Monday, July 19, 2010

"Pension Tsunami" heading our way

From last month's Grand Jury report, "Pension Tsunami: The Billion Dollar Bubble":

The 2008 economic crisis caused a decline in the City’s pension fund of approximately $3 billion or 25% of the fund balance as of June 30, 2009. While employee contributions to the pension fund have remained constant at 7.5% of wages, the City’s contributions rate has increased rapidly. The City’s rate was 0% until 2004, will be 13.56% next year (FY 2010-2011)...The City and County of San Francisco has a current annual pension liability of $287 million for FY 2009-10. A combination of too high estimates on investment returns, and too low annual employee contributions may lead to a billion-dollar pension crisis in San Francisco within five years.

This is the reality the city faces, which makes even the ballot initiative by Public Defender Jeff Adachi not enough to staunch the flow of red ink from the General Fund from unfunded pensions and health care for city workers.

Not surprisingly, Steven Jones at the Bay Guardian sees Adachi's initiative as an effort "to blame the city's fiscal problems on employees, rather than the large financial institutions that don't even pay any kind of business tax to the city." He even provides an extended quotation by Gary Delagnes, president of the city's Police Officers Association, who sounds "a bit like a Guardian editorial writer":

Even more problematic is the rapidly developing notion that public employee pensions serve as the root of all evil, and are almost solely to blame for all of our economic woes...Those of use who long ago made the decision to forgo large salaries in exchange for a life of public service, are now being portrayed as greedy and self-centered, taking unwarranted pensions and benefits after 30 years of service as firefighters, police officers, teachers, and nurses. These are shameful accusations, and utterly without merit.

Of course no one is saying that public employee pensions are "the root of all evil" or are to blame for "all our economic woes." This is the rhetoric we would expect from a union leader when union benefits are questioned. What people are saying is that the present system is not sustainable.

As the Grand Jury explains, however, city cops and firemen are among the greatest beneficiaries of the current pension system: There are now 23,175 retired city workers receiving pensions from the city. Of that total 4,237---18%---are former city cops and firefighters, and the rest---18,938, or 82%---are "miscellaneous," or job descriptions other than cops or firemen. But of the retirees who are getting a pension of more than $75,000 a year, former cops and firemen lead the way with 1,713 (82%), while only 671 (4%) of retirees from all other categories get that much. And the disparity holds true for those receiving pensions of more than $100,000 a year, with 741 (36%) of those lucky old farts being cops/firemen and only 159 (1%) from other job categories. The moral of the story: encourage your kids to be cops and firemen in San Francisco, where they have unions strong enough to get them those benefits.

But the Grand Jury also found that some cops and firemen are gaming the retirement system to puff up their pensions. It's called "pension spiking." The year before they retire some workers "artificially inflate their final compensation just before retiring, in order to increase their pensions," as the 2008-2009 Grand Jury reported ("Pensions: Beyond Our Ability to Pay"). Pension spiking by increasing your overtime has been illegal since 1976, but, with the necessary collaboration of fire and police management, it's now done by simply assigning favored people to a higher rank a year before they retire:

A Lieutenant[in the fire department] was temporarily assigned to a rank of Battalion Chief in his last year of service. As a result, the Lieutenant contributed $1,915 into the pension fund during the final year of employment, which raised his pension amount by $25,500 per year for every year of his retirement. The present value of the incremental pension cost of $25,500 over his life expectancy was estimated to be $296,000 ("Beyond Our Ability to Pay," page 4).

Firefighters are more guilty of this practice than city cops. The Grand Jury looked at 241 recent retirees from the SFPD and the fire department:

A 10% or greater increase a retiree's hourly pensionable rate over the hourly wage rate in any given year was used to identify possible pension spiking. The Jury found few instances of pension spiking among Police retirees for the period. However, 71 Firefighter retirees received a 10% or more increase in pension income in their final year before retirement. This represented approximately 68% of the total number of Firefighters who retired during the period ("Pension Tsunami," page 22).

And then there's the separate issue of paying for employee medical benefits:

All San Francisco employees hired before January 10, 2009, have a right to lifetime retiree health benefits after only five years on the job, a right vested in the City Charter. For about 60,000 employees---on-the-job or retired---the City has a debt obligation...The costs of retiree medical benefits have escalated dramatically with medical inflation over the past 25 years. Benefits that once cost employers a few hundred dollars monthly for a handful of retirees now cost more than $10-12,000 a year for a rapidly-growing legion of Baby Boomer retirees. Granting these benefits before retirees achieve Medicare age, and to dependents and survivors, has escalated the costs even further. Unlike pensions, health benefits for most retirees are not pre-funded but are paid directly out of the City's General Fund. In 2001, the City expended $17 million on retiree health care. By 2011, that amount will have grown to $140 million and is expected to rise unabated ("Pension Tsunami," page 8).

The Grand Jury makes an interesting point about 2002's Proposition H:

Proposition H, passed by San Francisco voters n 2002, was a charter amendment that changed the formula for Police and Firefighter retirement benefits...Proposition H mandated that the City and Safety employees' representatives "meet and confer" on a "material pension cost-sharing arrangement." The Jury found no evidence that the City and the bargaining agents for Safety employees established such a cost-sharing arrangement...The Jury has recommended that the City Attorney seek a court order requiring SFERS[San Francisco Employee Retirement System] to comply with the City Charter ("Pension Tsunami," page 5).

How likely is it that City Attorney Dennis Herrera, who couldn't/wouldn't stand up to Planning and the Board of Supervisors on the Bicycle Plan, is going to defy progressives and the unions on Proposition H?

If Herrera won't do it, maybe Adachi, as the Public Defender, could also go for a court order to enforce Prop. H on behalf of the people---and the taxpayers---of San Francisco.

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