A recent audit of the San Francisco city pension fund by a Superior Court Grand Jury came to the conclusion that a high-risk model of investments has not worked and has caused unfunded obligations that require annually greater contributions by the city. Inside we detail the seven reported findings, links to the actual report and how the new SF mayor is trying to reform the plan
Recently, the San Francisco Supreme Court convened a grand jury to better understand why the City’s pension fund was underfunded by $2 Billion. Additionally, the grand jury was formed to audit the investment policies and practices of the pension board. In their full report
, one of the seven key findings was “unrealistically high assumed investment return of 7.66% is driven by concern for the mandated member and City contributions, with little regard for prudent management.” The overall conclusion of the report was the “Yale Model” of high-risk investment is causing the city significant losses in its pension fund, requiring significantly higher contributions.
Other Key Findings
The six other findings by the Grand Jury were as follows:
- The system is underfunded by $2 Billion
- The Retirement Board did not complete a “failure analysis” subsequent to funding losses suffered in 2008-2009
- The City must pay increasing contributions to the Fund due to underfunding
- Increases in pension contributions by the City are growing at a faster rate than expenditures on most other City services since 1999
- The Fund can artificially reduce the City’s estimated liabilities by increasing its investment return assumptions for future years
- Low-risk investment policies perform as well or better than high-risk policies
SF Mayor Plans Reforms
In 2010, the city paid $275 million to its pension plan for retired city employees
. The next year, $375 million. If the trend kept going, the city expected it would be paying $532 million by 2014 – a cost jump of more than 93 percent. The pension fund would jump from 4 percent of the city’s budget to eating up 7.8 percent of it. Residents concerns were voiced, so Lee and 2011 mayoral candidate Jeff Adachi sent dueling pension reform programs to the voters in a November 2011 ballot referendum. Lee’s Proposition C plan overwhelmingly passed
, as did his mayoral candidacy that year.
Lee’s plan has one major difference from other pension reforms being implemented around the country. Current employees – which had been paying 7.5 percent – now have to pay more
into the fund during times of economic stress, and less during good economic times. The highest they’ll have to pay is 13.5 percent.
The plan also calls for differing contributions tied to an employee’s salary, with classes of under $50,000, between $50,000 and $100,000 and $100,000-plus. The reform plan
also focuses on increases in the retirement age, the halt of pension-spiking and caps on pension benefits. Aside from just pension reform, it called for new city employees to contribute to their retiree health costs. According to the mayor’s office, the changes immediately generated a savings of almost $40 million in the city’s 2012-13 budget