The Billion-Dollar Bet: Which Pension Reform Measure Will Pass and Survive Legal Challenge

Illustration by Charlie Powell

Until recently, pension reform was largely the obsession of a mafia of nerds. These economists, politicos, journalists, and others brandished alarming financial forecasts and horrifying charts, solemnly prophesizing the sky would fall.

And, lo, it has. Dire predictions have grown ever more so, and dire realities have commenced. Thirty states have slashed pension benefits for new employees; 11 have done so for current workers.

Here in San Francisco, though, voters last year heavily rejected Proposition B, in retrospect a modest alteration to employees' pension and health care plans. As a direct result, the city's credit rating was downgraded. This year, San Francisco funneled $423 million to its pension plan — a $100 million spike from the prior year. By 2014, the city may be bleeding in the realm of $700 million to fund a virtual second government of pensioners. These aren't good times — they're bad times. But they're good times for those who foresaw bad times. They're good times for Jeff Adachi.

“Did I make it on time?” the public defender asks rhetorically as he strides into the Department of Elections on a recent Friday. Adachi, the author of Prop. B and this year's follow-up, is the man pension reform built. And, after signing a few papers and taking an oath — he was, after all, on time — he's also a candidate for mayor. A scrum of camera- and notebook-toting members of the media are here, because he told them to meet him here. The blinding TV lights illuminate the shadowy corridors of City Hall as Adachi speaks about politics and pensions in slow, easy-to-follow sound bites.

Pension politics, however, is not an easy subject to follow. Adachi's 11th-hour entry into the mayor's race further muddies an already complicated battle between a pair of esoteric measures on November's ballot: the “mayor's plan” or “city plan,” meticulously kneaded into existence by city labor and management and near-universally endorsed by the people in this city called upon to endorse things — and Adachi's blunter and less labor-friendly rival pension proposal. Wading through the politics and sussing out the differences in the competing measures would be a commitment for voters even if they weren't, in effect, deciding a proxy battle between two mayoral candidates: Adachi and Mayor Ed Lee. Both were late entrants to the fray. And both can, if they wish, harness contributions to their ballot measures to indirectly advance their mayoral ambitions (unlike contributions to candidates, there's no limit on how much an individual donor can pour into a ballot race).

Apart from the mayoral drama, and no matter what the forest-destroying piles of forthcoming political mailers claim, the crux of both plans is the same: Current workers must contribute more toward their pensions so the city can contribute less, preventing scores of millions of dollars a year from being sucked away from running the city and poured into pensions. But based upon decades of case law, this is a tenuous proposition. So just how the competing measures go about inducing workers to pay up is vital — a billion-dollar plan won't save a dime if a judge tosses it.

The city plan proposes an intricate pas des deux with legal precedents, hoping to simultaneously evade litigation while buttressing itself against attacks. Adachi's plan offers no such subtleties. It gives short shrift to established legal sentiments that you can't simply demand higher contribution rates from workers — and simply demands higher contribution rates from workers. Old precedents, Adachi notes, are old. “We need to look at what's happening around the country and what the California Supreme Court will do now,” he says. “This is an issue that needs to be litigated.”

Whether San Francisco and other cities can wrest more from the current workforce is “your million-dollar question,” says University of Minnesota law professor and pension expert Amy Monahan. “In California, it's a multibillion-dollar question.” The measures' backers, to varying degrees, are gambling. Each is making a billion-dollar bet that they can sidestep or smash legal challenges, alleviate San Francisco's crushing pension obligations — and maybe, just maybe, reap the political benefits.

Counterintuitively, Adachi claims he's been quietly negotiating with labor even into late August in hopes of striking a pension compromise. Regardless, city voters are in for a gamble as well. Barring a political miracle, they'll choose one plan or the other — or, burying their heads deep in the sand, reject both. Faced with dueling pension proposals that both promise near-certain litigation — and the even likelier specter of depleted city services and free-falling bond ratings by maintaining the status quo — voters may recall a famed fictional San Franciscan's bitter query: Do I feel lucky?

The city pension plan, crafted by cavalcades of wonks, bean counters, and labor officials over several months and run through the legal wringer by a platoon of lawyers from the City Attorney's office, is nearly 300 pages long. Near-identical, pages-long legal proscriptions and references to various subsets of the city charter are restated, recapitulated, and repeated ad nauseam. It is impenetrable to a degree that rivals Finnegans Wake. Adachi's plan, meanwhile, weighs in at a dozen pages. It could fit in your back pocket — a necessity for a measure toted by paid signature-gatherers.

Not surprisingly, considering its bulk, the city plan focuses on many more facets of city policy than Adachi's. Among them:

It will do away with an only-in-San Francisco treat in which employees who leave after five years but before they're due a significant pension receive back all of the money they paid into the retirement system — plus interest — as well as a 100 percent match from the city.

It will compel existing employees to finally begin contributing a small percentage of their salaries to a fund offsetting their future health care costs. Tens of millions of dollars will be amassed in a decade's time to address a multibillion-dollar problem. It's not much — but it may appease the folks who set the city's bond rating.


Finally, it will alter the composition of the Health Services Board. The little-known but crucial body determines the richness of San Francisco's health plans. Four of the seven members are elected by workers to represent workers — a situation city officials liken to a wage board being staffed by employees. Should voters opt for the city plan, the 4-3 split would be tilted back into the city's favor, as it was prior to 2004. Hypothetically, the savings could be huge — but Adachi, who was portrayed as joyously driving single mothers to the poorhouse by stripping their benefits in lethally effective 2010 campaign ads, has steered clear of health-related matters altogether this year.

Both plans, meanwhile, would alter the astoundingly generous manner in which the city doles out cost-of-living adjustments (COLAs). As it stands, the retirement system automatically pays out a supplemental COLA — on top of the regular one — if it beats its 7.75 percent investment return goal. This is mandated regardless of whether the plan is fully funded and even if the system is reeling from prodigious losses — as was the case last year, when retirees were showered with $170 million in supplemental COLAs.

Of course, if the economy tanks and the city repeatedly misses the 7.75 percent return rate, altering the COLA formula won't save money in the short-term. Quite simply, if the city doesn't make its investment goal, it isn't mandated to pay out supplemental COLAs (though poor investment returns would be a mammoth problem of its own). Tabulating the plans' 10-year savings, however, the controller figures San Francisco will hit its investment mark enough that both measures would save the city around $300 million.

Other than those near-matching COLA numbers, however, 88 percent or more of either measure's estimated savings come via higher employee contribution rates. In a pair of 10-year projections — one rosy, one dour — the controller calculates the city would contribute a whopping $5 billion or $7.2 billion to pensions in the next decade if neither measure is adopted. The city plan, however, would yank $575 million or $860 million out of workers' pockets instead of city coffers. Under the same two fiscal models, Adachi's plan would result in $875 million or $1.3 billion in additional employee payments.

The question of whether San Francisco can get its current workforce to kick in more toward pensions isn't just important — it's all-important. And, through the decades, California judges have often come back with an unsettling answer: You can't.

The California Supreme Court's view on pension plans reads like it was devised by Isaac Newton: For every action, there is an equal and opposite reaction. And for every tweak of a pension plan that results in a current worker's disadvantage, there must be a “comparable, offsetting advantage.” That public sector workers can reasonably expect the employee pension rates they paid on day one to hold throughout a lengthy career is a deeply established state precedent. As is the notion that upping employee contributions without upping payouts constitutes a “disadvantage.”

San Francisco has long treated active employees' pension contribution rates — enshrined in the city charter — as “vested rights” that cannot be hiked without offering something in return. When last year SEIU members agreed to pay more toward pensions, for example, the pot was necessarily sweetened with sizable raises.

Swapping raises for higher pension contributions doesn't save money — in fact, it may even lose the city money. Creating a benefit that doesn't actually provide benefits, then, is tricky. It harks to a Monty Python bit in which a man is sold an insurance policy that “states quite clearly that no claim you make will be paid.” Yet the creators of the city plan contend they've created a benefit that will still save the city a bundle — an “advantage” that isn't advantageous. And they've even branded it with a title befitting a 1950s gameshow: “The Fairness Float.”

Here's how it works: Contributions to pension plans hail from three sources — employees, the employer, and investment returns. Employee contributions are, as noted above, hewn into the rock of the city charter; most workers give 7.5 percent of their paychecks. City payments, however, are not fixed and are tied to investment returns. Massive losses at the outset of the Great Recession led the city's contribution to explode from 5 percent of payroll in 2008 to 18.1 percent today (actuarial projections don't foresee it going lower before 2030). Under the Fairness Float, however, workers' contributions would no longer be static. As the city is forced to pay more, so will workers, on a sliding scale based on their salaries. But, if the city's contribution drops below 11 percent of payroll, employees will begin paying less than the base of 7.5 percent. This, the city plan's backers argue, provides the necessary “commensurate benefit.”

Adachi's plan has no niceties of this sort. It raises police and firefighters' contributions from 7.5 percent to 10 percent right off the top. It then proffers a more aggressive sliding scale — it only goes up, demands more from city workers, and much more of the city's six-figure earners. He claims his plan also has a commensurate benefit: the continued fiscal viability of the pension system and solvency of San Francisco.

This is a rather apocalyptic argument, and a gift workers will likely appreciate less than socks on Christmas Day. It is not unprecedented, however. Courts have specifically found that dinging workers for higher contributions is permissible if it ensures the solvency of the system. Yet there is a rich history of cities and states attempting to use their lousy finances to justify modifying workers' vested rights — and failing. If Adachi's plan took up this challenge, it would ostensibly have to pass the nigh-unbeatable court test that it's “the least drastic” solution to San Francisco's problem.

So, unlike the city plan, which was engineered to tap dance around existing precedents, Adachi's proposal really is more of a battering ram meant to go through them. “We're pushing the envelope,” says Supervisor Sean Elsbernd, one of the heavy lifters behind the city plan. “Jeff is blowing it up.”


The seminal decisions the state Supreme Court made in the 1950s and '70s have little relevance today, Adachi maintains. With the court system itself crippled in the budget process this year, a number of government voices feel this is an opportune time for cities to press that pensions are bleeding them dry — strike while the iron is broke, in other words. If this is your mindset, California's mountain of case law doesn't amount to a hill of beans. “I wouldn't put too much stock in any of those cases,” says Drexel University law professor and pension authority Norman Stein. “The law changes. You have a very different Supreme Court than you had in California in 1978. … Right now, the law is probably in flux.”

That a judge will be the ultimate arbiter of either measure seems all but certain. And though the city's plan was crafted in concert with labor leaders, it is not immune from legal challenges. It takes only one disgruntled person to sue — and the Fairness Float will disgruntle more than one person. Aforementioned projections establish that for the foreseeable future, workers would only pay more and never less. Even employees in early stages of their careers would never derive tangible benefits from this “commensurate benefit.” Case law has established that, in determining if disadvantages to workers are truly offset, courts must focus on the particular employees who are disadvantaged — and whether they, as individuals, will gain from the potential pension plan changes. A benefit that doesn't provide benefits may be a hard sell. Yet locating litigants and lawyers willing to take on not only the city but the entire labor establishment may be a hard sell as well.

Voters are left with an intriguing — and not entirely enviable — decision. The city plan would admittedly save less than Adachi's. But it does so in a conventionally legally defensible manner. It also establishes bonhomie with labor — not a trifling matter with a number of contracts due to be negotiated in the near future, and the ever-present specter of litigation. Adachi's plan, meanwhile, would save the city more — and could serve as the legal bombshell to immolate the state's vested-rights doctrine. But it might blow up in the city's face — both plans were crafted to generate savings in the short-term, which neither will do if it's tied up in court or invalidated. Years-long legal battles would cost the city a fortune — but that expenditure will be dwarfed by the pension dollars the city bleeds while the measures meant to avoid just such a situation are litigated.

The city and its residents are on the cusp of a high-risk, high-reward gamble. Do you feel lucky? Well — do you?

Asked whether it was more important if his pension measure pass or he win the mayoral race, Adachi quickly answers, “Both.” It's a fitting reply for a man who is both a lawyer and a politician, who rarely says more than he means to say, and who remains an enigma to his fellow elected officials, labor representatives, power brokers, and bureaucrats comprising the “city family” — which has essentially disowned him. But Adachi's leap into the mayoral fray was painted as anything but enigmatic by his political opponents. This, they said, was proof that the public defender always meant to leverage his 18-month pension crusade into a springboard for personal gain at the behest of billionaire Michael Moritz and other well-heeled backers.

“The pieces now fall into place,” Elsbernd says. “In the end, what Jeff is really all about is Jeff.”

While contributions to candidates are capped at $500 a pop in San Francisco — and no individual may give more than $1,500 total — donations toward ballot measures are unlimited. With a billionaire or two in his corner, Adachi can use his pension measure to generate serious money and name recognition. Of course, he isn't the only mayoral candidate pushing a pension plan and capable of tapping wealthy backers to generate piles of soft money. So is Mayor Ed Lee.

Earlier this year, Jim Stearns — the consultant who eviscerated Adachi's Prop. B in 2010 — was bounced from representing the mayor's pension plan. The decree was that no consultant affiliated with a mayoral candidate could handle one of the city's ballot measures, and Stearns is working for state Sen. Leland Yee. Lee, of course, subsequently declared his own candidacy for mayor.

With Stearns out of the picture, the path is now clear for Lee and his colleagues, if they so choose, to push Lee's candidacy via “the mayor's plan” — and do it on the dimes of labor, Warren Hellman, and other generous, unrestricted benefactors.

It warrants mentioning that, while “the mayor's pension plan” is the commonplace term, Lee was not on the front lines of crafting policy. That fell to his chief of staff Steve Kawa, Elsbernd, labor leaders, and personnel from the Department of Human Resources, Controller, and City Attorney. Like a general observing the battle from a hilltop, Lee was debriefed on progress while underlings led the cavalry charge. “He took a very appropriate role for an executive,” one player in the plan says. A less-enamored observer describes Lee's function as “the affable uncle.”

Shots in the battle between the pension measures have, in fact, already been fired. During negotiations about givebacks from public safety unions last month, Lee and the city handed the police and firefighters a politically pointed gift: They alone would be exempted from contributing at the Adachi plan's steeper rates until 2015. To obtain $31 million in givebacks, the city could be forfeiting up to $61 million in higher police and fire pension contributions — assuming, of course, Adachi's plan passes.

Also in July, Elsbernd introduced an amendment to the city plan, unanimously adopted by his fellow supervisors, that massively elevated San Francisco's pension tension. Elsbernd's move killed the possibility of nonconflicting elements of the rival pension plans — say, the health stipulations of the city's plan and the higher contribution rates of Adachi's — both becoming law if both pass. This, he says, was necessary to eliminate the possibility of an Adachi-led campaign to vote yes on both measures.


“Admittedly, that puts in jeopardy areas of our proposal that aren't included in Jeff's,” Elsbernd continues. But he still chose to “cut the legs out from under a 'yes-yes campaign'” because he and his colleagues believe Adachi's plan to be legally dubious. Should it pass, “we'll end up losing all our pension savings.”

In this race, there will be no silver medal for second. And if either pension measure is successful, but subsequently invalidated by a judge, San Francisco will revert to the status quo — meaning the city will be another year older and hundreds of millions of dollars deeper in debt.

Jeff Adachi's mayoral declaration was a moment not unlike Kurt Cobain's suicide: People were shocked, but not surprised. “If you're the candidate who's driving the No. 1 issue in the city, why wouldn't you run to lead the city?” veteran consultant Jim Ross asks.

Neither the consultant backing the city plan nor Adachi's plan — Duane Baughman and Tad Devine, respectively — opted to speak to SF Weekly. So it remains uncertain what strategies they've devised to push either measure. A number of local political consultants had ideas of how they'd play this chess match, however.

With the majority of local political power swearing fealty to Lee's pension plan, it's his race to lose, says David Latterman, a mayoral consultant for David Chiu and USF lecturer. “The city version is going to be an easier sell,” he says. “Everybody under the sun is endorsing it. It's like one of those school bond measures.” As long as the elfin mayor remains near-universally popular, it figures his pension measure will enjoy trickle-down approval. Should Lee's opponents' barbs stick, however, a change in strategy may be called for.

Last year's Prop. B campaign was plotted by Adachi in collaboration with political naifs. The city's professional consultants — who desired to work in this town again — did not deign to cross labor and take the job. Adachi's analytical mailers, which crammed sheaves of tiny text onto both sides of the paper, were no match for the emotional appeals of the winning side (Single mothers threatened! Minorities threatened! Bad medicine!).

This year, however, Adachi has competent professionals calling the shots. You may or may not see images of the empty swingsets or gaping potholes befitting a broke city — but a successful Adachi campaign will go right for the gut. “Last year, Jeff ran a very rational campaign when politics is a more visceral thing,” Ross says. This time around, “Adachi's is very much the position that his is the real reform measure. … He'll be saying you can't trust [the city plan] because it was written by the people benefiting from it.”

In a winner-take-all scenario, it's not enough to hold up your measure — you've got to knock the other guy's down. Negative campaigns don't work so well here when directed against candidates, but, Ross reminds, “negativity around ballot measures people don't mind.” Adachi's treasurer, Craig Weber, says he's sitting on around $220,000; the city plan, per Elsbernd, has not yet raised any funds. But then the race has hardly started. And with the possibility of big money on both sides, things could get ugly — and fast. “No holds are barred,” Elsbernd says. “We're going to go out there and beat Jeff's” measure.

Neither firm heading these races has a reputation for shyness. Baughman famously sent out campaign fliers in the 2004 District 11 supervisorial race emblazoned with a swastika implying the incumbent, Gerardo Sandoval, was anti-Semitic. A judge ruled the ads violated campaign finance laws, but Sandoval was unsuccessful in his subsequent civil lawsuit and ended up owing Baughman tens of thousands of dollars in legal fees. Both Adachi and Elsbernd agreed that the pending campaign could be “a bloodbath.” But it needn't be unless its backers want it to be. And that's not clear.

Adachi reveals to SF Weekly that, even after declaring for mayor, he has still met with labor leaders — a number of whom confirmed that “back-channel communications” have been ongoing for months. Adachi claims he continues to push for some manner of “safety valve” to increase worker contributions in the event of truly dire times to somehow be included in the mayor's pension plan. If this comes to pass, he says he'll disassociate himself from his own plan. Barring that, Adachi says he hopes to cut a deal to keep the tenor of the pension campaign civil enough that voters don't reject both plans. “There's little to be gained by a huge political fight between the two campaigns,” he says. “I want to see pension reform win. Our plan is better — but I want to have pension reform win in November. If voters decide to not choose either one, that'd just be a disaster for the city.”

No one foresees a clear or easy path to victory for Adachi — in either contest. Still, on a recent foggy morning at a SOMA cafe, Adachi didn't behave like a man facing an uphill battle. He jauntily spoke at a breakneck clip, exuding the energy of a true believer — a term even some who don't admire him or what he's doing still feel compelled to apply. After knocking back a massive mug of hot chocolate, he bolted off to parts unknown to tend to his billion-dollar bet.

Adachi, it would seem, is feeling lucky.

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