Proposition F - Targeted Early RetirementNovember 1, 2003
What it does
The City’s budget shortfall makes it very likely that employees will be laid off. Union seniority rules require that within each job category, the most recently hired, usually younger, workers will be let go first. Prop. F would encourage older workers in job categories being reduced and who are near retirement to retire early, so that younger (and less costly) workers can be retained.
Prop. F emerges out of the most recent round of labor negotiations. It is the first time the City has won the ability to retain critical senior employees, while encouraging retirement of those in job categories the City wants to shrink.
Why it is on the ballot
In all probability, the City will be facing significant budgetary shortfalls for the next few years. The City’s ability to raise new revenue is limited, so layoffs are very likely. Layoffs generally affect junior (and less costly) employees. However, in many cases, older (and costlier) employees in the same classifications would volunteer to leave the workforce if they had reached their retirement maximums. Each such voluntary retirement saves a younger employee from being laid off involuntarily.
A similar idea was tried in 1991, when the City faced similar budget shortfalls. That Charter amendment, Prop. A, allowed any city “miscellaneous” employee to earn an early retirement credit. In return, the City sought to reduce its future workforce by requiring that at least 500 positions be abolished. SPUR opposed the measure, predicting that there would be a short-term savings but a long term cost to the City. After voters passed Prop. A, a large number of critical employees quickly took early retirement. Prop. A is universally regarded as a disaster because the City had to immediately replace every single employee who retired, and incurred a $100 million obligation, of which $80 million is still owed.
Based on that experience, this year the City insisted that any early retirement program be targeted to jobs the City was already planning to eliminate—on the theory that the City is less likely to refill jobs it has already concluded it can do without.
- Targeted early retirement programs have worked in some private businesses. The targeted nature of this program, while new for government, greatly enhances the chance that it will succeed—i.e. that the positions vacated will not be refilled quickly
- The program may encourage the City to trim its workforce. Practically speaking, it is very difficult for the City to lay off workers, and very few are ever laid off. This program may allow the City to downsize in a way that is more consistent with its values and politics. The City will save an average of $85,000 in salary and benefits for each position removed from the budget. According to the Controller, the City will save money under Prop. F if it cuts a position and does not replace it for at least two years
- The measure contains checks and balances —principally the involvement of the nonpartisan City Controller—to prevent it from being misused
- The program does not bar the City from replacing workers who are permitted to take early retirement. If positions are replaced in less than two years, taxpayers lose
- During the stock market boom of the late 1990s, the City had a large surplus in its retirement trust. As a result, the City was able to avoid contributing the City’s share of retirement costs for a number of years. Unions used the argument that “increased retirement benefits had no cost to the City” to win major retirement increases. Predictably, the stock market went into an inevitable cyclical decline, and it now looks likely that the City will once again have to contribute General Fund money each year to pay for the employer contribution. This means that as more people retire, the City will be liable for the sweetened retirement benefits passed the last few years
If work force reductions are to succeed, the City needs to have the right people leave—something that is taken for granted in the private sector, but is hard to achieve in government. If a person in an indispensable job takes early retirement then his or her position has to be quickly refilled, and the retirement actually costs the City money rather than saving money. Ideally, the City would give retirement incentives to older workers who are about to retire anyway, and to workers in jobs that managers have chosen to eliminate.
How much one receives upon retiring is based on the worker’s age and number of years of City employment. City retirement for most employees is calculated by multiplying their highest annual salary by an age factor for each year of service. Under the Charter, the age factor is 1% at age 50, rising 0.1% a year to a maximum of 2% at age 60. Thus, an employee with 20 years of service receives 20% of his or her highest salary at age 50, 30% at 55, or 40% at age 60. The maximum allowance is 75%. An individual would need to work 37 1/2 years, retiring at age 60, to reach the 75% maximum.
This measure would not change this formula (referred to as “2% at 60”), but would allow employees nearing retirement to receive credit for an additional 3 years of service and 3 years of age. Thus, for example, an employee targeted for early retirement would reach the 2% age factor at age 57, and would be credited with 37 1/2 years of service after serving 34 1/2 years.
Prop. F establishes a mechanism for identifying jobs eligible for early retirement. In a nutshell, the Controller would be required to certify the names of employees eligible for early retirement who are in jobs being cut in the next fiscal year’s budget; that number could not exceed the number of employees slated to be laid off.
Most early retirement measures are for a very limited time. Prop. F is unusual in that it will be available in fiscal years 2003–2004 and 2004–2005, and could be extended an additional two years by a three-fourths vote of the Board of Supervisors. The program also extends retroactively to employees laid off after March 1, 2003.
With much less tax revenue, the City has to tighten its belt. Laying off employees is almost inevitable. If Prop. F works, it will be the first time the City has managed to conduct lay offs in a manner that makes it more efficient. While no one can guarantee that Prop. F will work, it is the right direction for the City to go.
SPUR recommends a "Yes" vote on Proposition F.