Pension Bomb: City May Be Facing Additional $100 Million Burden

Categories: Government
The city's situation really sucks...
When your doctor is feeling parts of your body, squints, utters an expletive, and says "well, that's not supposed to be there," it's uncertain what the situation is. But, this much is clear -- it's not good.

And that's how things stand with the city's pension plan. This week, the retirement board upheld a December vote to lower the city's assumed investment return from 7.75 percent to 7.5 percent. When you're counting on lower investment returns, you need to put more money into the plan. The majority of that money will come from city coffers, and be used to pay people to not work instead of fund any number of city programs. So, it's uncertain just how bad of a hit the city's going to take. But it's not good.

The total of $60 million had been bandied about City Hall. But the preliminary figures SF Weekly obtained from the controller's office are both better and worse than those earlier reported. The full impact of lowering the assumed investment return may approach or exceed $100 million (bad). But that's over three years, with the worst of it a bit down the line (good. Sort of).

Here's how it works.

The city is lowering its investment return assumption -- but it's doing it incrementally. This will both soften and backload the burden on the city.

Just how much more everyone figures to be paying will become much clearer on Feb. 8, when the city's actuaries present calculations taking into account the reduced investment return assumption. But working totals from the controller's office peg next year's employer costs at 20.5 percent of payroll -- a bump of only around 0.2 percent more than previously anticipated due to this week's actions.

Joe Eskenazi
Jeff Adachi notes that much of Prop. C's purported savings has already vanished
The following year's costs will jump to around 25.3 percent of payroll -- a 1 percent rise over what it would have been with a higher investment return assumption. Finally, in 2014, we figure to be paying 26.9 percent of payroll -- 2.1 percent higher than the city figured in December.

Since 1 percent of payroll is, very roughly, equivalent to $30 million, this year's additional burden is around $6 million; next year's is roughly $30 million, and the year after that will clock in at $63 million. All told, that's around $100 million extra the city needs to pay in the near term after lowering the assumed investment return rate from 7.75 percent to 7.5 percent.

Some -- but far, far from all -- of this additional money will for the first time be picked up by city workers, thanks to Prop. C's "Fairness Float." The city currently pays 18.1 percent of payroll toward pensions -- and when Prop. C becomes law in June, workers will begin contributing 2 to 3 percent more of their paychecks toward that total, on top of the 7.5 percent to 9 percent they already do.

Workers will contribute 0.5 percent more when the city contribution exceeds 20 percent. And they'll kick in 0.5 to 1 percent more as city payments pass 22.5 percent, 25 percent, and so on. So, very roughly, when the city's obligation reaches 25 percent -- around $750 million -- workers will mitigate that blow with a contribution of between 3.5 and 4.5 percent (in the vicinity of $105 million to $135 million).

Public Defender Jeff Adachi publicly stated that 7.75 percent was too rosy an investment return to count on while pushing his Proposition D. This week he refrained from saying "I told you so," but did note that "This all but wipes out the savings Prop. C would have created."

Ben Rosenfield, the city's controller, is inclined to agree. "The savings from Prop. C are going to be more than the effect of this actuarial change," he says. "But the actuarial change is going to eat away a substantial portion of those savings."

Just how much of those would-be savings are going to be lost is something that will grow clearer next month. Right now, we're left with the befuddling medical analogy we used to start this story. Whatever it is -- it's not good.

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What is needed is dramatic pension benefit rollbacks. The fact that the projected rate of return assumption can be lowered by a mere quarter percent, from 7.75% to 7.50%, yet trigger a $100 million bill, makes this obvious. Last year CalPERS barely earned a 1.0% return. We live in an era of debt reduction, i.e., the debt-fueled era of unsustainably rapid economic growth is over.

What if the projected rate of return goes down to 6.0% or 5.0%? Why on earth wouldn't it? Then what?

It is time to require public sector employees to pay via payroll withholding at least 50% of their pension fund contribution. And it is time to roll pension benefits back to the levels they were in the 1990's.

Kris Hunt
Kris Hunt

The point is that this earnings change is needed to reflect reality. A earnings estimate that is too "rosy" pushes the pension cost down the road, but it will still have to be paid!   

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