Archive for July, 2009

SF pensions: Once a model, now cause for alarm

July 23, 2009

The San Francisco Employees Retirement System, whose voter approval of benefits has been copied by San Diego and Orange counties, faces big rate hikes and accusations of pension padding.

A hard-hitting grand jury report, titled “Pensions Beyond Our Ability to Pay,” warns that pension and retiree health obligations may require “severe cuts in essential services” to residents and businesses.

Requiring that pension benefits be approved by voters, rather than in negotiations between elected officials and labor unions, has given San Francisco unusually low pension costs and helped win good management awards.

San Francisco was the acknowledged model when ballot measures imposing requirements that voters approve pension benefit increases were approved in San Diego County in 2006 and in Orange County last fall. (See Calpensions 27 Feb 09: “San Francisco pensions: conservative trendsetter”)

But after an eight-month investigation, the San Francisco Civil Grand Jury issued a report last week saying that the city’s annual pension contributions are expected to soar from $178 million last fiscal year to $520 million in 2011-12.

The grand jury said public officials and unions negotiated “extraordinary” retirement benefits, an apparent conflict of interest because “everyone involved” is a member of the pension system.

And voters were not a safeguard.

“Unfortunately, the San Francisco electorate is as guilty as the politicians for approving measures that push out obligations to pay retirement and health benefits into future years,” said the report.

The grand jury said the “staggering” pension and retiree health care costs are “like having a secondary police and fire department — one active member and one retired member.”

Because of retroactive salary and annual inflation adjustments, said the report, 60 percent of police and 55 percent of firefighters who have retired since 1998 now receive annual pension payments that exceed their highest salary on the job.

“Nearly 20 percent of retired safety officers are earning a pension over $100,000,” said the report.

The grand jury said advocates of increased benefits have routinely argued that generous pensions make up for government salaries that are lower than pay for comparable work in the private sector.

But a recent survey by the city’s Human Resources department found “that in nearly all job classifications the city pays more in wages and salaries than the other governmental agencies and more than most private-sector employers,” said the report.

San Francisco voters approved a measure in 1975 that prevents overtime pay from being used in determining pension amounts, which is said to be a common way to boost or “spike” payments.

The grand jury said pension spiking “may be institutionalized and ongoing” among police and firefighters through another means — salary increases shortly before retirement.

“Approximately 25 percent of safety personnel that retired in the last 10 years received an increase of 10 percent or greater in their last year prior to retirement,” said the report.

The grand jury estimated that the “spiking” cost the city and members of the retirement system $132 million during the period. About half of the city’s annual pension payments go to persons who retired during the last decade.

“When retiring employees play the ‘spiking game,’ they rob the SFERS members’ pension fund of the expected lifetime investment income on their contributions,” said the report. “Spiking is ‘something-for-nothing’ abuse of the system.”

Now a potential problem, said the grand jury report, is an aging workforce in which 40 percent of the employees are currently eligible for retirement and another 15 percent will be eligible in the next five years.

“A dramatic increase in the retirement rate for some unforeseen circumstance will present an incredible risk to the city in terms of funding and cash flow,” said the report. “In the past month, the controller stated to the jury that the rising pension cost is a serious concern to the financial health of the city.”

Missing from the alarming grand jury report is something often included when one government agency issues a critical report of another agency — a response from the target of the criticism.

A high court justice in New York famously observed that grand juries can be persuaded to “indict a ham sandwich.” The San Francisco Employees Retirement System is expected to respond to the grand jury report in September.

Meanwhile, the San Francisco Chronicle reported that Mayor Gavin Newsom’s office is “very concerned” and plans to convene “a group of experts to advise him on meaningful pension reform and develop a strategy.”

Supervisor Sean Elsbernd (San Francisco is a unique consolidated city and county) said the grand jury grossly overstates the city’s risk, the Chronicle reported. He said there could be short-term problems, but the long-term picture is far more positive.

One thing driving up contribution rates is that the San Francisco retirement system, like most pension funds, suffered major investment losses during the stock market crash last fall.

San Francisco also is one of the few government agencies in California that has begun setting aside money to pay future retiree health obligations, estimated to be $4 billion.

A governor’s commission said last year that state and local governments have an unfunded retiree health obligation of at least $118 billion over the next 30 years. The commission recommended that money be set aside to begin paying for the debt.

Measure B approved by San Francisco voters in June of last year requires new employees to contribute 2 percent of their salary to a new retiree health care fund. The agency they work for will contribute 1 percent.

Another change for new employees could result from a grand jury recommendation: A task force to evaluate switching all new employees to a “defined contribution” retirement plan.

Instead of a guaranteed monthly pension check under the current “defined benefit” plan, the new hires would have a 401(k)-style individual investment plan that can rise and fall with the stock market.

“By adopting a defined contribution plan, the mayor, board of supervisors and San Francisco Employees Retirement System can do more to restore credibility to the public pension plans than any other action they can take,” said the grand jury report.

A 401(k) plan allows employers to avoid crippling pension debt and shift risk to employees. But critics say the 401(k) was only intended to be a supplement, allows individuals to mismanage investments, and takes years to recover after a market crash.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Posted 23 Jul 09

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