2011 San Francisco pension fix not panning out

The pension reform measure that San Francisco voters passed in 2011 isn’t yielding the savings that city leaders expected, and for several reasons — one of which should worry all pension-paying institutions. That reason: Retirees are living significantly longer than old assumptions.

In 2011, the hope was that Proposition C, by changing pension formulas for new hires and capping some payments, would lead to city pension spending peaking in 2014. Instead, these costs are still growing, and are easily the single biggest factor in the $99 million hole projected in San Francisco’s 2016-17 budget.

The news of the projected deficit has triggered shock in San Francisco. The local economy is booming as never before, thanks to the rapid growth of local tech companies, and the assumption was that abundant revenue could let city leaders pursue ambitious plans, such as sharply adding to proposed transportation infrastructure upgrades.

Matier & Ross have details in their San Francisco Chronicle column:

Numbers crunchers say the pension payout for retired government workers could grow to $380 million a year from the city’s general fund by 2019. That’s $113 million more than was projected just last year. … Of the $99 million deficit that the city will have to eliminate by the start of the fiscal year July 1, $42 million is attributable to more going out in pensions than the city is taking in from the fund’s investments. …

 

Retirees are living longer than expected — and investments are coming in with only a 4 percent return versus the 7.5 percent that actuaries had predicted.

 

Plus, the city lost a lawsuit filed by retirees, invalidating the portion of Prop. C that did away with an automatic 1.5 percent increase in years when the system wasn’t fully funded.

Revised actuarial study ‘good news and bad news’

In October 2014, the Society of Actuaries issued its first updated predictions on Americans’ longevity since 2000.  The study triggered sharp concern among private pension plans and was featured in the Wall Street Journal. Its key finding, as reported by Modern Health Care:

Men at retirement age are now expected to live to 86.6 and women to 88.8, an increase of two years and two-and-a-half years, respectively, since the last actuarial adjustments were made in 2000. While hospital officials have made some revisions over the intervening decade-and-a-half, many systems are only now coming into line with the latest projections.

 

These changing demographics have increased pension obligations by 4 percent to 8 percent over that time period, the Society of Actuaries estimates. “It’s one of those bad-news, good-news things,” said Gregg Nevola, vice president for total rewards at North Shore-Long Island Jewish Health System, where the cost of promised pension benefits increased about 16 percent last year to roughly $2 billion. “The bad news is we’re all living longer. The good news is we’re all living longer,” Nevola said.

But government pension agencies, at least in California, haven’t reacted with the alarm seen in the private sector. In an April interview with PlanSponsor, a website devoted to government pension plans, Richard Costigan — chair of the CalPERS Finance and Administration Committee — never even mentioned that retirees living longer adds to CalPERS’ longtime obligations and increases its unfunded liabilities. Instead, he depicted the development as something that could be addressed with technical tweaks:

“As the fund matures, and the retired population grows, it’s important that the rates reflect the changing demographics of our members. … Pension plans require stable funding, and the new rates incorporate the Board’s actions over the last several years that will reduce rate volatility in the long term.”