Oct. 14 (Bloomberg) -- If anyone fits the profile of a San Francisco Democrat, it’s Jeff Adachi. In 2004, the elected public defender volunteered to officiate at ceremonies for same-sex couples during the city’s short-lived attempt to legalize gay marriage.
This year, though Adachi is running unopposed, he is drawing the scorn of fellow Democrats for embracing a new controversy: He spearheaded a November ballot proposition that would force city workers to pay more of their rising pension and health-care costs.
“How dare you!” Leland Yee, a Democratic state senator from San Francisco, thundered into the microphone as about 100 workers rallied Oct. 5 against the measure in California’s fourth-largest city. “How dare you take it off the backs of city workers!”
As public-pension costs soar -- U.S. taxpayers face as much as $3 trillion in unfunded state retirement liabilities, according to a study by the University of Rochester and Northwestern University -- they’re igniting political fights across the country. In California alone, voters in nine cities and counties will decide next month whether to curb benefits for current or retired police officers, firefighters, librarians and janitors.
Beyond November, the question of government pensions threatens to become a defining policy issue of the coming decade, Bloomberg Businessweek reports in its Oct. 18 issue.
As politicians seek to reduce state and local budgets, civil servants are trying to protect what they consider a social contract with taxpayers whose retirement benefits are often far less generous. State and local governments paid $3.04 per hour toward each employee’s retirement as of 2007, according to U.S. Labor Department data. Private employers paid 92 cents per hour.
More than 80 percent of the nation’s 27 million state and local government workers and retirees are covered by public pensions. The median state pension plan had enough money to pay just 76 percent of its obligations as of Aug. 20, according to data compiled by Bloomberg.
Pension plans covering some public workers in six cities -- Philadelphia, Boston, Chicago, Cincinnati, Jacksonville, Florida, and St. Paul, Minnesota -- will run out of pension money from existing assets by 2020, according to the Rochester and Northwestern study published Oct. 12.
Four of the 77 funds in the study are sponsored by entities separate from the city, Rauh said. These four are the Chicago teachers and transit authority retirement plans, the Chicago area water district’s plan, and the St. Paul school district’s teachers retirement plan, according to Rauh.
“This is something that definitely wasn’t on voters’ minds a decade ago,” said Patrick Murray, director of the Monmouth University Polling Institute in West Long Branch, New Jersey. “But the bills that weren’t paid a decade ago are coming due.”
Unions Slam ‘Deadbeats’
Organized labor is battling back. The Service Employees International Union is dispatching members to town hall meetings and handing out campaign literature that says seven out of 10 retired public employees receive less than $30,000 a year in pension benefits. The American Federation of State, County and Municipal Employees is lashing out at politicians as “deadbeats” for wanting to walk away from promised pensions.
“This is deferred compensation that is owed to workers,” said Steven Kreisberg, director of collective bargaining for the 1.6 million-member AFSCME, based in Washington. “Some of the politicians demagoguing on this issue are losing sight of their moral and legal responsibility.”
The unions’ biggest ally could be the courts. Retirement benefits in most states are protected by constitutional provisions or state common law, so it’s difficult to reduce the size of the payouts to current or retired workers.
Pensioners filed lawsuits this year against Colorado, Minnesota and South Dakota when the three states passed legislation to cut annual cost-of-living increases for retired workers, some of whom aren’t covered by Social Security. If unions win their argument that states must confine pension rollbacks to future hires, it will severely limit any savings.
Unions expect more governments to pursue hybrid plans that incorporate a 401(k)-style account alongside the traditional pension, said AFSCME’s Kreisberg. Many public-sector employees can’t strike and have their benefits set through legislation rather than at the bargaining table, he said.
While unions once counted on Democrats for support, some prominent party nominees such as gubernatorial candidates Jerry Brown in California and Andrew Cuomo in New York are vowing to get tough on pensions.
The fight has turned nasty in California, where Brown’s opponent, Republican Meg Whitman, is proposing to exempt public-safety workers from her proposal to convert state employees to 401(k)-style retirement plans. That prompted a Brown associate, who suspected Whitman of cutting a backroom deal with a police union for an endorsement, to call her a “whore” in a recording posted online Oct. 7 by the Los Angeles Times.
Darrel Ng, a spokesman for Whitman, said her pension-overhaul proposal had been announced five months before she won the endorsement of the Los Angeles Police Protective League and that her plan would do more than Brown’s to curb costs. Brown apologized to Whitman in a televised debate Oct. 12.
Already this year, lawmakers in 16 states increased individual contributions for government employees or cut benefits for new hires. Nine states raised the number of years that new hires must work to earn full retirement, including Missouri and Illinois, which boosted to 67 the age at which they can draw maximum benefits.
California’s new budget, signed by Governor Arnold Schwarzenegger on Oct. 8, requires current state workers to pay more toward their retirement funds and rolls back pension benefits for new hires to pre-1999 levels.
In New Jersey, where first-term Republican Governor Chris Christie has become a YouTube sensation with his campaign to reduce benefits for teachers and other public employees, there is no statewide race this fall. Instead, unions have thrown their money behind the campaign of Democratic State Assemblywoman Linda Greenstein. She is trying next month to unseat Republican Senator Tom Goodwin, whom Christie is backing in the district that includes suburbs of the state capital of Trenton and thousands of state workers.
“I think it’s an indication of the importance of public employee unions in this election,” said Brigid Harrison, a political analyst from Montclair State University.
Representative Darrell Issa, the California Republican who will chair the House oversight committee if his party regains control in November, is drafting a report about underfunded state and local pension plans. Issa is concerned “that calls for a federal bailout to avert a fiscal disaster for state and local governments may be just over the horizon if the situation is not addressed,” said Kurt Bardella, a spokesman.
Issa’s fellow congressional Republican, House Minority Whip Eric Cantor, has proposed reducing federal pension payouts to reflect private-sector practices and eliminating early retirement benefits before age 62. Cantor touted the ideas in July in an online contest dubbed YouCut, which House Republicans created to let people vote on government spending they’d like to see eliminated.
Fueled by reports of annual retirement payouts exceeding $100,000, public sentiment is hostile to government workers’ benefits. Seventy-six percent of Californians polled in June said public pension spending was a big problem or “somewhat of a problem,” according to the Pew Center on the States and the Public Policy Institute of California. In the same poll in Illinois, 83 percent answered that way. In New York, it was 79 percent.
“Pension envy” among private-sector workers is justifiable in some cases, but it goes too far, said Alicia Munnell, director of the Center for Retirement Research at Boston College. The average annual benefit for public retirees was $22,780 in 2008, according to the center’s study of the 126 largest public retirement plans.
“It’s surprising our teachers, police officers and firefighters are public enemy No. 1,” Munnell said.
San Francisco government employees such as Yuan Zhu, who makes $38,000 a year as a food-service worker at Laguna Honda hospital, say the city is trying to balance its books on their families’ backs. Under Adachi’s ballot measure, called Proposition B, Zhu’s out-of-pocket cost for his family’s medical coverage would increase by $2,639 a year.
“We are not the ones making over $100,000 per year,” said Zhu, 48. “That’s a lot of money for us to pay.”
The San Francisco Employees’ Retirement System’s assets covered 93 percent of its promised obligations as of June 2010, said Gary Amelio, its executive director. Economists Joshua Rauh of the Kellogg School of Management at Northwestern and Robert Novy-Marx of the University of Rochester disagree.
Their study found that the system may have only enough funds to cover 59 percent of the promises it has made to workers and retirees. The study based its conclusions on more conservative assumptions than the 7.75 percent rate of asset returns the pension projects.
With taxpayers on the hook for unfunded costs -- projected to double to $752 million by 2015, according to the city controller -- Adachi is proposing to require that workers pay more for benefits already promised.
Proposition B would require that existing public employees pay 9 percent to 10 percent of their salaries toward their retirement benefits; the city currently makes the entire contribution for almost half its workers, according to a June report from San Francisco’s civil grand jury, which investigates government operations.
Adachi, 51, who is running unopposed in November, said his budget as public defender has been cut for five consecutive years. His office turned down more than 1,000 cases last year because of insufficient funding, he said. He worries that shuttered drug-treatment centers, canceled after-school programs and other cuts to social services will feed crime in San Francisco.
“This is a progressive issue,” said Adachi, whose ballot measure has won the support of former San Francisco Mayor Willie Brown, a Democrat. “All of the progressive programs that we fought so hard for over the years are getting crowded out by rising pension costs.”
Almost a quarter of San Francisco’s retired firefighters receive $100,000 or more, according to the civil grand jury report. Firefighters routinely receive pay raises of 10 percent or more in their last year on the job, boosting their benefits over the rest of their lives, said the report, titled “Pension Tsunami.”
Thomas O’Connor, president of the San Francisco firefighters union, said his members have given back $21 million in pay raises to help the city balance its latest budget.
For voters -- and the officials they elect -- such issues will come to a head in next month’s elections. In California, Michael Moritz, a managing partner at venture firm Sequoia Capital in Menlo Park, said he’s hoping that Proposition B will show the country a solution. He and his wife, novelist Harriet Heyman, contributed $245,000 to the proposition campaign.
“If we could get this done in a city as liberal and progressive as San Francisco,” he said, “perhaps it would send a message and set an example for other cities and states across the country.”
To contact the editor responsible for this story: Gary Putka at email@example.com