SAN FRANCISCO — In this city known for its eccentricities, why should retiree benefit reform be any different?
San Francisco politicians, unions, and insiders have formed two feuding groups that plan to battle it out at the polls in November for what appears to be the same goal: to address spiraling pension and retiree health care costs that endanger future city budgets.
The two groups — one made up of union and city leaders and prominent private-equity investor Warren Hellman, and another led by the city’s elected public defender, Jeff Adachi — are working on different ballot measures to try to lower the city’s $6 billion of employee retirement benefit liabilities.
Mayor Edwin Lee has said San Francisco may be on the road to bankruptcy if rising retiree costs are left unchecked. Lee has been working with the Hellman group on reform.
“We are not in bankruptcy yet, but it has to be out there in the five- or 10-year range in the situations that we could lend ourselves to,” Lee said during a video interview with the local Bay Citizen news site in February. “I never would have believed five years ago that Vallejo would have gone under.”
Lee’s office declined repeated requests for an interview to discuss his comments about bankruptcy.
Earlier this month, Adachi filed language for his second attempt at a ballot measure to rein in the employee pension and retiree health care costs. He filed three draft versions of the measure with the city’s election department. He needs to get 45,000 signatures to qualify one for the ballot.
One version addresses only pension costs, while the other two handle both pensions and retiree health care costs in different forms. All would require current employees to share more of the costs.
Adachi was behind a failed ballot measure in November that would have required city workers to contribute more to pension and retiree medical benefit costs. His first attempt drew ire from some union and city leaders. That led to the formation of the Hellman-led group united in opposition to Adachi’s Proposition B, which after the election evolved into a competing pension-reform coalition.
“He is too divisive and too antagonistic to organized labor to be a productive member of this coalition,” Nathan Ballard, a Democratic Party strategist and spokesman for the Hellman group, said of Adachi, who did not return calls for comment.
Hellman’s group has been meeting for months to hammer out an initiative to put on the ballot.
Ballard said the group would release a “comprehensive retirement reform package” that could include raising current employee contributions.
Because the meetings have been held out of the public spotlight, no one outside Hellman’s group knows what will be contained in the proposal.
Once released, likely by May, the proposal will be submitted to the Board of Supervisors, which can vote to put it on the ballot. Lee also has the power to put a measure on the ballot.
But there is a chance that neither faction’s effort will be enough to keep the rising costs from seriously impacting the city’s long-term budget.
Joe Nation, a Stanford University professor and former California state assemblyman, said in a recent report on San Francisco’s pension and retiree health care costs that neither approach is likely to generate the investment returns needed to meet obligations.
“Even under the best scenario possible, they are in real trouble,” Nation said, “And frankly, San Francisco is in better shape than a lot of pension systems out there, which gives you a sense of how bad this is across California.”
Sequoia Capital partner Michael Moritz, who supported Adachi’s reform measure, commissioned Nation to conduct the study.
Nation argued in a report last year that California’s retirement systems and governments use overly optimistic discount rates when calculating pension liabilities.
According to a report by actuarial consultant Cheiron that was commissioned by the city and released earlier this year, San Francisco’s unfunded pension actuarial liability for the $13 billion employee retirement system was $1.57 billion on July 1, 2010, up from $493 million one year earlier.
California’s fourth-largest city is also dealing with $2.6 billion to $4 billion of unfunded actuarial retiree health care costs, also known as other post-employment benefit, or OPEB, liabilities, according to Moody’s Investors Service. Combined, the city’s total actuarial retirement benefit liabilities may be as high as $6 billion.
On a market-value basis, the total unfunded liability reaches more than $9 billion, according to Nation. Assuming what he says is a more realistic, long-term investment return of 6.2%, the aggregate unfunded liability on a market basis increases to $11.4 billion, his report said.
Between fiscal 2000 and the current fiscal year, the city’s total pension costs nearly tripled, to $357 million from $125 million, Nation says. Over the same period, retiree health care costs rose by more than 500%, to $156 million from $23 million.
As a result, the city’s pension contributions have increased 35%, or $100 million, to $378 million so far in fiscal 2011, according to the city controller’s office. They are expected to rise another 23%, or $90 million, to $467 million in fiscal 2012 under existing labor contracts and staffing levels.
About 60% of pension costs are supported by the general fund and the rest are backed by enterprise funds. The city is facing a $360 million budget shortfall as it prepares its budget for fiscal 2012, which begins July 1.
Citing that budget gap, Moody’s in November downgraded San Francisco’s credit rating to Aa2 from Aa1. Standard & Poor’s rates the city AA with a stable outlook. Fitch Ratings also rates it AA, but with a negative outlook.
Moody’s analyst Dari Barzel said in the report that the city ended fiscal 2009 with a balance sheet that was weaker than at any time in the previous 10 years and extremely weak by comparison with other similarly rated local governments.
Barzel said fiscal 2010 and 2011’s budgets both relied heavily on one-time solutions, including draws on reserves.
