Will the City's Pension Proposal Really Solve the Pension Crisis?

BY COREY MARSHALL, GOOD GOVERNMENT POLICY DIRECTOR
June 14, 2011

In the coming weeks, the SF Board of Supervisors Rules Committee will be hearing the "consensus" proposal for pension reform, which Mayor Ed Lee and a coalition of the city’s labor unions released May 24. The board has until July to make amendments and vote on the proposal.

The proposal, which projects savings of $1 billion over ten years, would:

  • Require that city employees pay more for their benefits, rather than reducing benefits. Employee contributions to the pension fund would increase as the city’s contributions increase. Employees earning less than $50,000 per year would be exempted.   
  • Increase the retirement ages for new employees from 62 to 65 for most employees and from 55 to 58 for public safety employees.
  • For new employees, calculate pensions based on the average of the last three years of service (instead of the last two years, as is the current practice).
  • Amend the composition of the Health Services Board to give the city more influence over employee health benefits and costs.
  • Require existing employees to contribute to the Retiree Health Care Trust fund starting in 2016.

We congratulate the mayor on navigating an extremely difficult political process to achieve some level of consensus. But a number of questions still remain. It’s no secret that the city’s pension spending has exploded in recent years, but less well known is how it will increase in the coming years. The city controller projects that the pension burden will grow by an average of approximately $100 million per year in the next five years to somewhere between $717 million and $820 million per year by fiscal year 2015–16 — a near doubling of annual costs in just 5 years. Further, these projections show the city’s annual pension payments reaching nearly $1 billion somewhere around fiscal year 2020–21. To address this, Mayor Lee indicated that negotiations must save at least $300 million to $400 million per year to save the city from near-certain bankruptcy.

The City’s pension costs are projected to rise to at least $700 million per year within 5 years.

Preliminary estimates indicate that maximum savings generated will be approximately $60 million in the first year (2012–13) and total just over $1 billion over 10 years — well short of the Mayor’s original estimates, and well short of the projected increase in pension costs. Estimates of savings from the Adachi proposal total more than $100 million in the first year and $1.6 billion over 10 years.

What does all of this mean? Simply: neither of the solutions currently on the table actually solve the pension problem, but they certainly move things in the right direction. At best, they address 10 to 20 percent of the total pension burden at its projected peak and continue to divert significant funding from important public programs. And these savings will only be realized if one (or both) of these proposals is approved by voters in November. Unfortunately, all signs point toward two competing measures on the ballot — whether the second is driven by Adachi or by members of his coalition.

The Board of Supervisors Rules Committee meets the first and third Thursday of each month at 1:30 p.m. Follow their discussion of the consensus proposal here.