trim the city’s employee benefit costs.

That effort was the subject of a Bay Citizen story last weekend. Investor and philanthropist Warren Hellman (who is chairman of The Bay Citizen’s board but plays no role in editorial operations) has also been involved, and he said last Thursday in an interview that the group must come up with savings of $300 million to $400 million a year to stave off a bankruptcy that will likely occur in five years if nothing at all is done. 

Lee ruffled some feathers by meeting on Friday with city Public Defender Jeff Adachi, who introduced Proposition B, a controversial November ballot initiative that would have required city employees to contribute more toward their pension and benefit costs. The measure, which lost by a large margin, would have saved the city $120 million a year — about a third of what Hellman, and now Lee, indicate will be necessary. Adachi has said that he is preparing another ballot measure to address the same issues. The unions are adamantly opposed to allowing Adachi in to their working group. 

While he did not say he would invite Adachi to attend the meetings, Lee indicated he would continue to solicit Adachi's point of view: "I'm bringing Jeff Adachi into the tent whether you like it or not," he said.

Video recording by John Upton. Video editing by Dan Ming.