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

Wednesday, Aug 31 2011

Page 2 of 4

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."

About The Author

Joe Eskenazi

Joe Eskenazi

Joe Eskenazi was born in San Francisco, raised in the Bay Area, and attended U.C. Berkeley. He never left. "Your humble narrator" was a staff writer and columnist for SF Weekly from 2007 to 2015. He resides in the Excelsior with his wife, 4.3 miles from his birthplace and 5,474 from hers.


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