02/07/2011 08:09 am ET Updated May 25, 2011

Ending Piggybank Politics: Checkbook Balancing in San Francisco

Imagine a major, public company where the executive officers posted phony financial projections, systematically misled shareholders with over-optimistic forecasts, organized compensation committees with no independent members, intimidated suppliers with threats of reprisals, stacked supervisory boards with management cronies and failed to disclose campaign contributions. The SEC would hurl the book. A criminal jury would convict. And Bernie Madoff would quickly have a new circle of cellmates. Yet, somehow or other, this behavior is tolerated in city government, and nowhere is it more evident than in San Francisco, where the political leaders -- in a panic to protect their sinecures and political careers -- recently locked arms to ensure that a modest ballot measure to ensure sound financial management was defeated.

Given the massive spending and "Death panel" style campaign mounted by former Mayor Gavin Newsom and his political benefactors, it's a miracle that San Francisco's quixotic, cobbled-together financial reform campaign almost squeaked to victory last November. Since the election two things have happened. San Francisco's affairs have deteriorated further and Gavin Newsom has artfully dodged the consequences of piggy-bank management by becoming California's lieutenant governor following a campaign whose twenty largest contributors -- organized labor groups -- had enjoyed his mayoral largess.

San Francisco, like most U.S. cities, has two monstrous financial holes. First it cannot afford to pay retirement benefits because irresponsible political promises have outpaced the investment returns of the pension system. This requires the city to fork out $430 million this year and $700 million by 2014 to close the gap. Without this crushing obligation San Francisco's operating budget would actually be in the black and civic services could be maintained. Second the unfunded obligation for health benefits is now almost $4.5 billion. (In plain English this means that politicians have arbitrarily slapped an extra $30,000 mortgage on every San Francisco household). To top it all off the city's retirement system recently granted an additional $170 million of one-time bonus payments to retirees because of "excess" earnings on investments. This is somewhat akin to going on a round-the-world trip binge cruise when you cannot make your credit-card payments.

But what's done is done and now we have to figure out a way to change the tone of civic leadership in San Francisco. Some politicians are having furtive meetings which will allow them to claim they are in favor of the idea -- not the reality -- of reform. There is also the chance that Ed Lee, the interim mayor, who has expressed no desire to seek election and is unbeholden to anyone, can bring about real change. However, the only sure path to a safe future for San Franciscans is for them -- via a series of new ballot initiatives now being prepared -- to alter the moral compass of city government.

Here's what needs to happen. First, San Franciscans need to understand that their political leaders have pushed their city over the abyss. Once this occurs it will be clear to them that it's time to hit the reset button and city employees who retire prior to the age of 65 should not be entitled to full retirement benefits; pensions should probably be replaced by 401K plans; "spiking" -- the devious way in which salaries are jacked prior to retirement in order to increase pension payouts -- should be banned; overtime pay should not form part of the pension calculation; benefit increases need to be tied to cost of living rather than wage increases; employees need to pay half the costs of their benefit plans; retirees should not be allowed back on the civic payroll while collecting pension benefits; labor negotiations should be conducted by independent third parties and union contracts -- which suck up most of the tax payments made by ordinary citizens -- should require voter approval.

The electorate of San Francisco may have been bamboozled once. But the political establishment will have a tougher time staging an encore performance. History shows that there is no more potent engine for reform than the passion of voters who feel betrayed by the politicians they hoped would do the right thing.