In fall 1911, President William Howard Taft visited San Francisco to celebrate preparations for the World’s Fair. Impressed with The City’s remarkable reincarnation after the Great Earthquake, he toasted us as “the city that knows how.” Somewhere along the way, however, San Francisco became better known for its free spirit, progressive politics and often-crazy antics.
So how wonderful it would be if San Francisco could lead the way on such an unlikely national issue as pension reform. I believe this is a city that knows how, and I believe we will accomplish real pension reform this year.
For months, I’ve met with representatives from public employee unions, elected officials, actuaries, benefits experts and business leaders to take a hard look at The City’s pension fund and identify areas needing reform. The process has taught me much and helped explode a number of myths about San Francisco and our public employee pension problems.
Myth 1: Liberal SF is a fiscal disaster
While residents’ interactions with everything from public transit to parking control might incite irritation, San Francisco is a well-run city fiscally. Our pension fund’s health is better than most cities and we’re weathering the worldwide financial meltdown better than most of California. Our problems are solvable. We might have a social worker’s heart, but at least we have a banker’s head.
Myth 2: We don’t need pension reform
The City’s pension fund covers its liabilities three ways: money contributed by active employees, money contributed by city government and money earned by its investments.
When the fund’s investments suffer from the kind of financial crisis we’re experiencing, The City under the current model is forced to pay a larger share from its general operating budget to make up the difference. Even though the pension fund might not be needed for years, elected officials have a responsibility to keep it solvent, whether through cuts to services or raising taxes, or some combination.
Regardless of whether I believe in tax increases — and I do in some cases and on some people — taxes are extremely hard to pass in the current environment. City employees will have to pay more for their retirement and health benefits if they want to keep them.
Myth 3: City pensions are an immediate crisis
On the other hand, the notion that The City’s pension fund is in immediate meltdown is simply not true. Public pension funds invest huge sums of money over very long periods of time in order to be able to deliver a steady income stream to retirees.
Without reform, however, The City eventually will have to spend so much from its general operating budget that huge numbers of city employees will have to be laid off and entire classes of city services cut to cover the difference. Not addressing the problem now would be irresponsible.
Myth 4: Solutions are black and white
The real challenge in all this is determining through negotiations how to share equitably the cost for the current and future liabilities of the pension fund and the 53,000 active and retired city employees it serves. This isn’t just about making employees pay more.
The financial models used to calculate and forecast the current and future value of the pension fund are impenetrably complex. And even economists and other financial experts working on the problem can reasonably disagree on how to interpret the data.
One model supported by public employees would extend the period of time over which investment gains and losses are calculated, “smoothing” the impact of the current economic crisis and easing the financial pain for both The City and its workers. Fiscal conservatives, however, are concerned that relying to heavily on smoothing will hurt San Francisco’s bond rating, which would have its own deleterious effect on the budget.
To the unions, I would say I support some smoothing, but you can’t solve all your problems by averaging gains and losses over a longer time period. At some point, both sides simply have to pay more into the system to sustain the same benefits. To fiscal conservatives, I’d ask how the bond-rating agencies would respond if we told them we lost long-term pension reform fighting over changes worth just $25 million to $50 million in a $14 billion fund.
Maybe I should stick to organizing bluegrass festivals — at least everybody applauds.
Myth 5: One side or the other must be evil
Working over several months with leaders of many of The City’s public employee unions, I’ve found them all to be intelligent, engaged, well-informed and even reasonable. All care passionately about protecting the people they represent, but they also are realistic about the current state of the economy.
On the other side, there’s Public Defender Jeff Adachi, whose blunt and unilateral attempts to reform the pension system have made him a bogeyman to the public employee unions. And yet, it would be disingenuous to suggest pension reform would be close to happening without the fight he’s put up. I also believe that, if real pension reform makes the ballot, Adachi will drop his current measure and clear the way for a consensus campaign.
If that happens, we’ll have earned back our reputation as a city that knows how.
Warren Hellman, a co-founder of private equity firm Hellman & Friedman, is spearheading a working group to reform The City’s pension system.