SAN FRANCISCO — Pension liabilities have tripled from a year ago due to investment losses, siphoning scarce funds from San Francisco at a time when elected officials are already facing a $360 million budget shortfall.
The new forecast was contained in a report Cheiron prepared for the city this month. The actuarial consultant projects that unfunded actuarial pension liabilities this fiscal year will reach $1.57 billion for the $13 billion employee retirement system, due mainly to losses on investments. That compares with $493 million for fiscal 2010, which ended June 30.
Due to the jump in unfunded liabilities, San Francisco’s contributions have increased by around $100 million to $378 million so far in fiscal 2011, according to Leo Levenson, director of the budget and analysis division in the city’s controller’s office. They are expected to rise another $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, according to Levenson.
He indicated that city officials and labor leaders are discussing how to tackle the major shortfalls taking place.
“Most pension design changes would be very good for long-term stability of the program but would not create any short-term major savings,” Levenson said. Anything to have significant impact would have to be an actual change for active employees, such as what they contribute.”
The retirement system’s average annual return based on the market value of assets, rather than the actuarial value that smooth the cost over time, was 2.85% over the last decade. That compares with an anticipated return of 8%, according to the report.
“Because assets are smoothed and the investment losses from 2008 to 2009 have not been fully recognized yet, the contribution rate is expected to increase for the next three years assuming investment returns are 7.75% per year,” according to the Cheiron report, which was dated Jan. 4.
New Mayor Edwin Lee has called on each department to reduce their share of the general fund budget by 10%, Levenson said. That target includes the increased costs of employees.
Moody’s Investors Service recently downgraded San Francisco’s rating to Aa1 from Aa2 with a stable outlook because of the budget problems. Standard & Poor’s rates the city AA with a stable outlook. Fitch Ratings also rates it AA but with a negative outlook.
“The city ended fiscal 2009 with a balance sheet that was weaker than at any time in the prior 10 years and extremely weak by comparison with other similarly rated local government,” Moody’s analyst Dari Barzel said in the November report. “Its fiscal 2010 and 2011 budgets both relied heavily on one-time solutions, including draws on reserves.”
Levenson said the city’s rainy-day fund is at $30 million, which Moody’s called “extraordinarily thin.” San Francisco is authorized to use half of that fund in the coming budget.
California’s fourth-largest city is also dealing with $2.6 billion to $4 billion of unfunded other post-employment benefit actuarial liabilities, according to Moody’s.
The city has shown strong control of its budget and has a moderate debt burden that is conservatively structured, according to Barzel.
The analyst said the city’s pensions are relatively well-funded, but rising contributions will pose a challenge if revenues remain constrained.
San Francisco is not the only municipality dealing with rising pension costs.
“The investment returns are not what they once were and it is putting more pressure on municipal budgets from a standpoint of having to increase contributions,” said John Hallacy, municipal bond analyst and managing director at Bank of America Merrill Lynch.
“The challenge is that a lot of baby boomers are starting to retire and there is not as much time as there used to be to build up assets.”