A confusing 2017 California Supreme Court ruling about the threshold of approval for local ballot measures that are qualified for the ballot through citizen-led signature-gathering efforts – as opposed to being placed before voters by local officeholders – is causing major uncertainty in the Bay Area.

In the case of California Cannabis Coalition v. the City of Upland, the state high court appeared to suggest that citizen-qualified tax or fee measures needed only a simple majority for approval, while others required two-thirds support. But the court did not offer a definitive statement. Many legal experts questioned how justices came up with a new interpretation of 1978’s Proposition 13 and 1996’s Proposition 218, which generally imposed a two-thirds requirement for voter approval of local taxes.

This has created uncertainty around three measures in San Francisco and one in Oakland that were approved by strong majorities of voters – but not by two-thirds.

One city attorney says majority OK; other says two-thirds needed

Last week, the Harvard Jarvis Taxpayers Association, the California Business Roundtable and the California Business Properties Association launched a legal challenge to San Francisco’s Proposition C. It is a complicated measure that imposes a new tax on businesses with more than $50 million in gross receipts. Some industries are charged 0.175 percent, while others pay 0.69 percent – nearly four times as much. This is on top of San Francisco’s existing gross receipts tax on companies with $1 million or more in gross receipts.

Relying on City Attorney Dennis Herrera’s interpretation of the 2017 California high court ruling, the city has treated the new tax as valid despite its November passage with less than a two-thirds majority. Proposition C is expected to generate at least $300 million a year for homeless programs.

Herrera holds the same position on two measures approved by San Francisco voters last June. One imposed an annual parcel tax of $298 to help increase teacher salaries. The other raised taxes on some commercial rents to fund child care and education programs.

In interviews, Herrera has offered explanations for his position that seem more populist than rooted in any broader legal theory about how California direct democracy should function. He’s said voters should be able to impose tax hikes with simple majorities.

In Oakland, a divided City Council last week decided not to levy an annual $198-per-house, $135-per-apartment annual parcel tax in 2019. The parcel tax was passed by voters as Measure AA in November. It was expected to generate as much as $900 million for education programs over 30 years. While two council members wanted to begin collecting and spending the funds immediately, a council majority ended up heeding City Attorney Barbara Parker, who wrote in the official voters guide that two-thirds support was necessary for passage.

S.F. unruffled by loss of city’s highest-grossing firm

By far the most controversial of the four measures in legal limbo is Proposition C. It was opposed by Mayor London Breed and Twitter co-founder Jack Dorsey not just because it could be seen as creating a hostile business climate but because the measure would fund homeless programs without setting up metrics to determine what worked and what didn’t.

One huge multinational corporation made plain its unhappiness with the new levy. On Nov. 30, 11 days after a CalWatchdog report anticipating the decision, pharmaceutical giant McKesson Corp. announced it was relocating its headquarters from San Francisco to a Dallas suburb. The loss of McKesson – by far the highest-grossing San Francisco company, the second-largest in California after Apple and the sixth-largest in the U.S. – appeared to vindicate Breed’s and Dorsey’s warnings.

But despite McKesson’s exit and huge problems with housing and homelessness, San Francisco officials are much more upbeat than those in elsewhere in Silicon Valley about the sustainability of the tech boom. From 2010 to 2017, while tech job growth began to slow in the region, the number of tech jobs in San Francisco went from about 21,000 to 84,000.

A San Francisco Chronicle analysis noted that no large tech firm had left the city in recent years. Such companies, development analyst Colin Yasukochi told the Chronicle, are “in the innovation business. Being able to attract the best and brightest minds is going to give them a competitive advantage when it comes to innovating new products and services.”

The bailout requires school districts, the state government and teachers to steadily increase their annual contributions to CalSTRS in coming years. The $5.9 billion in 2014 funding for CalSTRS’ future unfunded liabilities ramps up to nearly $11 billion in fiscal 2020-21, with school districts providing 70 percent of the extra funds, 20 percent coming from the state general fund and 10 percent from teachers.

The report is only the latest from the LAO to raise concerns about how the bailout is being implemented. But it offers a particularly serious warning: Even though the 2014 law sharply increases the amount of money that must be set aside for long-term pension costs, it may not reduce long-term state liabilities:

Over the long term, if investments consistently underperform assumptions — or if CalSTRS reduces its investment return assumption — the state’s share of the unfunded liability could increase substantially and state contributions could be several billion dollars higher by the 2040s. As implemented, districts would be largely insulated from large unfunded liabilities under these bad investment scenarios. While there are pros and cons to the implementation — both from the perspective of the state and districts — we are unsure that these are the outcomes the Legislature intended when it passed the CalSTRS funding plan into law.

The concern about low returns has been an increasing focus both of pension systems and financial rating firms. Early last year, when Standard & Poor’s raised California’s credit rating because of its improved revenue picture and relatively tight budgets, it also warned that “the state teachers’ retirement system (CalSTRS) is in need of a long-term funding strategy.”

Life expectancy increase may balloon liabilities

Another factor has CalSTRS officials worried, as Ed Mendel reported this week on calpensions.org:

Last week, the CalSTRS board was told that the life spans of retirees have been increasing faster than anticipated. Two years ago CalPERS increased employer rates to cover longer life spans expected for its retirees.

 

Rick Reed, CalSTRS chief actuary, said the same mortality table has been used for persons age 20 and age 60. A weighted average tends to estimate a life span that is too long for the 60-year-old and too short for the 20-year-old.

 

With new computer technology, Reed said, it’s possible to have a mortality table for each individual for each year. For a person age 20, there would be 70 mortality tables by age 90.

Such technology will also make it easier to track the unpward arc in unfunded liabilities because retirees are living longer.

The double whammy of low investment returns and increased life expectancy has already had a harsh impact on San Francisco. The Chronicle reported in December that these factors had badly undercut hopes that Proposition C, a 2011 pension reform approved by voters, would deliver big savings:

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.

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.”