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Smart Voter
San Francisco County, CA June 8, 2010 Election
Proposition D
Retirement Benefit Costs
San Francisco County

Charter Amendment - Majority Approval Required

Pass: 112100 / 78.77% Yes votes ...... 30222 / 21.23% No votes

See Also: Index of all Propositions

Information shown below: Fiscal Impact | Yes/No Meaning | Impartial Analysis | Arguments |

Shall the City: calculate retirement benefits for new City employees using average monthly compensation over two years instead of over one year; increase the retirement benefit employee contribution for new safety employees and new employees in positions covered by the State retirement system; and require that savings from reduced employer contributions to the City's retirement system be deposited in the Retiree Health Care Trust Fund?

Fiscal Impact from The City Controller:
City Controller Ben Rosenfield has issued the following statement on the fiscal impact of Proposition D:

Should the proposed charter amendment be approved by the voters, in my opinion, the City will have reduced costs in the medium and long term for the cost of employee pensions, with those costs largely being shifted from the employer to employees.

Employer and Employee Pension Contribution Rates:

Each year, based on actuarial analysis, the San Francisco Employees' Retirement System (SFERS) board sets the required contribution rates for the City and its employees to fund the cost of current and projected future pension benefits. In FY2009-2010, the City's required contribution was 9.49% of payroll. In FY2010-11, the City's required contribution will increase to 13.56% of payroll, due in part to losses in SFERS' assets related to the economic downturn.

Currently, most employees pay 7.5% of salary to the retirement system as their share of pension costs. This employee contribution rate is fixed in the Charter. For employees in public safety classifications, whose pension cost is higher, the City also pays the difference between 9.0% and the employee contribution rate of 7.5%. Similarly, for city employees who are members of the California Public Employees Retirement System (CalPERS), the City pays the difference between 7.5% and CalPERS' mandated employee contribution, which was 9.0% in the most recent year. The amendment would specify that SFERS public safety employees and CalPERS members hired after July 1, 2010 would have to contribute 9.0% of salary as the mandated employee contribution for their pensions.

Final Pension Compensation Calculation:

Currently, employee pension payments are calculated using a formula that, among other factors, is based upon an employee's highest year of compensation. The Charter amendment would change this part of the formula to specify that final compensation will instead be based upon average monthly compensation earned during the highest two years.

Under the Charter and Federal laws, this change would not affect any current employees--only those hired after July 1, 2010. Effectively, the changes will require the creation of a new "tier" of employees whose final compensation calculation is different than most current employees. By approximately 2032, most city employees would be under this arrangement.

City Savings Estimate:

Taken together, the change in the SFERS safety and CalPERS employee contribution rates from 7.5% to 9.0%, and the two year final compensation calculation, are expected to reduce the employer long-term cost (called the `normal' cost) of pension funding by approximately 0.7% over the 25 year period between fiscal year 2011-2012 and fiscal year 2035-2036. Cumulatively, the savings for that same 25 year period is estimated to range between $300 and $500 million depending on future wage and benefit rates for employees, and other factors.

Maintaining City Benefit Contributions at the `Normal' Cost:

The Charter amendment would specify that for any year in which the City's actuarially-required contribution rate to SFERS fell below the `normal' funding cost, the city would deposit the difference into the retiree health trust fund to pay for future benefit costs. Historically there have been periods in which the City's pension contribution rate was very low or zero due largely to strong investment performance in the SFERS trust. When and if such conditions occur again, this change would effectively require the city to nonetheless continue paying for pension and/or cost-employment benefit liabilities at the estimated long-term cost of pension funding which typically ranges around 9% to 10% of payroll over time.

Note that the City currently pays the cost of retirees' health benefits each year as that year's expense is due. As a result, there is a substantial unfunded liability, estimated to be approximately $4 billion in total, for the future cost of retiree health benefits that current employees have already earned. That liability has been somewhat reduced by the passage of Proposition B in June 2008 which required employees hired beginning in 2009 to pay a portion of post-employment health benefit costs, but the bulk of the cost, estimated at between $250 and $300 million annually at current rates, will have to be otherwise addressed by the City. The contributions that would be mandated by this amendment would address a portion of this liability.

Meaning of Voting Yes/No
A YES vote on this measure means:
If you vote "yes," you want to amend the Charter:
  • to calculate retirement benefits for new employees using average monthly compensation over two years instead of average monthly compensation over one year,
  • to increase the employee contribution for new safety employees and new CalPERS members, and
  • to require that savings from reduced employer contributions to SFERS be deposited in the Retiree Health Care Trust Fund.

A NO vote on this measure means:
If you vote "no," you do not want to make these changes to the Charter.

Impartial Analysis from San Francisco Ballot Simplification Committee
The Way It Is Now: The San Francisco Employees'Retirement System (SFERS) provides retirement benefits for most City employees. The California Public Employees' Retirement System (CalPERS) provides retirement benefits for City employees in certain job classifications.

Retirement benefits for City employees are calculated using a formula that includes the employee's "final compensation," which is the employee's highest average monthly compensation for any one year of earnings.

The Charter requires employees to pay a percentage of their compensation to SFERS or CalPERS to help pay for retirement benefits they will receive.

  • Most city employees pay 7.5%.

  • Safety employees such as police officers and firefighters pay 7.5%, even though the retirement benefits they receive cost more than the benefits paid to most City employees.

  • Some CalPERS members pay 7.5%, even though the required employee contribution is 9.0%. Because of contractual agreements or Charter requirements, the City pays the difference.

The Charter requires the City to contribute to SFERS following a set formula. Under this formula, the employer contribution to SFERS depends partly on the investment earnings of the pension fund.

The City has a Retiree Health Care Trust Fund to help pay for costs related to retiree health care. The San Francisco Unified School District and the Community College District are participating employers in this Fund.

The Proposal: Proposition D is a Charter Amendment that would change the retirement benefits formula, change the employee contribution for certain employees, and require that savings from reduced employer contributions be deposited in the Retiree Health Care Trust Fund.

For employees hired on and after July 1, 2010, "final compensation" would be calculated using a two-year formula. An employee's final compensation would be determined by averaging monthly compensation during:

  • any two consecutive fiscal years of earnings, or

  • the 24 months immediately before retirement.

The final basis for retirement benefits would be the higher of the two figures.

For safety employees and CalPERS members hired on and after July 1, 2010, the employee contribution to SFERS or CalPERS would increase to 9.0% of compensation.

In years when the City's contribution to SFERS is less than expected because of large investment earnings, the amount saved would be deposited into the Retiree Health Care Trust Fund. The participating employers could choose to have this rule apply to them.

Proposition D would permit the San Francisco Superior Court to choose to become a participating employer in the Retiree Health Care Trust Fund.

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Arguments For Proposition D Arguments Against Proposition D
The costs of providing retirement benefits to City employees are increasing at an unsustainable rate.

This year, the City will pay less than $300 million to provide retirement benefits to City employees. By 2014, that number will increase to over $800 million dollarsmore than the operating budget of General Hospital and five times the Recreation and Park Department's budget.

Prop D is real pension reform with real cost-savings

Prop D is a critical step toward reform of our City's pension system. While it will not solve the pension problem, it is a step in the right direction and an indication that the City is willing to address the problem.

Prop D will save the City between $400 and $600 million over 25 years - funds that can and should be used for critical programs and core services.

Prop D better manages retirement costs and retiree health

Prop D will address the escalating costs of retirement by requiring increased contributions from new public safety employees. It will require that employees who receive a more generous retirement benefit pay a higher rate, increasing the contribution required of new Police, Fire and Sheriff employees from 7.5 percent to 9.0 percent.

Prop D will also reduce pensions for all new City employees by calculating final compensation based on the average salary for the past 24 months of service, not the last 12 months.

Finally, Prop D will address the City's $4 billion unfunded liability to retiree health by requiring contributions to the health trust fund when the economy is good.

Please join us and vote YES on Prop D

Mayor Gavin Newsom Public Defender Jeff Adachi* Supervisor David Campos* Supervisor Carmen Chu* Supervisor Sean Elsbernd* Supervisor Eric Mar

For identification purposes only; author is signing as an individual and not on behalf of an organization.

Rebuttal to Arguments For
No Rebuttal or Opponent's Argument Against Proposition D was submitted

No Rebuttal or Opponent's Argument Against Proposition D was submitted

Rebuttal to Arguments Against
No Rebuttal or Opponent's Argument Against Proposition D was submitted

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Created: August 20, 2010 21:43 PDT
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