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San Francisco Pension Reform Bills Explained In Plain English

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SAN FRANCISCO PENSION REFORM
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People often complain that most important things in city government happen in secret.

While this is often the case, on a just as regular basis, crucial aspects of how City Hall operates happen right out in the open but are made opaque by their sheer size and mind-numbing complexity. The two pension reform bills San Francisco voters will consider this November are a perfect example. They both offer sweeping visions of how to reorganize a system whose costs are spiraling out of control.

When the financial crisis struck, it hit San Francisco's city coffers especially hard. The declining stock market and resulting job losses shrunk our tax base and decimated the pension fund. In order to keep the retirement benefits promised to its former employees rolling out as scheduled, the city government increased the amount of money it paid into the fund. As San Francisco's deficit spiraled, spending more money on pensions gave officials less resources for other essential services, from paving potholes to ensuring Muni runs on time.

This year alone, San Francisco spent $357 million on employee pensions. Within four years, the cost is expected to top $600 million annually. By then, the city's budget deficit will be approaching a billion dollars. Mayor Ed Lee told the Bay Citizen he believes that, without a major course correction, the city could face bankruptcy within the next decade. If the city were able to make its pension system self-sufficient, much of its projected long-term deficit would disappear.

The question, at least to people who see pension reform as a necessary part of getting the city's finances in order, is which of the two bills is a better fit? Due to a provision in one of the bills, if both pass, the one with the most votes becomes law, while the other is resigned to the scrap heap.

To quote The Highlander, "There can only be one."

Each of the bills has been identified primarily by its highest profile backers. Proposition C is supported by what Lee calls "The City Family": the Mayor, the Board of Supervisors, Senator Dianne Feinstein, House Minority Leader Nancy Pelosi, the San Francisco Chamber of Commerce and the San Francisco Planning and Urban Research Association (SPUR) have all vocally backed the bill.

Proposition D is the signature issue of Public Defender Jeff Adachi, who is also running for mayor against Lee and Supervisors John Avalos and David Chiu, all three of whom are official Prop C sponsors.

Right now, most city workers pay 7.5 percent of the their annual salaries into the city's pension fund and can start withdrawing that money, plus additional matching funds put in by the city, after they retire. Up until last year, a large group of city workers (such as Muni drivers and SEIU members) didn't have to pay that 7.5 percent themselves—it was contributed for them by the city. Even though all city workers now pay their individual contributions, the amount of money the city is required to put in to keep the fund solvent has spiraled.

Both propositions effectively use the same overall strategy to shore up the pension system—requiring city employees to contribute a larger portion of their salaries into the fund.

Under Prop C, newly hired city employees would receive a less generous (read: less expensive) retirement package, while the rate current employees pay will no longer remain fixed at 7.5 percent. Instead, it will rise and fall with the overall health of the fund. In good times, employees pay less, and in bad times, they'll pay more. The highest amount anyone would have to pay is 13.5 percent. That way, say the bill's backers, the pension system won't go into crisis mode whenever the economy tanks, but it also won't be unduly onerous to city workers in the years when when the system is flush with cash, many of whom hadn't budgeted a penny toward their own pensions as recently as a few years ago.

Prop D, on the other hand, contains no such triggers; it creates a tiered system where the amount a city employee kicks in is increased by a given percentage based on how much money they make. Employees earning under $50,000 a year would be exempted from any contribution increases (this is the case with Prop C as well) but those making over $50,000 would be forced to pay more. The more an employee makes, the more they're going to be asked to contribute. The highest rate, for top-level managers making over $200,000 a year, will be a full 16 percent of their salaries.

Prop C similarly splits up how much more each employee has to contribute to their pension, however it only has three income brackets—under $50,000, $50,000-$100,000 and $100,000+. Prop D's nine income brackets are significantly more progressive, breaking more often and topping out at double Prop C's rate.

The pension reform measure voters defeated last year didn't solely focus on retirement plans; it also proposed a hike in the amount of money city workers were expected to contribute towards their own health benefits. "[When it failed], we learned that voters oppose toying with anyone's health benefits," said Prop D Campaign Treasurer Craig Weber, who was also one of the major backers of last year's failed initiative. This time around, Weber's team left heath care out of the picture entirely.

Conversely, the backers of Prop C learned the opposite lesson from last year's defeat. Prop C includes an increase in how much city employees pay towards their health care and changes the composition of the Health Benefit Commission in a way that will make the commission more likely to control costs, something a lot of retired city workers are unhappy about, fearing voices on the commission will become significantly diminished.

Proposition D caps the maximum annual amount employees hired after the beginning of next year can receive on their pensions at $140,000 or 75 percent of pensionable compensation, whichever is lower. Pensionable compensation is the amount used to figure out how much someone's annual pension is worth. Determining exactly what "pensionable compensation" means for each city worker is complicated—there are over a dozen full-time city employees exclusively dedicated to determining what defines pensionable compensation for each worker. It also eliminates the regular "cost of living" increases in pension payouts unless the system is fully funded.

This isn't to imply that the bills don't have a lot of similarities. For example, they both work to end "pension spiking," which is the practice of sharply increasing an employee's pay right before their retirement in order to artificially inflate the value of their pension. Spiking works because the amount of money someone earns on their pension is currently determined by the last year or two of their salary. Both propositions increase that time frame to five years, hopefully making "spiking" something most city managers would be far less likely to tolerate.

Under both propositions, employees hired after either bill goes into effect will pay a slightly lower rate than current employees but will likewise receive fewer benefits.

A report released by the City Controller earlier this year said that, over the next ten years, Prop C would save the city $1.29 billion, whereas Prop D would save the city $1.6 billion.

"Although," said Prop C campaign spokesperson Nathan Ballard, "the savings under Prop D will be zero because it won't survive the inevitable legal challenge."

Ballard argues this is because Prop D illegally takes away the "vested rights" of city workers. Under federal law, it's illegal pass a legislation taking away workers' benefits unless they receive something of value in return. Prop C skirts the law because, if the pension system is fully paid for and the fund reaches a certain rate of return, the amount city employees have to pay into it will drop below current levels.

Weber counters Ballard's argument, saying that Prop D was drafted by an accomplished lawyer, former City Attorney Louise Renee, and is being pushed by another, Adachi—neither of whom are scared about the law being overturned. Weber adds that Prop C is just as likely to be toppled in court as his favored proposition. "Prop C's givebacks aren't realistic," says Weber. "The history of returns on the fund have historically been lower than the percentage required to lower rates below where they are now."

At the end of the day, what's most striking about the propositions is the text of the laws themselves. Prop D is 18 pages long and is written in something approaching English. Prop C, on the other hand, tops out at 280 pages and is written in a language only a lawyer could love; it's packed with an endless litany of amendments, definitions and provisions.

That difference is really representative of the conditions under which each bill was created. Prop D is the result of a small group of insurgents looking to change, wholesale, how San Francisco's pension system works with little concern about who they offend in the process. Prop C, on the other hand, is the result of a broad-based consensus building. Bringing a wide group of powerful stakeholders to the table and crafting something they could all agree on creates inevitable complexity.

Which one, if any, will resonate with voters? We'll find out in November.

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