(Bloomberg) — The technology industry has transformed San Francisco with a boom other cities can only envy. But it hasn’t eradicated a problem well known to industrial-era towns: the rising cost of pensions.
The city, where the unemployment rate is just 3.2% and the typical home sells for more than $1 million, is facing a budget shortfall that will reach $848 million in five years. Increases in pension payments and other payroll costs are driving the gap, according to a five-year financial plan, despite a measure voters approved in 2011 that aimed to cut employee-retirement bills.
San Francisco officials, who will present an updated fiscal blueprint this week, say they can adjust spending to balance their books, as well as gird for cuts the federal government may implement. Yet the predicament, even in a city known for stratospheric wealth, underscores the financial challenge for states and cities around the country that have to make good on promises to police officers, teachers and other civil servants.
"I do think there will be another conversation in the not too distant future about what is affordable for the city and our employees for pensions," said Controller Ben Rosenfield. "I don’t think where we are is where we need to end up."
For some cities without San Francisco’s prodigious tax base, however, reforms alone aren’t enough. State and local governments have about $2 trillion less than what they need to cover retirement benefits because of investment losses, inadequate contributions and perks granted in boom times. And in California, over the next few years, there will be "a rash of local agencies unable to meet their pension obligations," said Dane Hutchings, a lobbyist for the League of California Cities.
San Francisco’s net pension liability — a key measure of how much retirement benefits exceed the assets set aside to cover them — more than doubled to $5.5 billion in the year ended in June due to lagging investment returns and an update to assumptions, including longer lifespans for retirees. In addition, the city lost a court case and must now pay some cost of living adjustments to retirees it was trying to limit because of the measure that voters approved.
Contributions to the San Francisco Employees’ Retirement System will increase 36% by 2022, more than three times faster than the city’s revenue, according to the five-year plan. The general-fund budget this year is $4.9 billion.
"These costs will continue to be a significant budgetary challenge for the foreseeable future," wrote analysts in March at S&P Global Ratings, which grades the city at AA+, the second-highest rank.
This is occurring even after voters more than five years ago approved several measures that sought to curb the growth in retirement expenses, such as requiring employee contributions that go higher based on the city’s share and limiting what’s included in pension calculations to hold down the payouts.
The budget shortfalls are also a result of how city officials have decided to spend the money flooding in. With a burgeoning population, San Francisco turned to restoring and expanding programs. Voters weighed in through ballot measures to mandate spending for groups such as seniors and children. The city has hired 4,519 more workers since fiscal 2011, a 17% increase in its payrolls.
It’s plowed more money into repairing its facilities and renovating streets, the controller said. Municipal workers responded to 97% of pothole repair requests in 72 hours last year, according to a city scorecard.
"We’re definitely a service-rich government," Rosenfield said.
Mayor Ed Lee recognizes the need to address the rising retirement costs, said Melissa Whitehouse, budget director.
"It’s very important to him to make sure our fiscal house is in order when he leaves office," she said.