This November, San Franciscans will have the opportunity to address The City’s pension crisis. In the past year, the crisis has deepened, with pension costs rising by $100 million, contributing to nearly half San Francisco’s deficit.
These costs will continue to drain funding for essential services and increase fines and fees paid by residents. With pension costs projected to increase by $400 million in five years, we can’t afford to keep kicking the can down the road.
San Franciscans have a choice between two proposals: the San Francisco Pension Reform Act, which will be placed on the ballot by voters, and another crafted by city employee labor groups. Both measures claim to solve the pension problem, but in very different ways.
According to the city controller, the Pension Reform Act would result in savings of $90 million to $144 million a year — more than any other plan. This is because it relies on a common-sense approach: When taxpayers’ costs of funding pension benefits rise, city employees will be required to contribute more. This would reduce the burden on taxpayers and help protect funding for basic services.
The proposal also ensures that employees who make more will pay a higher contribution rate than those who earn less. By providing for a progressive, graduated pension contribution rate, lower-paid employees would be protected from cost increases.
While labor groups claim their proposal will provide similar savings, there is a critical difference as to how those savings are achieved. Labor’s proposal relies on an accounting method known as “pension smoothing,” which allows fund losses to be spread over 10 years. This is like losing $5,000 in Las Vegas, but telling your spouse you only lost $500 because you are spreading your losses over 10 years. In 2005, then-California Attorney General Bill Lockyer issued a legal opinion saying changing The City’s charter to allow this practice is illegal. That fatal flaw means the entire labor proposal would likely be thrown out by a judge.
Labor’s proposal only increases employee contributions by 2 to 4 percent, while the Pension Reform Act increases employees’ contributions in proportion to increases in taxpayers’ costs. The Pension Reform Act is designed to address unpredictable costs in the future, while labor’s method will require a new fix when pension costs rise again in a few years.
Labor’s proposal also fails to distinguish between higher- and lower-paid employees, instead charging a flat rate for all workers. For example, a police officer who earns $200,000 a year would pay the same rate as an employee who makes $55,000 a year. By contrast, the Pension Reform Act would require public safety workers, who receive more-generous benefits and can retire earlier, to pay more toward their pensions.
According to the city controller, the pension costs of public safety workers are two to three times higher than other employees. In fact, although public safety employees only contribute 17 percent of the pension system’s funds, their pension benefits account for 36 percent of the withdrawals from the system.
Also, the Pension Reform Act will stop the practice of “spiking,” which is the artificial increase of an employee’s salary in the last years of service to receive a bigger pension. By using a five-year average to determine the amount of the pension, “spiking” is eliminated. Labor’s proposal uses a three-year formula, which would result in much less savings.
Mayor Ed Lee is working on a consensus pension reform proposal that is still in its formative stages and must be approved by the Board of Supervisors. In the event that no consensus proposal is reached, or the proposal is watered down to the point where it fails to solve the problem — as has occurred in the past — the taxpayers of San Francisco will be on the hook for higher pension costs with no relief in sight.
When it comes to pension reform, we should only do it once and do it right. We must choose the approach that actually solves the pension crisis and does so in a way that is fair and consistent with San Francisco’s progressive values.
Jeff Adachi is The City’s public defender. Craig Weber is a former member of the grand jury that issued two reports on pension reform.