Monday, March 14, 2011

Pension reform for San Francisco

From Public Defender Jeff Adachi's pension reform website:

We learned a lot from the Prop B campaign. Also, since the original proposition was drafted, the pension and benefits crisis has grown even deeper. Going forward, we are going to be drafting a new measure that will not only address the problems identified with the original Proposition B measure, but also more comprehensively address the growing pension and benefits crisis our city is facing.

As a starting place, the following principles are offered to help guide the discussion.

1. Any real solution must offset the city’s cost to the pension fund and result in immediate savings in order to address the city’s current fiscal crisis.

Proposition B would have resulted in immediate savings of $121 million each year, every year. Any solution proposed must provide similar immediate relief. The only way to achieve this is to increase contributions by existing employees to their pensions. Increasing contributions by future employees has little to no effect on the city’s current fiscal crisis.

Historically, when the city has increased employee contributions, the city has also given its employees a concurrent increase in wages. In most instances, this has served to increase the cost to taxpayers.

For example, in 2010, the Mayor and the Board of Supervisors agreed to give 10,000 city employees a 6% raise in exchange for a 7.5% contribution towards their pensions. This agreement actually exacerbated the city’s pension problems, since the taxpayers are on the hook not only for the 6% raise, but also for a 6% pension increase when the employees who received the raise retire. This “raise” will continue to cost taxpayers hundreds of millions of dollars in the future.

2. Any real solution must increase the existing employees’ share of the health care costs.

Currently, city employees pay nothing for their health care costs, while the City pays 100% of the employees’ health care, and pays 75% of their family’s health care costs. Proposition B would have required city employees to pay anything above 50% of their dependent’s health care, using the lowest cost plan. During the campaign, Prop B opponents claimed that these changes were too drastic. A possible compromise solution would be to require city employees to pay at least 50% of the cost of the dependent’s health care plan they currently use, or to require that city employees earning above a certain income level to pay more for their health care costs.

However, these would not come close to the $80 million in annual savings that Prop B would have realized.

3. Retiree pension and health care costs must be addressed.

While a retiree’s pension is treated as a vested right, their health care costs are not. For retirees, retirees’ health care costs are set by the Charter. A similar provision could require a higher health care contribution by retirees who receive higher-end pensions or choose more expensive health care plans.

4. Police and fire employees should be required to contribute more to their pensions than other city employees.

This is because their pension costs as well as the benefits they receive are much greater. Police and fire employees are able to retire at 55 years of age with 90% of their last year’s income, while other city employees retire at 62 with 75% of their last year’s income. According to CALPERs, the state’s public safety pension fund, police and fire employees live just as long as other public employees, and thus, their pension costs are being borne by other city employees who must contribute equally to the pension fund. 2002’s Proposition H requires the police and fire to enter into a cost-sharing agreement with the city to bear their share of the cost of these enhanced benefits. It should first be determined what the real cost of these benefits are, and a fair amount, such as 50%, should be contributed by police and firefighters to their pensions, over and beyond what they currently pay.

5. For new employees, the city should consider increasing the retirement age, and explore the fiscal impact of combining a defined pension program with a 401K.

While this won’t have any immediate fiscal impact, since new rules relating to retirement benefits cannot be applied to existing employees, it would help ensure that the city does not find itself in the situation it is now in the future. Many states and cities have put forth new retirement plans for new hires which have accomplished this.

6. Pensions should also be capped at a certain amount to avoid obligating taxpayers to pay extravagant pensions

Currently, over 100 public safety officers earn over $247,000 a year, not including benefits. They will each earn an annual pension which is 90% of their last year’s income upon their retirement. One out of every three city employees earns over $100,000 a year, and will receive between 75-90% of their last year’s pay upon retirement.

Pensions were never meant to provide an extravagant income to city employees, even those who are high earners. These pensions should be capped at a reasonable amount, so that employees can still earn good incomes, but not retire with $150,000-$250,000 annual pensions. Also, multipliers which increase pension costs, such as salary bumps for retention and training, should not be included in their pension payouts.

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