San Francisco Civil Grand Jury Report

PENSION TSUNAMI: The Billion-Dollar Bubble

During recent periods of economic prosperity our City officials, along with compassionate voters, created relatively generous pensions for many City employees. With the recent downturn in our economy and loss of millions in value from the City’s pension fund, these rapidly increasing costs threaten to jeopardize the City’s financial future. The Office of the Controller estimates that the funding of pension and retiree health benefit costs for fiscal year 2010 is $413 million, which is expected to rise to $1 billion in 2015, approximately a third of the City’s current General Fund. The expected General Fund contribution, which is approximately 61% of the total pension and retiree health benefits costs, will increase annually by $60 million for the next five years. This shift in resources may drastically impact funding to other basic services, affecting all San Franciscans.

The $100K Club: The typical San Francisco public servant will receive a modest pension after many years of service and the Grand Jury is grateful for their dedication and hard work. However, we note that 24% of retired firefighters, 12% of retired police officers, and 1% of miscellaneous (non-safety) employees receive retirement benefits of over $100,000 a year. The California Pension Reform website designates these as “the $100K Club,” and San Francisco has more than 900 retirees in this category.

Forgotten Proposition H: In 2002, San Francisco voters passed Proposition H, a charter amendment changing the formula for Police and Firefighter retirement benefits and mandating that, should the City’s contribution rate to the pension fund exceed 0%, the City and Safety employees’ representatives should “meet and confer” on a “material pension cost-sharing arrangement.” The City’s contribution rate has exceeded 0% since fiscal 2004-05, yet the Jury found no evidence that the City and Safety employee bargaining agents established such a cost-sharing arrangement. The Jury has recommended that the City Attorney seek a court order requiring the SFERS Board to comply with the City Charter.

The Swap: Since 2002 the City has “picked up” the employees’ 7.5% pension contributions for members of the Service Employee International Union (SEIU) Local 1021 and other smaller collective bargaining units (at least 9,883 employees). In May 2010, the City and SEIU Local 1021 entered into an agreement that employees pay their own 7.5% contributions, and, in return, that the City increase the employees’ base wage by 6% or approximately $60 million, effective July 1, 2010. This “swap” was described as “cost neutral” for budgetary purposes. However, the City’s negotiation team apparently failed to consider that the $60 million swap would significantly impact the City’s future pension obligations.

Pension Spiking and Pyramiding: Pension Spiking is an end-of-career promotion or an excessive raise to increase or “spike” workers’ final pensionable income during the last year of employment, the base period for calculating the pension amount. The Jury found that seventy-one Firefighter retirees received a 10% or more increase in pensionable income in their final year before retirement — approximately 68% of the total number of Firefighters who retired over the past 22 months. There were few instances of spiking among Police or other retirees for that period. The Jury also found instances of pension-pyramiding among some nursing supervisors, for example. These retirees have been allowed to hold two concurrent jobs, resulting in dual pensions. The Jury recommends that the City take steps to curb abuses from pension spiking and pension-pyramiding by limiting the final pensionable income an employee can claim at retirement.

The Civil Grand Jury is empowered by the Constitution of California to investigate the various officers, departments and agencies of the City and County of San Francisco

July 2010