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Long-form Journalism

Let it Bleed (Everything you need to know about San Francisco’s budget problems)

By June 23, 2009June 23rd, 2017No Comments

(This originally appeared in the SF Weekly, co-written with Joe Eskenazi)

“Infinite” is not a word you expect to find in a report on municipal spending. It’s more of a science fiction–type term — Tremble, Earthling, before the infinite might of Galaxor! But there it was, in a recent report on San Francisco’s finances: Spending on the city’s employee retirement system in the past decade had grown at an “infinite” rate.

Naturally, that’s an exaggeration. If you do the math, the city’s retirement costs for employees in the past 10 years actually grew only 66,733 percent.

Still, you might call that a Galaxor-sized number.

In fiscal year 1999-2000, the city spent about $300,000 on its retirement system. In fiscal year 2009-10, it was $200.5 million. Benefits alone — not salaries, just benefits — for current and retired employees this year are budgeted at $993 million. Spending on retirees’ health care and pensions is conservatively projected to triple within five years.

And after that? Infinite.

This is not a conspiracy but, rather, a mathematical certainty. It’s also not a surprise. Every San Francisco government official who can do math has known about this calamity for years.

This isn’t a uniquely San Franciscan problem. Cities and states across the country are facing a pension and health care meltdown. In fact, compared to many retirement systems nationwide, San Francisco’s has been well run. There’s no rampant corruption (cough, cough, Bell), and it wasn’t spectacularly mismanaged (Achoo! San Diego). Many retirement systems would gladly trade places with this city’s.

But that’s because, given the chance, those other cities would actually try to solve the problem. What’s uniquely San Franciscan about our benefits crisis is that we aren’t trying. San Francisco has known about this looming crisis for a decade — and gone out of its way to make things worse.

In fact, on those few occasions when somebody has tried to do something about it, city government has worked with unions to successfully sabotage those efforts. San Francisco may not be in as deep a hole as many cities, but it’s shoveling a lot harder.

This election cycle, the city’s practiced mastery of procrastination and hand-wringing has been brought to the fore by Proposition B, a so-called pension reform measure that would require increases in pension and health care contributions from the city’s workforce. Its author, Public Defender Jeff Adachi, admits that it doesn’t come close to solving the fiscal nightmare. But even this baby step has been subjected to a coordinated assault. Unions have assembled a million-dollar war chest against it; the Democratic County Central Committee voted 29-0 to tell people to vote against it; every single elected official (besides Adachi) has gone on record opposing it — and Mayor Gavin Newsom has said publicly that, if it passes, he expects to find a way around it.

After all, the city has a history of cynically sidestepping this kind of reform. No matter what the voters say.

Want to see the complete list of San Francisco employees whose pensions are over $75,000 (all 2,384 of them!)?: Click on the link below to view and download the list.image

Highest Pensions in S.F. Government (.PDF file)

San Francisco is named for St. Francis, the patron saint of animals and the environment. Its budget, however, is the domain of St. Jude, the patron saint of lost causes. Close to a billion dollars — and counting — is now sucked out of the general fund every year to fund workers’ benefits. The city’s other programs and responsibilities are being martyred.

This year, the city is contributing $324 million from the general fund to its pension plan — more than it spends on the Recreation and Parks Department ($127 million) or the fire department ($289 million). These contributions aren’t negotiable: San Francisco is charter- and contractually mandated to make them. As they rise toward infinity and beyond, money is simply siphoned away from all the other obligations of city government. “Cuts in the city budget are real,” says Peg Stevenson, the director of performance at the City Controller’s office. As a result of San Francisco’s rapidly escalating pension payments, she says, “people got laid off, grants to community organizations ceased. There isn’t anybody who works with money in the city who isn’t aware of the scope of this.”

Not surprisingly, fiscally conservative Supervisor Sean Elsbernd agrees. More surprisingly, so does liberal Supervisor John Avalos, a former union organizer. “We’ve been going off a cliff year after year; nothing is getting fixed structurally,” Avalos says. “What we’re gonna have to do is cut the hell out of services and look at revenue options.”

Says Elsbernd, “Budgets are going to get slashed. Jobs will be cut, services will be cut, fees and taxes have to go up. The core problem with our budget is our benefits. It is the fundamental reason why our budget is so out of whack.”

So we’re already taking away services from people who live here to pay for people who no longer work here.

But that’s not the worst of it. There’s an even bigger financial apocalypse right behind this one. By 2015, the city’s pension contribution will swell to at least half a billion dollars — as a best-case scenario. Meanwhile, the city has a $4 billion unfunded health care liability looming that it hasn’t saved any money for.

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.

Pension increases were approved by voters in 1996, 1998, 2000, 2002, 2004, and 2008. Also in 2000, the city’s five-year vested health care plan was rendered even more generous by Proposition E, capping retirees’ payments and allowing them to get dependents into the plan. “That ballot measure has cost us hundreds of millions of dollars,” Elsbernd says. “Eventually, it’ll cost us billions.”

City residents angry that the rec center pool has people living in it and that the city’s potholes have potholes are themselves partly to blame. In voters’ defense, however, the measures brought to the electorate were crafted and backed by labor and the entire spectrum of San Francisco’s relevant political structure — and publicly condemned almost exclusively by token Republican gadflies who decry any expenditure of public dollars as creeping socialism.

But San Francisco was warned by credible people, too. Former supervisor and state Senator Quentin Kopp wrote in the 1990s that upping pensions would “turn the clock back to an era of runaway expenditures, budgetary gaps, and extraordinary pension plans for a selected few city employees, at the expense of taxpayers and other city employees.” Essentially, that’s what happened. But with the economy booming, austerity was a tough sell.

While the city was ever-increasing the percentage of workers’ final salaries they’d be paid in perpetuity, it was also raising those salaries. Between fiscal 2001-02 and the present, the size of the city’s workforce has remained stable — but its budgeted salary jumped by some $566 million. Pensions are based on final salaries, so the combination of augmenting both salaries and pensions is akin to receiving a raise followed by a bonus based on your salary — with a cherry on top. For life.

City voters also approved changing final salaries from the average of workers’ last three years to their salary during their last year on the job. For most employees, this was simply a small financial benefit. But for those who received fat promotions in their final years, it was a personal gold mine. According to a recent Civil Grand Jury report, 68 percent of firefighters in the past several years received a raise of 10 percent or more in their final year on the job. The Board of Supervisors’ response to reports of institutionalized pension-spiking has been to pass resolutions forbidding pension-spiking, without defining what it is or admitting it ever occurs.

This law isn’t just toothless — it doesn’t even know what it’s supposed to bite. Addressing the supes at a recent hearing, Deputy Fire Chief Monica Fields flatly told the Board of Supervisors, “Any increases on final pensionable compensation are legitimate … increases in final pensionable income do not occur for purposes of increasing employees’ pension compensation.” End of discussion. And that was good enough for the board.

This pattern of behavior makes no sense if you assume that the purpose of San Francisco city government is to run San Francisco. But it makes perfect sense if you think of San Francisco as a vending machine for salary and benefits.

It’s not a scheme, but it is a system. All the people responsible for making decisions about San Francisco’s pensions are themselves receiving a city pension — so there are no truly independent actors.

The unions whose members gain from increased benefits are direct contributors to politicians tasked with making decisions about union members’ benefits. The last eight measures augmenting pensions or health care were placed on the ballot by the Board of Supervisors — by an aggregate 79-4 vote.

The city’s Health Services Board, which decides what medical plans San Francisco uses and how they’re implemented, has seven members — a majority of whom are elected by city employees to represent city employees. Every step of the retirement process is controlled by people who have a vested interest in it — literally. Not only is the fox guarding the henhouse, the fox has opened up a KFC franchise.

In theory, politicians are supposed to act as a check on ballooning retirement costs — but in San Francisco, unions and politicians are like conjoined twins. That’s why, on those rare occasions when someone does actually propose solutions to our retirement crisis, politicians and unions sabotage them together.

Take Proposition H, which voters enacted in 2002. The measure, which upped maximum police and fire pensions from 75 percent to 90 percent, was sold with the pledge that, should the city ever have to contribute to its pension plan again, public safety workers would “meet and confer” with the city and “cover all or part of the costs” of the vastly augmented new pensions. The public handily approved the measure with the understanding that it could do limited fiscal harm. Even the controller indicated that the retirement system’s “large surplus” rendered the notion of the city paying cash to support the changes far-fetched.

D’oh. The city’s pension holiday ended abruptly in 2004 — and a recent Civil Grand Jury report claims the city failed to enforce Prop. H, paying hundreds of millions of dollars that ought to have been picked up by public safety workers.

City officials claim they did nothing wrong. In 2003 — a year before the city had to contribute to the pension system — public safety employees agreed to pay some of their pension costs in order to stave off a budget shortfall. The city now claims this concession also satisfied the Prop. H cost-sharing requirement — which wasn’t triggered until a year later. One pot of money was used to satisfy two wholly separate obligations in different years. The cops and firefighters’ contribution was double-booked.

Voters, it seems, don’t read the fine print before heading to the ballot booth. The City Attorney does — and his office pointed out that the Prop. H pledge of “cost-sharing” does not necessitate a “dollar-for-dollar” correlation, meaning any contribution from police and firefighters could theoretically satisfy the law. The language of the law allowed the public safety unions to enjoy a risk-free reward. Taxpayers are picking up costs incurred by Prop. H although they were assured they wouldn’t have to.

But the most cynical manipulation of a real effort to address the city’s nightmarish finances came via Prop. B of 2008. That measure finally curtailed the city’s ruinous five-year vested health care policy. City employees hired after January 2009 must now work 20 years to enjoy lifetime health care. In the long run, this will save the city billions. Yet in the sausage factory of San Francisco legislation, the proposition also included hefty pension and Cost-of-Living Adjustment increases for city employees — not just for the future employees who would be subject to more modest health care stipulations, but the current workforce, already enjoying the city’s generous health provisions.

The effects of this switcheroo were staggering. While the proposition will ostensibly save San Francisco a bundle in the far future — when city employees from the Justin Bieber generation retire — in the near-term, it will cost the city billions. A 2008 actuarial report of the San Francisco Employee Retirement System revealed that the Cost-of-Living Adjustments alone increased the city’s pension obligation by $750 million. In order to close a billion-dollar loophole, San Francisco saw fit to toss billions into a new loophole of its own creation.

It’s astounding — but it shouldn’t be. In San Francisco, when labor asks to change a twenty, it always gets back three fives and a ten.

A funny thing happens when you confront San Francisco officials with these budget-destroying numbers and history of abuse. They don’t offer a solution: Instead they point out, uniformly, that our system is presently doing better than a lot of systems in California.

They’re right. San Francisco’s retirement system is almost certainly the best in California. We can keep telling ourselves this, even after they come to repossess the doorknobs.

The problem isn’t how bad things are now, though they’re lousy. The problem is how bad things will be in just a few years. The universal excuse that we’re better off than Detroit is not a solution — it’s like the captain of the Titanic pointing out that the Lusitania sank faster.

But this assumes that elected officials want a solution. No evidence suggests they do. Vanquishing Prop. B, Adachi’s benefits reform measure, is the rare cause that has united Mayor Newsom and Supervisor Chris Daly, along with every other elected official, and platoons of campaign staff paid with union money — and none of them has presented an alternative for even beginning to address the city’s problems. Instead, they have a message: Won’t somebody think of the children?

At a recent No on B rally, organizers said Adachi’s real goal was to harm city employees’ kids, and that he’d cleverly disguised a measure to do so as “pension reform.” It’s true that Prop. B will increase health care costs, especially for city employees with dependents. The measure’s critics repeatedly cite that a single mom would be forced to bleed an extra $5,600 yearly, should Prop. B pass. That’s accurate — but it applies to less than 1 percent of the city’s workforce, who are on the costliest plan the city offers, and likely have the option of switching to less expensive plans. Even with new costs demanded by Prop. B, a city worker could insure herself plus a dependent for $249 a month through Kaiser, or $473 with Blue Cross. That’s not astoundingly cheap, but it’s significantly better than most plans in the private sector.

And isn’t that the way it’s supposed to be? Prop. B opponents are quick to point out that a strong benefits package is what attracts people to civil service in the first place. Government work can’t compete with private sector on salary.

That was true when everyone liked Ike. But today’s city employees significantly outearn most of San Francisco’s private sector workers. According to the Bureau of Labor Statistics, the average private sector employee working in San Francisco earns $73,133. The average city employee now draws $91,500 — with fringe benefits valued at $38,000.

Okay, but that giant public sector salary comes by averaging Gavin Newsom ($247,825) with Larry the airport janitor ($56,454), right? Yes, but it’s still representative. According to the fiscal 2009-10 payroll, 62 percent of San Francisco employees took home more than $75,000.

Their pensions can be even better. According to Civil Grand Jury analyses, 55 percent of firefighters and 60 percent of cops who retired between 1998 and 2008 now earn pensions higher than their final salaries. Thanks to Cost-of-Living Adjustments and other postretirement sweeteners, some retirees have been bumped into a higher tax bracket than when they were working.

In total, some 900 retirees earn yearly pensions of $100,000 or more, and nearly 2,400 receive $75,000. Payouts for these top earners exceeded $234 million last year (all told, 22,200 retirees cashed $744 million). Former Police Chief Heather Fong is the city’s No. 1 pensioner at $265,558 a year — and she’s only 54. So most public sector employees are doing pretty well for themselves, and some are doing spectacularly well — and on average, they’re all doing significantly better than private sector workers.

Prop. B won’t change that. It also won’t solve the problem of pension-spiking. Prop. B won’t solve the benefits-driven budget crisis, either. What it will do is shift 14 percent of the forthcoming massive benefits burden to workers, leaving the city with 86 percent of the anticipated load, starting in fiscal year 2013. That’s $744 million still on the city’s tab, per the Controller’s office.

“It’s not that city workers shouldn’t have health care; of course they should have health care,” Adachi says. “But, for God’s sake, it’s not something that shouldn’t be subject to the realities of the economic recession we’re facing.”

That’s still too much for the powers that be to countenance — and, even if approved, Prop. B faces an uphill battle to be implemented. Unions have promised to take it to court, and even if their lawsuit fails, it’s all but certain to keep the city from putting the measure into effect for years to come — by which time San Francisco’s benefit costs will require city actuaries to buy calculators with more digits on them.

Supervisors could always put another measure on the ballot to undermine Prop. B — and keep doing that every year until the voters roll over.

But perhaps the most insidious example of how the city is willing to sabotage pension reform is revealed by commentary from Newsom. Should voters approve Prop. B, the mayor told the editorial board of The Bay Citizen, the city would be forced to offer raises to its employees to make up for their increased benefits costs, deepening the city’s pension chasm. Of course, his ploy would be a direct violation of the stated will of the people. To protect city workers from having to pay for retirement costs, whether you like it or not, is a statement of priorities. For city government, it seems, democracy is less important than preserving payouts.

When it comes to addressing the city’s runaway benefits costs, elected officials are of two minds. Some don’t know, and others go out of their way not to know.

At a recent committee meeting, Supervisor Sophie Maxwell asked the Controller’s office if the dire financial picture pointed out in a 2010 Civil Grand Jury report was right. It seemed so bad — could it possibly be true?

“This is not news,” Peg Stevenson told her. “You all have been aware of this. … Those things are true, and you have all been working on them.”

Maxwell acknowledged this. Then the supervisors went on to disagree with most of the findings they’d admitted they knew were true.

Much in the same way people in the city haven’t prepared adequately for an earthquake everybody knows is coming, San Francisco is going out of its way to sandbag serious efforts to address a financial disaster.

Both labor-friendly supervisors and labor leaders insist there is a solution for this problem. That solution is for labor-friendly supervisors and labor leaders to meet and devise a solution.

“We need to involve all the stakeholders,” Supervisor David Campos says. “It can’t be one supervisor or one elected official, be it the public defender or anyone else, making a top-down move.” Adds San Francisco Labor Council executive director Tim Paulson, “Public employee unions have been at the table every single time to deal with anything to save city services.”

Unions and politicians sitting around a table, talking about contracts? Sounds great. Except, isn’t that what got San Francisco in trouble in the first place?

John Avalos doesn’t foresee a pleasant chat. “We’re going to have to say no to labor,” he says. “There’s going to have to be cuts in the workforce, the largest part of our budget. We have no choice but to come up with these concessions.”

That’s not the conversation labor wants to have. Both Paulson and Bob Muscat, executive director of Engineers’ Local 21, claimed actuarial projections of massive pension contributions are unrealistic “worst-case scenarios.” This is factually untrue, but Muscat went one better. He claimed that the independently prepared actuarial predictions — undisputed by any city agency and long used to set contributions to the city’s Employee Retirement System — are bunk. “Some people honestly don’t believe any of those costs,” he says. “I know people who’ve spent half their life in the retirement system who disagree.”

So, in essence, a city that has bent over backwards for decades to accommodate labor, and is vigorously defending it against this year’s Prop. B, is now using “bad” actuarial data to force union concessions. It’s doing this by contributing hundreds of millions more to their pension plans than it would otherwise have to.

Well, okay then.

San Francisco does have some long-term approaches that could help. Very long-term. In 2009, voters passed Prop. D, which mandates that the city significantly fund its retirement account during years when investment returns are good enough that it could take one of those pension holidays. It’s a great idea — and if it were in place 20 years ago, the city would now be on solid fiscal footing. Unfortunately, it will probably be decades before the balance sheet is healthy enough that Prop. D will be triggered.

At the city’s Health Service System, director Catherine Dodd has an ambitious plan to reduce San Francisco’s health care costs by keeping employees healthy and fit. The city is providing Weight Watchers classes, exercise opportunities, and healthier food choices — and looking for opportunities to do more. That’s why she has concerns about Prop. B. Making insurance more expensive means employees will use less of it, which can cost the city more in the long run.

Dodd is also trying to use San Francisco’s clout as a major customer to force industry reforms that could save big money down the line. Health care providers now must meet the city’s criteria for effectiveness and follow-through or fork over millions in penalties.

Clever — but, again, these are strategies that could take decades to see real savings. No one knows how to even start chipping away at the health system’s $4 billion unfunded liability.

Other ideas are just too politically unpalatable. Elsbernd says he’d like to see the amount employees pay for their benefits indexed to the amount San Francisco pays — so that when one goes up, both go up. That way, unions would have to pay for every increased benefit they ask for, and would reap rewards if they save the city money.

But even if these programs help, they’ll help only so much. The key to understanding San Francisco’s fiscal future is this: For decades, when San Francisco had money to save, it was too busy spending it. Instead of preparing for the enormous cost of its workers’ benefits, it paid for popular programs. That’s no longer an option.

San Francisco can either bring its benefits into line, substantially raise taxes and fees to maintain the status quo, or severely cut services and employees. Or it can do all of the above.

San Francisco’s benefits system is protected by the city charter, and is sustainable. The city, as we know it, isn’t.