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News + PoliticsMayor's budget message blames pension costs, lets corporations off...

Mayor’s budget message blames pension costs, lets corporations off the hook

Is it really pensions that are putting the city in the red -- or is it tax breaks, giveaways, and new development not paying its fair share? Could we finally be getting the message that growth doesn't pay for growth?

The mayor says it's fine not to charge developers for the cost of Muni -- but pensions are causing a deficit
The mayor says it’s fine not to charge developers for the cost of Muni — but pensions are causing a deficit

JANUARY 6, 2015 — Mayor Ed Lee is telling all city departments to cut their budgets by three percent over the next two years, saying that the city needs to address a $100 million deficit.

The Ex reported on this today; you can get the mayor’s budget message to departments here.

When the current budget is $8.9 billion, that deficit is about 1.1 percent, a fairly small amount – and although the General Fund part of the budget, which has to absorb all of the cuts, is only about half of that, the deficit is still a fairly small amount.

But here’s what’s interesting: The city can’t balance its books – even at a time when the local economy is undergoing the greatest boom in at least half a century. The mayor is proud of his “jobs agenda,” of all the new companies coming into town, of all the new construction going on … and all of that ought to be shoveling tax money into the city coffers.

Instead, he is calling for cuts, and asking departments to find new ways to raise revenue through fees, fines, and charging for services. Which tends to hit the poor the hardest.

So why are we running a deficit?

To hear the mayor’s description of the problem, it’s mostly about labor.

From his office:

Several factors contributed to the projected shortfall, but the top three were lower than expected returns in pension system for FY 2014-15, updated mortality assumptions meaning employees living longer and collecting pensions longer, and the loss of a legal challenge to a portion of Prop C related to supplemental COLA payments.

Why are these the only line items singled out as the cause of the deficit?

How about the Twitter tax break? How much is that costing the city? How about the money we’ve lost by allowing illegal office conversions?

Kimberly Alvarenga, a candidate for supervisor from D11 who is political director for SEIU Local 1021, which represents many city employees, told me:

To suggest that we balance the budget by instructing city departments to `increase fees, fines and charges for services’ shows complete disregard for working families that are already paying their fair share. The news today that our city is in a $100 million budget deficit is proof that the 1 percent are clearly off the hook in San Francisco.”

Sup. John Avalos, who served on the Budget Committee for many years, told me that he had opposed the tax breaks because it didn’t seem that the corporations were paying their way.

That’s the bigger issue here, I think: These numbers suggest that maybe all of this growth we’re seeing isn’t paying for itself – that all these new buildings actually cost us more than they bring in.

Think about it: We know that new buildings are only paying a tiny fraction of what they cost the city in Muni service. The city is subsidizing them to the tune of billions of dollars. The more new buildings we allow, the more Muni runs in the red. So with all the office space and luxury housing coming on line, the city must be losing millions over the next two years. That’s not in the mayor’s budget message.

We know that new construction doesn’t pay its fair share for affordable housing needs, and that means either the housing isn’t built or the taxpayers have to fund more of it.

Why doesn’t the mayor talk about any of that?

No: It’s much easier to play the game that Republicans love to play, and blame the workers.

We have heard this so many times before – pensions are bankrupting us, pensions are destroying state and local budgets, public employees are way overpaid, and on and on and on.

Robert Reich has a good explanation of what’s wrong with that argument. I would add, at the local level, this:

If you keep driving up the cost of living by attracting tech companies, who don’t pay their fair share of taxes, you need to pay employees more to keep up. Private businesses can close their doors or leave the city. Local government doesn’t have that option.

So the taxpayers (those of us who don’t get tax breaks) have to fork over more and more money to make it possible for the people who work for us, and keep us safe and fix our streets and drive our buses and run our hospitals and make sure the water is clean and all those other jobs can afford to pay the rent and retire with some dignity.

Oh, and since more people are getting evicted (and in some cases becoming homeless), and he social service needs of a city that has among the worst wealth gaps in the nation are (almost by definition) growing, we need more people working for the city.

I will go back to the case I’ve made in the past: For most people in San Francisco, certainly the middle and working-class, life is typically worse during the boom years.

That’s the hidden message in the mayor’s budget cuts.

Full disclosure: I am proud to do some freelance work for SEIU Local 1021, editing the union’s quarterly magazine. I have no role in union policy. I also teach at USF and am I guest lecturer at City College. In the unlikely event anyone else offers me paid work, I will be sure to let you know.

Like this article? Please support 48 Hills for more. 

Tim Redmond
Tim Redmond has been a political and investigative reporter in San Francisco for more than 30 years. He spent much of that time as executive editor of the Bay Guardian. He is the founder of 48hills.
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70 COMMENTS

  1. They are “gold- plated.” Check anyone on the database above. And hence, money that should be going to actual benefits for SF citizens instead gets funneled into the pension pot.

  2. The system will have to be changed…or else it will crumble and take all the pensioners along with it.

    It is in the best interest of all the school teachers in Stockton and elsewhere to instigate reform measures on your own before you end up with nothing.

  3. SEIU does not give “gold-plated pension benefits” and will probably get no retirement whatsoever from SEIU. SEIU represents City employees. SEIU wages & benefits are completely different

  4. The people of SF are not subsidizing Twitter. Twitter is just paying slightly less tax than they otherwise would have been.

    They do not make any profit and yet generate millions in tax revenues from the city. Anywhere else would kill for that deal.

  5. If Twitter can’t higher afford taxes, let them save by move to a place with cheaper real estate. The people of SF don’t owe Twitter a centrally located office, when a more profitable company can move there and have an easier time paying its share in taxes. We’re not running a charity here.

  6. Sure but then that means lower returns to the pension funds we are talking about.

    Every way you look at it, there is no free lunch here. We all pay.

  7. Previously the cap was raised to account for inflation and not as an ideological attack on the rich. If you want to remove the caps then no doubt you would then complain that some former CEO was collecting 15K a month in social security payouts.

    It’s an insurance premium and not a tax.

  8. I listed several options for how higher costs get passed on to you and me. The exact split between them will vary from company to company.

    Twitter may appear “free” to you but they could charge advertisers more, or offer fewer services or content, or pay their workers less, or fire some of them, and so no.

  9. Not entirely true.

    O&M increases can be passed through but only after a ponderous application process involving an administrative law hearing at the Rent Board where the tenants can oppose the increase and have a lawyer to argue their case. Moreover low-income tenants may be exempted from paying the increases. In practice therefore this mostly happens when a building changes hands meaning that the new owner has considerably higher costs. And then of course property tax is rebased anyway.

    Sojourner is also correct that taxes have to be covered by rents, just like any other cost. Otherwise the building is no longer viable as a rental business, whereupon it is closed down and put to another use, thereby decreasing supply and driving up rents.You will tie yourself in knots trying to argue that prop 13 is “bad” but rent control is “good”. It’s almost like a NIMBY arguing for affordable housing.

  10. The City taxes and spends $8.9 billion per year. That’s $10,000 per person, $9 per square foot. Two thirds of City employees make over $100,000 per year. How much do you make? Look at all the money wasted on changing street signs from CAPITAL LETTERS to Small Letters, needless curb construction, free housing for 50,000 tax parasites. Are you getting your money’s worth?

  11. Want to pull $200M a year out of thin air? Eliminate the homeless budget ($200M/year). Put half in the general fund, and the rest toward policing vagrancy, harassment, panhandling, squatting, sit/lie and toward trash pickup and parks maintenance, which is what people are complaining about when they complain about homelessness, anyway. As many supes have recently said, we have a half-empty jail, and this can be used as shelter for these serial offenders of our laws. Instead of taking care of the effects of the homeless, the goal has become to find life meaning and direction for every lost soul who passes through our streets. Just give up on this pointless and endless mission that has cost us so much for so long.

  12. Eliminate the homeless budget ($200M/year) put half in the general fund and the rest toward policing vagrancy, harassment, squatting, sit/lie and toward trash pickup and parks maintenance, which is what people are complaining about when they complain about homelessness, anyway. Instead of taking care of these effects, the goal has become to find life meaning and direction for every lost soul who passes through our streets.

  13. The rent ordinance allows operating and maintenance increases for controlled tenants already, there’s no third rail. Market rents in San Francisco have nothing to do with taxes or other operating costs.

  14. Raise property taxes and, correspondingly, rents will need to be raised as well. Thats the third-rail in SF, isn’t it?

  15. Yes, Detroit (and Stockton, and San Bernardino, and many more in the future) should be a lessen to all public-sector workers. That lesson being: If you can’t learn to cover more of your own pension costs, nobody is going be bail you out when your city goes bankrupt, bankrupt in part because of your soaring pension costs.

    Anyone who retires on a defined-benefit pension at 60 is not going to get any sympathy from citizens when the pension pot runs dry.

  16. also let’s look at the losses incurred by the billionaire boat owners during America’s Cup… we all paid for that stupidity.

  17. Call on the Mayor to direct Phil Ginsburg to lay off the huge public relations/property manager staff. Since Ginsburg took over he’s hired several six figure p.r. people who do nothing except work against the public’s interest. As if our parks need to marketed. Disgusting waste of our money.

  18. If we’ve raised the cap several times already, we can do it several times more. The problems with Social Security are less a matter of solvency than they are unhappiness with the whole idea of Social Security by the rich people who fund Republican campaigns. Dancing to that tune is a no-win proposition because their appetite is insatiable; they will not be satisfied until the entire social safety net is eliminated and we return to a feudal social and political structure.

  19. Whether or not rising pension obligations are the problem has very little to do with who got what tax break and everything to do with how much are pensions as a percentage of the budget and whether or not they continue to grow. One solution to that problem is to raise taxes. You could do that to anyone or any group. You can also cut costs. You could do a little of both. I take issue (indeed, I take issue with it every time it appears in a 48Hills article) with the concept that certain groups or kinds of people aren’t “paying for itself.” California homeowner get huge tax breaks [ note: it’s incorrect to say that “taxpayers (those of us who don’t get tax breaks)…”] Are any of us paying for ourselves? Tim’s issue is that he feels that city policy is biased in favor of one group (business) and should be more biased toward another group (not business), but arguing that the shortfall is because business is not paying for itself is deeply flawed. It implies that everyone else is paying for themselves. Are people who live in public housing paying for themselves? What about the homeless? Are fancy single-family home owners paying for themselves? Is the problem with business that it isn’t paying enough taxes directly, or are all those new employees not paying enough?

    Budget shortfalls exist, and many occurred prior to our current boom. If, in fact, pension costs did grow at rate that was higher than expected or planned, than the shortfall has very little to do with taxes we collected recently (other than to say that we just didn’t collect enough from anyone). These are obligations incurred prior to the boom that come due now and would have come do regardless of whether or not there was a boom. The boom did not cause pension costs to balloon.. If anything a lack of tech boom may have meant that the shortfall would have been bigger than it is.

    I’m not saying that business shouldn’t be taxed more, but I am saying that Tim’s argument that “Things that don’t pay for themselves (especially if that thing is “business” should 1) pay more taxes or 2) get out BECAUSE it’s causing a budget shortfall is utter nonsense. The twitter tax break didn’t cause the budget shortfall, unexpected costs incurred long ago caused the shortfall. If Tim were arguing that “we have a budget shortfall and the best way to pay for it is X because Y” (where X is “business” and Y is “because I hate them”) then at least it would be an honest argument. Using the “pay your own way” framework renters could easily say that property owners should pay more, and property owners could say that people in pubic housing should pay more and that the homeless should get out.

    Stirring the populist rage pot is a dangerous game.

  20. No more tax breaks for tech companies – and start taxing them based on the Wall Street valuations they love to trumpet, not the cooked bullshit they “report” April 15.

  21. Why is an SEIU director or any Union considered a credible source on this? It would appear there’s a conflict of interest buried in there.

    I agree with the SEIU quote though, fees, fines and charges are not the answer, and anyone who has had to deal with the City lately can sense they’re asserting those charges to an unusual degree. This hits the developer types as much as the working families though. Maybe the Mayor can cut the bloated City departments that are staffed to handle all those charges instead?

  22. We have already done that several times, while it’s even harsher on the employer side and is a real job killer. But even if the voters were OK with that it would never be sufficient, which is why most solutions involve that AND a paring back of benefits AND a raising of the retirement age. Problems that large require policy changes on all fronts.

    And local pension schemes are the same. Eventually we will need to cut back benefits AND increase contributions AND raise the retirement age. At some point we’ll have to do what everyone else has done and switch to a DC scheme.

    But wcw is correct in a way, without him realizing it. When local and state pension schemes are failing across the land, perhaps in response to a market collapse, then the government may need to bail them all out to avoid wholesale section nine filings. And then you would see pension benefits getting crammed down to what we are willing and able to pay for..

  23. Raising the cap on the wage tax in steps is easily done and relatively painless. I do not believe that merging Social Security with the general fund is wise; the crazy right wingers would get hold of it and give it to their rich buddies.

  24. The entire point of Redmond’s article is to try and claim that all funding problems go away if only we tax, tax and tax again. You are essentially saying the same thing here but your logic is even more flawed than Tim’s

    The thing with social security is that it really isn’t a tax at all. Nor is it welfare. It is an insurance contract – you pay in and later, you get paid back.

    It has more in common with a life assurance policy where you pay a premium and later get a payout. And as such, the premium is a flat rate, which explains why there is a cut-off point. Likewise, there is a cut-off point on the payout – currently about $2,600 a month I believe.

    If you really believe in your idea then you should instead argue to abolish social security and effectively merge it with general taxation, which would lift the top marginal rate of income tax to near 50% before state taxes. Not sure the voters would like that.

    Oh, and it has always been a tax on earned income i.e. salaries, again for good reasons. Applying it to rents, dividends or gains would simply drive tax avoidance and funnel those funds offshore.

  25. There’s a simple fix for Social Security: raise the cap on the taxed wage income. We could also apply it to capital gains and dividend income.

  26. We already have a national pension scheme. It’s called social security. It has got problems too.

    At least municipalities have a section nine exit strategy. States and the Feds do not.

  27. There’s nothing special to the story: like most politicians, San Francisco’s find it easy to make pension promises; SFERS return assumptions were not conservative enough; 2008 happened.

    SFERS was 110% funded in fiscal 2007.

    Pension schemes should be national, but that would be socialism or social democracy or something. Freedom fries forever, I guess.

  28. Take a look at the link in my post above. I checked 10 random employees and all ten had outrageous amounts of OT. This is an institutional problem.

  29. Uh, jc. Do you know what a defined-benefit pension is? You are guaranteed a pension at a specific amount that rises annually no matter what bad investments the pension manager makes. This was a common practice at for-profit companies until 2000. Only corporate CEOs and public sector workers still have them.

    They are unsustainable, and increasingly gobbling more of city general funds.

  30. The union’s most recent contract threw the new guys under the bus to keep the gold plated benefits for the more senior people.

  31. I certainly wasn’t advocating that people should be worked to the point of exhaustion.

    Pension spiking may still happen although the rules were changed about that.

    But overtime is ultimately a management decision. I was speculating that if there is a high fixed overhead for each employee because of these benefits, then that might induce management to rely on more hours rather than more workers.

  32. The opposite is usually true: People working OT are more tired and less efficient.

    This could be part of not wanting to hire or it could be employees gaming the system for more salary or attempting to spike their pensions.

  33. Is that 58 for ALL city employees? Or just police and fire, which I can more understand?

    Full healthcare benefits for life? Does anyone else get healthcare from a job after they leave it? Insanity, especially since MediCare kicks in at age 65.

  34. Fair point. I’d imagine that since Tim works for SEIU on a freelance basis, that he doesn’t enjoy any of the gold-plated pension benefits under discussion here.

    His bias is purely ideological 🙂

  35. I wonder if part of the reason is that the expensive pensions and healthcare benefits mean that it is cheaper to have less workers doing more hours, then staff correctly?

  36. There are lots of state and city pension funds. I mentioned CALPERS only because it is the best known. They all tend to operate in a similar manner. I believe the city also has some older funds that are now closed but operate as a sinking fund for existing retirees. They will be a black hole until the beneficiaries all die off.

    All three of your reasons played a part, I believe. But the over-arching problem is a lack of spine and political will to tackle the pensions “timebomb” because it is just too large and ugly. The private sector has largely gotten the problem under control, but the public sector has barely started.

    I suspect it will take a much bigger crisis than a lousy 100 million for finally get everyone;s attention on this disaster.

  37. As usual, Tim fails to disclose that he is on the payroll of a public-sector union (he edits a SEIU newsletter) and therefore cannot be objective on this matter.

    http://transparentcalifornia.c

    Not true. There is a disclosure at the end of the article. Did you read through it?

  38. I thought we were talking about the city pension fund, not CALPERS.

    My questions still stand. If the mayor is going to blame $100M in future pension obligations for current cutbacks, there should be an in depth look at how we got to this point. I think any of the three possible reasons I gave, and maybe a combination of them, could be largely to blame.

    BTW, today’s Examiner reports that the Ethics Commission doesn’t want to cut its budget and may seek an increase. Its reason: Pay to play politics at City Hall needs more scrutiny. I agree.

  39. How does one make $79K in overtime over the course of the year? That’s over $200 each day, seven days a week, every week.

    But the overtime chits get signed because no one is ever held accountable for costs in our disfunctional city. “City Family Rules! Public Be Damned!”

  40. Some long-term investment advisers suggest that living in a major US city could become an economic liability in the future as these unfunded pension liabilities spiral out of control.

    They suggest that people live in smaller towns with less aggressive budgets, services and ideologies. Maybe even unincorporated regions of counties which typically are run in a much more modest and prudent manner.

    There will be a day of reckoning for all this wanton extravagance and negligence. And Tim’s too-convenient idea that all we need to do is “tax the rich” won’t help much if those rich folks have moved beyond your jurisdiction..

  41. The fund has not been badly managed. In fact CALPERS has historically had a quite a good reputation, albeit tarnished more recently.

    The reason is clear, I think. Politicians always like to kick the can down the road, and make the lowest possible contributions. There aren’t many votes in firing cops to make the pension fund safer. Politicians would rather figure it out later. You see the same problem with social security and medicare shortfall. These will all come to bite us around the same time, given the demographic trends.

    Also, pension contributions are based on a very high projected rate of return on the funds, typically 7% or 8%. These have been achieved in more recent years (2007-2009 aside) but future returns look like being more modest and that means higher contributions.

    Finally of course there is the delicate matter that the politicians themselves get these sweetheart pensions

  42. Yes,Adachi, a good progressive, took a lot of heat for touching the third rail , for questioning the huge pension packages granted to public-sector employees in this town. He effectively destroyed his political career.

    If you cross the “city family”, you are toast.

  43. No, property taxes are the most distorting because, as a form of wealth tax, there is no underlying transaction from which a pound of flesh can be taken. Plenty of older people are “house rich” but “cash poor”, and there is no guarantee they could pay uncontrolled property taxes.

    Again, having to pay tax on a purely unrealised property value gain seems unfair. We certainly do not tax on such a “mark to market” basis except for investment businesses.

    Also note that average property tax revenues have increased at an average of 7% a year since 1978. Any municipality that cannot live off those kinds of increases should be audited.

    All moot, because the voters will never repeal it of course. But that doesn’t mean the naysayers should not be rudely debunked.

  44. Sure, fine idea. Property taxes are least distorting, though, and all else equal that makes them the preferred target. Repeal of P13 is not inconceivable, either, especially with something like accrual of above-P13-tax against title, payable upon property transfer.

  45. As usual, Tim fails to disclose that he is on the payroll of a public-sector union (he edits a SEIU newsletter) and therefore cannot be objective on this matter.

    http://transparentcalifornia.com/

    I suggest that readers click the link above and punch in the name of any public-sector employee in San Francisco that they know. The high salaries are just fine by me. It is the persistently climbing pension costs that are upending the city budget year after year. SF public employees have defined-benefit pension plans (just like corporate CEOs) that guarantee 6% cumulative annual growth each year.

    Here’s one city employee, that I chose at random.Michael Fewer, a “police officer 3”: Granted, the $87K in overtime pay is a SFPD anomaly. But look at that pension cost ($38K!)! SF public-sector employees retire at age 58 on average with full health benefits for life for their families and receive pensions equivalent to 80% their salary.

    Meanwhile, the rest of us struggle to get by on Social Security and anything we put in our 401-K plans. This is patently unfair. Most of those pension funds should be paying for schools, roads, infrastructure…NOT public-pension largesse.
    Mike Fewer:
    Regular pay:
    $118,898.17

    Overtime pay:
    $87,894.63

    Other pay:
    $4,237.14

    Total pay:
    $211,029.94

    Pension benefits:
    $38,826.54

    Total pay & benefits:
    $249,856.48

  46. That’s only for the first 5 years. Then they get the full bloated payscale.

    37K a year is about right – that is what shuttle drivers make.

  47. The problem is that much of the city’s spending is contractual, like pension contributions and bond interest. Beyond that public safety is a huge cost but the voters will punish any politician that messes with their safety.

    So that leaves a relatively small part of the budget that has to bear disproportionate cuts, which is why library hours are always being cut.

    The solutions are clear but politically unpalatable. Convert all city workers to a DC pension scheme and make the workers fully fund them. And get out of the business of certain activities that the private sector can do as well or better

  48. Redmond’s eternal war on business rears its ugly head again.

    Unfortunately Redmond should realize that corporations are pass-through vehicles. Every cost they have, including taxes, has to be passed onto someone else or the business ceases to be viable.

    So you could tax corporations 50% of profits, or 10% of revenues, or whatever you want and it would not make any difference. Either they would jack up prices OR they would cut pay and benefits to their workers OR they would cut dividends which would kill those very pension funds that city is relying on OR they will do what Twitter was going to do and move a few miles.

    Higher corporate taxes would simply be a burden for all of us. We can’t all have free everything just by magically taxing business more and more.

    Meanwhile pensions aren’t specifically a SF problem. They have already bankrupted Detroit and Chicago could follow. SF’s good economy buys us more time, but a sharp market slowdown would mean much larger contributions to pension funds, paid for by service cuts of course.

  49. Or, as long as you are king of California, make city income taxes legal. Failing that, you can raise city business taxes, even if that would mean less foosball tables and other SF Gate tech office porn. If corporations let themselves be taxed millions of dollars by commercial landlords, let them be taxed by the city.

  50. You’re right. With a low unemployment rate and all the apparent prosperity in this town, it defies belief that the city is running a deficit. If we truly have a problem with pension obligations, how did we get to this point? Did the city fail to fund its fair share? Are employees not paying their fair share? Was the pension fund poorly managed? Some time ago, Redmond had a piece on a plan by the pension fund to invest in hedge funds, after losing at least $60 million on a similar past investment and at a time when pension funds were pulling out of hedge funds.

    All of this deserves a closer look.

  51. With this kind of news item, I’d like to see a few numbers. Is the budget overrun really due to a few big items, or a bunch of small ones?
    Tim’s point still holds. What on earth does it take for a city to be prosperous? If this kind of economy doesn’t do it, what the hell will?

  52. When Jeff Adachi ran for mayor he voiced his concern that the SF pension fund needs to be brought under control. The unions opposed him for touching their sacred cow, now look what’s happening.

  53. While further work does need to be done to continue bringing pension costs and deficits under control, I suggest that there are a lot of trophy/patronage commissions, committees and departments that need to be reined-in. Let’s start with the Port Commission and SFMTA.

    Oh, and the era of tax breaks for corporations is over. Let’s get them to pay up, maybe we need a ballot initiative for fair taxation or something.

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