Pension Bomb Explodes -- City Deficit to Soar

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And gettin' broker...
Last night, SF Weekly broke the news that the city's pension obligation could balloon based on the outcome of a retirement board meeting this morning.

Well, it has. The city's contribution to its pension plan might jump by $60 million in the next year alone, adding to San Francisco's already gaping budget deficit. And, thanks to Proposition C, "The Mayor's Pension Plan," city workers may be feeling the burn, too.

Last month, the retirement board took its actuary's advice, and lowered its anticipated investment return rate from 7.75 percent to 7.5 percent. This morning, a motion to reconsider that vote failed. As a result, the city will be mandated to greatly augment the "employer contribution" to its pension plan, as its assumed investment returns just shrank.

Mayor Ed Lee told the Examiner that he would have preferred the investment assumption remain at 7.75 percent, as a lower rate would "make things harder for us in budgeting and finding an extra $60 million" for pension contributions. (The city's projected deficit of $263 million also just ruptured).

Lee's assertion makes sense -- until you give it a moment's thought. Yes, it's inconvenient to have to sink far more than anticipated into pension costs. But the alternative is to rely on an overly rosy investment return rate -- and seriously underfund the system if the market tanks or even merely underperforms. Extending Lee's logic, the city could blithely -- and crazily -- assume a 10, 20, or 40 percent return and pay even less into the system. Until it catches up with us.

Supervisor Sean Elsbernd, a member of the retirement board, described today's move as the harbinger of a short-term fiscal burden that would help out the city in the long term.

The $60 million figure is, at this moment, not set in stone. Figures ranging from $30 million to $80 million have floated out of City Hall. By next month's retirement board meeting, the city's hired actuaries will assess the mandated employer contribution to the pension plan based on the downgraded 7.5 percent investment return assumption. The city currently pays around 18 percent of employee payroll into the plan -- upwards of $420 million -- a figure that will surely rise.

If it expands past 20 percent, per the provisions of Prop. C, city employees will be forced to kick an extra 0.5 percent of their paychecks into the pension hole. "I do believe city employees will be paying more than they believed they would in November," notes Elsbernd.

That determination should be made at the retirement board's Feb. 8 meeting -- just in time for Valentine's Day.

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Mrchild
Mrchild

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Wherearethey
Wherearethey

Who were the folks responsible for planning and implementing these diabolical pension plans?  How did something like this get approved and passed on the San Francisco residents, without their knowledge?  Pension plans weren't devised last year or even 10 years ago, they have been in the works for years and for the past 25 years each and every city, county state official have been fully aware that these plans were unsustainable.  Yet, no one did anything to stop this nightmare from rolling to the feet of their grandchildren.

s b
s b

Oh great, another politician relying on fictional investment returns. I thought Ed Lee was a practical guy, but apparently, he's drunk the mythical budget Kool-Aid, too.

cjroses
cjroses

Adachi has been correct since Day One. 

SciFiChica
SciFiChica

Wasn't that a$#hole ADACHI saying this in his campaign.  It must "suck to be right".  

cjroses
cjroses

Joe-

Let's be a little bit more clear:

1) Lee claimed his pension reform plan (Prop C) would save $30 million in the coming fiscal year, when in fact, pension costs will now be rising a net $30 million over already astronomical levels.  Strike one for Lee.

2) By advocating for 7.75%, let's be clear - Lee is pushing to kick the can down the road and hand the time bomb off to his successor just as his predecessors have done.  This also flies in the face of the movement by GASB to force ciities and counties to lower their investment return assumptions because everyone on planet earth knows 7.75% is too aggressive and forces pension funds to make even riskier investments.  I believe you have not covered GASB's recent actions in this area.  The Retirement Board did not come up with this idea independently. I am assuming within the audit of the City's pension fund it must comply with GASB.

3)  "Workers may be feeling the burn too?"  Pardon for being skeptical.  What is the exact math as to the percentage of the $60 million cost increase City employees would be picking up?  This is knowable.  If the employer contribution rate is increasing from 18% to 22% and City employees are picking up .5% as Elsbernd claims (not sure that is correct), then City employees are in fact, picking up very little of the pension costs increase and surprise suprise-taxpayers are forced to pick the tab as the general fund takes a big hit.

What percentage are City taxpayers and City employees picking up of the $60 million??

Keep up the good work but I'm sniffing a few holes here.  It's bizarre that SF media ignores this looming disaster.

Thx

Joe Eskenazi
Joe Eskenazi

cjroses --

These are all good points. But, keep in mind, this was a breaking article and not the end of the matter.

A quick note: The $60 million figure -- and I've heard ranges of $30 million to $80 million -- is, to the best of my understanding, solely employer costs. What the employees will now be mandated to pay is supplemental to that. Since we're not entirely sure what percentage of payroll the city will be stuck paying out, we also don't know how much more will come from employees. But it won't exactly be "very little" -- though it also will be far less than the city's chunk. Here's some rough math:

Let's say the city ends up contributing a shade over 20 percent of payroll (highly likely). Per Prop. C, that would bump most employees' contribution up 0.5 percent from the present rate and top earners up 1 percent. If the city ends up paying 22.51 percent of payroll, that would bump moderate earners (less than $100K) up 1 percent from the present amount, high-earners up 1.5 percent, and safety workers up 1.5 percent. That makes doing the arithmetic difficult. But 0.75 percent of payroll is roughly $15 million, just to toss a number out there.

Finally, how this affects pre-election promises about Prop. C is a sticky question. We're undoubtedly better off because some form of pension reform passed. That being said, Jeff Adachi and his allies did repeatedly claim that 7.75 percent was too rosy of a built-in assumption. Seems hard to argue with him now.

Best,

JE

Pierre
Pierre

Merci for the explanation JE.Next question:  Is Herb Meiberger an enemyof the Public Safety contingent on the Board?They are dying to replace him with DeborahLandis, Police Department controller.

Pierre
Pierre

Why did Sean Elsbernd reverse his vote second time around?Soon will the whole retirement board be Public Safety officers?

Joe Eskenazi
Joe Eskenazi

Pierre --

I didn't go into the actual voting as it is very much a side issue with relation to the matter at hand. But, yes, Elsbernd did today vote to retake the December vote, even though he is in favor of the result of that vote.

He explained to me that this was a "legislative courtesy" to the board members who weren't there, which he'd hope they'd extend to him if he had missed a vote.

And yet, even with Elsbernd's vote, the motion to retake the December vote failed.

Best,

JE

Pierre
Pierre

Joe Driscoll is in the fire department.  I would have thoughthe might vote to delay the problem.Seems like he and others did the responsible thing.Am I missing something?

Haggie
Haggie

In case you didn't understand the political double-speak from Mayor Lee and Supervisor   Elsbernd, I'll translate:

"San Francisco is bankrupt, but we're going to fudge the budget numbers until this becomes someone else's problem."

Joe Eskenazi
Joe Eskenazi

Haggie --

Nice try, but go through and read it again. Supervisor Elsbernd was a strong advocate of adopting the lower investment return rate, which makes this the city's problem now as opposed to later.

Best,

JE

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