Opportunity for Pension Reform

San Francisco’s public pension system is in dire need of reform, according to both city insiders and economic observers. The ongoing recession has caused the city’s once robust pension plan to become seriously underfunded. San Francisco simply cannot afford to ignore the pension crisis any longer.

According to recent estimates from the City Controller, San Francisco will need $375 million for retiree pay this fiscal year – $20 million more than expected and $100 million more than last year. Next year, the city will need $439 million. By 2014, the city will be paying $532 million to fund the pensions of its employees.

The crisis is even worse when it comes to the city’s health care obligations. The Controller estimates the city’s unfunded liability at $4.4 billion for retiree health benefits. And unlike the pension system, health care costs are funded almost entirely from annual revenues, on a “pay as you go” basis.

If we do not make needed reforms soon, these enormous financial liabilities will impact everyone. With more money going to pensions and health benefits every year, San Francisco will have less to spend on public health, public safety, economic development and other services important to business and residents. Difficult decisions must be made quickly or San Francisco is destined to follow the path of states and municipalities across the country that are cutting vital services because of the exploding costs of unfunded benefits.

Fixing our pension system will be difficult, and requires input and discussions with all stakeholders at the table. The most important requirement is that any changes to the pension system must be beneficial in the long term – not just a quick fix for this year and next. The system needs more flexibility that allows for changes in contributions tied to pension fund investment performance. One change that needs to be considered is asking employees to pay a higher contribution when the taxpayers’ contribution increases. This sacrifice will be great for some employees, but could be necessary to stabilize the city’s pension costs and help minimize layoffs and pay reductions in future years.

Charter reform will also be necessary. Currently, the City Charter requires that retirees receive a cost-of-living increase in years when the pension investment fund outperforms estimated goals. As a result, the city will pay $20 million more than expected this year due to last year’s better-than-expected stock market rally, even while the plan itself remains hundreds of millions of dollars underfunded. This Charter section should be amended to ensure that such cost-of-living adjustments happen only when the fund is 100 percent funded.

For new employees, the city should consider a defined contribution plan instead of a defined benefit plan. Today’s retirees are guaranteed a set monthly benefit, regardless of the economy or the city’s fiscal health. Moving to a defined contribution plan would enable the city to continue to contribute to employee pensions, while more fairly spreading the risk of market fluctuations and economic conditions.

Fortunately, there appears to be a window of opportunity for pension reform. Both Mayor Lee and the Board of Supervisors say pension reform is a priority. Labor groups are actively talking with city leaders about the issue. Public Defender Jeff Adachi, who is considering another pension reform ballot measure, appears open to engaging stakeholders in the process. The Chamber is also engaged in the discussion, working with the City Controller, Supervisors David Chiu and Sean Elsbernd, financier Warren Hellman and others to propose possible solutions that have worked successfully elsewhere.

San Francisco finally has the political will to address the funding challenge that threatens the future of city services. Now is the time to act on pension and benefits reform.