In June, the San Francisco civil grand jury released a report about the city’s mounting pension obligations. Entitled “Pension Tsunami,” it warned that San Francisco’s pension obligations could grow to $1 billion by 2014. The city’s annual budget is about $6.5 billion. The city already must pay 13.5 percent of each employee's salary into the pension fund to cover the pension fund’s yearly shortfall, and that figure may climb to as much as 30 percent of payroll in four years. If left unchecked, the grand jury report warned, pension and benefit costs could bankrupt San Francisco in the years ahead.
City officials are dismissive of the report, its facts, its findings and its intent — to say the least. Privately, some decry civil grand juries, which spend a year investigating an issue of public concern, as a pointless sideshow whose recommendations are traditionally ignored. Asking a public official about a civil grand jury’s findings, one senses, is somewhat akin to asking what he or she plans to do about the imminent end of the world, based on the ravings of a lunatic on a downtown street corner.
“The report is so flawed, it is comical,” Mayor Gavin Newsom said Wednesday as he paid a visit to The Bay Citizen’s newsroom. The report “means nothing at City Hall,” Newsom said, since he and his staff have been working on pension and benefits issues for years, and have achieved what he says are significant steps to reduce future obligations. “We don’t need a grand jury to shock us” to action, he said.
“We did pension reform,” Newsom said, citing the June passage of Proposition D, which significantly reduces pension liabilities going forward because it requires increased pension-fund contributions for new city employees, and seeks to reduce pension “spiking” by basing pension payouts on a worker’s average compensation over the last two years of employment, rather than the final year, when a big push in overtime can lead to greatly enhanced pension benefits.
Furthermore, Newsom said that recent wage concessions from most of the city's public-employee unions have saved the city nearly $240 million. “Our labor unions in the city have recognized” that the pensions and benefits offered in the past are placing the city in a budget vise, he said. The union leaders “took a lot of heat to agree to these pension packages. They should be recognized and supported” for that.
Newsom said he was accosted at a North Beach restaurant Tuesday night by a man enraged about what he perceived as too-rich public pensions.
Public-pension obligations have become a hot-button issue across the country. Northwestern University professor Joshua Rauh presented a study last week that found state governments alone face $3 trillion in unfunded pension liabilities. The civil grand jury’s report reflects wide public fears that the pension obligations taxpayers are legally required to honor will cripple governments in coming years.
Newsom and several other city officials were required to officially respond to the civil grand jury report this week. The city filed four official responses with the Superior Court, from City Attorney Dennis Herrera, Mayor Newsom, the Department of Human Resources and a consolidated response from City Controller Ben Rosenfield, San Francisco Employee Retirement System director Gary Amelio and fire Chief Joanne Hayes-White.
In general, their response was that the pension fund is in fine shape, that pension benefits for city workers are not as rich as those enjoyed by employees of many other California cities, and it may well be impossible to adjust already-promised pension packages anyway.
Uniformly dismissed by City Hall was the grand jury’s allegation that the city had failed to enforce provisions of 2002’s Proposition H, which increased firefighter and police pensions, but which was supposed to result in minimal cost to the city, since the pension fund was then operating at a surplus. Once the pension fund began running at a deficit, as it has ever year since 2004, Prop. H was to have forced the city and the unions to “meet and confer” annually to share costs.
Though SFERS is currently 97 percent funded, Craig Weber, the certified public accountant who chaired the grand jury's pension committee, cites a 2010 actuarial report prepared for SFERS that forecasts that its funding ratio may fall to just 60 percent in a few years.
Weber says that Prop. D has no effect on near-term obligations, since it only applies to new hires. Furthermore, he warns that SFERS has calculated an economic recovery into its assumptions, and it is far from certain that a broad recovery is at hand. A less robust recovery than that forecast by SFERS would cause the city’s required contribution to the pension fund to spike even higher than the forecast 30 percent, which “could result in very deep cuts in basic city services and possible downgrading of the City’s bond ratings,” Weber wrote in an e-mail.
Moody's Investors Service already has a "negative" outlook on its rating of San Francisco's creditworthiness, which means "we think it greater than a 50-50 chance that within the next two years, we will lower city's rating. It's that simple," explains San Francisco-based senior vice president Eric Hoffmann. Such a change would increase the city's borrowing costs. "Unless something significant changes — the economy, voters approve [new taxes] or the city negotiates greater concessions from labor — which seems unlikely, the rating is likely to be reduced."
City Supervisor Sean Elsbernd, who serves on the seven-person pension board and who initially helped to spearhead Prop. D, says that the truth of the city’s pension situation lies somewhere in between the city’s response, which tends to downplay things, and the civil grand jury’s position, which was perhaps overly alarmist in its use of the word “tsunami.” Elsbernd, who had asked the city for years about Prop. H compliance, says he is now satisfied that the city “has complied generally” with its provisions.
Herrera, however, did write that the Department of Human Resources should “improve its implementation” in requiring police and fire workers to share more of the costs of their increased pensions, and that the process should be made more transparent to the public.
Others who served on the grand jury feel that the city is starting to come to terms with the depth of the pension liability issue.
Abraham Simmons is an assistant U.S. attorney who was a grand juror for two years. He is also running for the Board of Supervisors from the district now represented by Michela Alioto-Pier. Simmons says he was encouraged that the city seemed to indicate in the letter signed by Controller Ben Rosenfield that more active efforts to reduce liabilities are necessary. “Under any reasonable economic scenario employer pension contribution rates are expected to increase significantly,” the letter notes. “City leadership will consider how to manage retirement costs and benefits, and … may make proposals regarding retirement benefits within the current system.”
Ronsenfield’s letter also touches on the notion that what constitutes a fair or unfair pension package is not ultimately up to the city: “It is important to note that the question of what is ‘fair’ … is for the voters to determine.”
City Attorney Herrera notes in his response that the broader financial issues raised in the grand-jury report may be addressed by officials privately. “The Civil Grand Jury touches upon serious policy questions about whether the City needs to take other actions to ensure the long-term viability of its Retirement and Health Systems and protect its General Fund,” Herrera wrote. “We are prepared to provide legal advice to the City policy-makers should they wish to examine such actions. “
Simmons says that he fully expects his support of Prop. B, the controversial pension and benefits initiative promoted by Public Defender Jeff Adachi, to doom Simmons’ bid to join the Board of Supervisors. (Prop. B, which would require greatly increased pension and health care contributions from current city employees, is on the November ballot, but city unions have filed suit in an effort to remove it.) “Something has to happen” to reduce the city’s pension obligations, Simmons said. “We cannot keep on the current path. The city will be bankrupt.” While not perfect, Prop. B “is one thing we can do,” he said.
Left somewhat forgotten amid all this debate are the actual pensioners, for whom all this hubbub is likely quite distressing. Newsom is pained by what he sees as a widespread misconception that hordes of retired government workers — including his father, a retired judge — are raking in six-figure pensions. (Nearly 2,400 city retirees, however, do receive more than $75,000 a year.) He made a plea for his father and retired public servants in general to get “a little respect” from the public.