By Chris Reed.
Earlier this decade — before Gov. Jerry Brown launched his successful 2012 push for state pension reforms in Sacramento — the leaders of Los Angeles and San Francisco executed retirement-benefit reforms that they said would keep the pension tsunami at bay.
In 2011, Mayor Antonio Villaraigosa (pictured) won a hard-fought deal with the Los Angeles police and firefighters unions that targeted “pension spiking” — late-career maneuvering that allowed individuals to push up their final pay and thus their annual pensions. It also reduced the minimum pension available after 20 years of service.
All employee unions also made concessions reducing retirement benefits for newly hired workers that year. And after the 2011 contracts, all new hires had to share in the costs of health care benefits. Taxpayers had previously covered the whole tab.
When Villaraigosa left office in 2013, he labelled the changes as among his most important accomplishments in his eight years on the job and said Los Angeles had achieved “the most far-reaching” pension reforms of any large city in the nation. The achievement is one of the centerpieces of his recently announced campaign for governor in 2018.
San Francisco followed a generally similar course in 2011. At the behest of newly elected Mayor Ed Lee and most supervisors, city voters approved Proposition C.
It eliminated a benefit in which employees who quit their jobs after five years could have all the pension contributions refunded with interest along with a full match from the city treasury. It also changed pension formulas so that new employees would get less generous benefits. It also capped some retiree payments. The campaign for Proposition C told voters the changes would lead to a decline in how much the city had to spend on pension benefits after the fiscal year ending in 2014 and produce $1.3 billion in savings over a decade.
Despite promises to voters, costs keep going up
Now, five years later, the reforms have proven deeply disappointing to budget watchers in both the iconic California cities.
This month, Los Angeles officials concluded after reviewing the final data for the 2015-16 fiscal year that payments for retirement benefits had hit an all-time high — both in the raw amount and as a share of annual revenue. The tab was $1.02 billion, or more than 20 percent of city revenue. That is expected to increase to $1.2 billion annually by decade’s end.
Officials said the main reason was that the positive effects of the new benefits weren’t being felt in a significant way; 19 of 20 police officers, for example, were working under the older, more generous terms.
San Francisco uses a far smaller percentage of its revenue for retirement benefits because it is its own county. County governments spend a much lower percentage of their general fund budgets on employee costs than cities because of the different nature of their responsibilities.
Instead of peaking in 2014, San Francisco pension costs in 2015-16 were $257 million — $42 million higher than expected. The total annual tab is now expected to be $390 million a year by 2019.
What did San Francisco officials blame? As with those in L.A., the slow early gains from changing pension formulas. But they also cited a factor that has actuaries deeply worried: the growing life expectancy of retirees.
With San Francisco’s revenue flooding in because of the tech boom, the pension tab is modest — likely less than 4 percent of the city-county’s budget in coming years. The 2016-17 budget is $9.7 billion.
On per-capita liabilities, S.F. highest of any local government
Yet when it comes to retiree health care, San Francisco has a long-term headache that’s among the worst in the nation — a $4 billion unfunded liability. The city-county has generally had a pay-as-you-go approach for these costs, declining to set aside funds for future bills.
According to a 2014 study by U.S. Common Sense, a fiscal watchdog group founded by Stanford graduates, this policy decision has left San Francisco with by far the highest unfunded liabilities on a per-person basis of any California local government of significant size.
The per-person liability in San Francisco then was $5,357. By comparison, Los Angeles County was $2,686. No large city in the state in 2104 had a liability even 40 percent the size of San Francisco’s.
Facing heavy pressure to add transit improvements, affordable housing, programs for the homeless and police officers, San Francisco supervisors have yet to make any significant gains in prefunding the retiree health benefits.