By Kate Conger
By Brian Rinker
By Rachel Swan
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By Chris Roberts
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Unless the notion of spending your golden years in a cardboard box sounds appealing, you'd be better off not funding your retirement plan in the same manner as San Francisco and countless other cities. Pension contributions come from three sources — employees, the city, and the city's investments. During boom years, investment income allows the city to go on a "pension holiday," paying nothing in, as San Francisco did from 1998 to 2004. But when the market tanks, it creates a crisis that reverberates for years. The city not only has to contribute heftily to the pension system, it must also pay down the investment fund's losses. Remarkably, right when a sour economy hits and the city has no money, it's required to start paying vastly more of it.
This city is already spending more than one dollar of every seven toward workers' health care and pensions. By 2013, the city projects it'll shell out $1.37 billion on benefits. To put that number in perspective, it currently spends $1.36 billion to run General Hospital, the fire department, and the police department.
And yet this is not the doomsday scenario. These grim projections assume that the city's retirement fund nets a respectable return. At a September hearing, Supervisor Carmen Chu repeatedly referred to a 4.5 percent return as the "worst-case scenario." Clearly, she has worked in government too long. When you invest, the "worst case" is that you lose money, not that you have 4.5 percent more of it than when you started. If the city loses money on its investments — and $3.5 billion evaporated from the retirement fund at the onset of the Great Recession — then the supervisors will be facing a truly worst-case scenario.
But what if the city does better than 4.5 percent? San Francisco made just shy of a 13 percent return this year. This is what a lot of people are hoping for; the stock market soars, and happy days are here again. Won't that save us? Pension expert Girard Miller says this is the dream of municipalities across California. "There's still this belief that magical revenue will be coming down from the sky," he says. Barring literal pennies from heaven, Miller says, a quick fix will depend on "magical pixie dust from a pension tooth fairy." But even this divine being — and truly divine returns — wouldn't right San Francisco's ship.
The city is still amortizing its losses of years past. Even a 15 percent investment return won't keep the city's pension contribution from leaping to more than half a billion dollars yearly — and fast. The difference between scintillating investment returns and ho-hum ones is the city doling out $652 million or $717 million to the pension plan by 2014, according to independent actuarial reports of the San Francisco Employee Retirement System. Essentially, it's akin to the difference between insulting bitterly disappointed 49ers fans or a roomful of Hells Angels. Either way, you're in for a beating.
But health care is where things are really ugly. San Francisco's overall costs jumped by 147 percent over the past decade, and are expected to continue skyrocketing. That's about how it went in many cities. But not every city had the obscenely generous policy of awarding lifetime health coverage to any worker with a scant five years on the job. That munificence bit San Francisco on the bottom line — and led to the looming $4 billion shortfall no one has figured out how to address. The city's $993 million spent on benefits this year does not include a single dollar toward that $4 billion gap between the projected costs of health care for future retirees and their families, and the money on hand to pay for it.
No city cost is exploding with quite the megatonnage of health care specifically for retirees, which, according to the Department of Human Resources (DHR), has surged 462 percent since the onset of the decade. That's due in part to an expensive — and charter-mandated — "City Plan" PPO and a retiree-dominated Health Services Board. Because of that minuscule five-year health care vestment, San Francisco has a small army of retirees on its books — and a survey by the Controller's office found San Francisco's health benefit spending per retiree is double that of comparable California cities. Worse, a wave of retirees is anticipated. Fully 20 percent of all current employees are eligible to retire tomorrow — and 27 percent of cops and firefighters can hang it up now if they choose, according to the DHR. Since a retired worker can cost San Francisco nearly 98 percent as much as a working one, goodbye parties are just the beginning of the city's pending expenses.
Obviously the city has to do something. That, at least, was the conclusion of Moody's Investor Services in a recent assessment of the city's finances. "Our Aa1 rating on the city's [general obligation] bonds assumes that the city will prepare a long-term solution to this funding challenge," its assessment reads. Any sober person would assume San Francisco would try to solve this problem. Because we're sane. Right?
If only. Instead, we're doing our very best to prove Moody's assumption wrong.
The road to San Francisco's fiscal hell is paved by a union employee earning top dollar and a 75 percent pension at age 60 — regardless of his or her intentions.