Last month, the San Francisco school board voted unanimously to offer Vincent Matthews a three-year contract paying $310,000 per year, $60,000 more than the $250,000 he made at his previous job as state administrator for the Inglewood school district in Southern California. That’s a nice chunk of change, but the deal is made even sweeter by the fact that San Francisco will also cover all healthcare premiums for Matthews and his family, contribute $100,000 over the next three years to a retirement account, and make payments into state pension funds totaling around $140,000. An article in the San Francisco Chronicle pointed out that these are the same provisions received by his predecessor, Richard Carranza, and are “fairly standard” in school districts across the state. It almost feels like the Chronicle is trying to justify what to me are outrageous benefits for a city and state with bleeding, broken pension systems that could at any minute erupt like dormant volcanoes and decimate the towns beneath them.
The San Francisco Unified School District employs nearly 10,000 people — almost double the number from a decade ago — but those in charge don’t seem too concerned about the future, as evidenced by San Francisco’s continued hiring spree. City employees make on average around $109,000 in annual salary and almost $50,000 in benefits. In 2008, the city had 27,885 total annually funded positions. In 2017, that number has increased to 30,626.
As I’ve mentioned before, City Hall counted on a sales tax increase last November that was resoundingly defeated by voters. The measure would have funded $50 million in homeless services and $100 million in transportation improvements. Fiscal projections are now in the red, with a deficit of $348 million over the next two years that will balloon to $848 million by 2022. The 2017–18 budget added 277 employees to the payroll, but as reality hit last December, Mayor Lee ordered city departments to cut spending by 3 percent and freeze new positions for the fiscal year starting this July.
The one bright point is a surge of new revenue from the voter-approved Proposition W, which increases taxes on pricey properties. From this pot, along with Medi-Cal waiver funding, the mayor said he would fund half of the new homeless services he had promised, as well as a legal defense fund for undocumented immigrants. Of course, little has been said about the city assuming an annual 7.5 percent rate of return on pension investments, which over the past two years earned less than half that. Liability for the San Francisco Employees’ Retirement System (SFERS) is over $2 billion, but its chief investment officer William Coaker Jr. is the city’s top earner with a salary over half a million bucks.
Also largely ignored is the big state picture — the California Public Employees’ Retirement System (Calpers), the largest U.S. pension fund, lowered its annual assumed rate of return to 7 percent from 7.5 percent, which will require workers to contribute more. With $303 billion in assets, Calpers’ coffers pale in comparison to the estimated $3.6 trillion in state and local government systems. If these funds reduced their return assumptions by one half percentage point — leaving return rate expectations still unrealistically high — employees would be required to offset the difference by billions of dollars per year.
As it is, California cities and counties will see their required contributions to Calpers nearly double in five years, according to analysis by the California Policy Center, totaling $5.3 billion in the July 1, 2017 fiscal year and rising to $9.8 billion in fiscal 2023. Calpers concealed the seriousness of the pension shortfall by using those unrealistic rates of return in its accounting methods, but it was recently forced to cut its projected rate to stay solvent (yes, you read that right … the largest pension fund in America could have gone under).
So why, you may ask, is it not a requirement for public pensions to be honest with their math? The answer is as simple as it is scary: Cities and states would collapse under the weight of an estimated $6 trillion in unfunded liabilities — triple the current estimate — if Treasury yields were implemented as the standard.
None of the above takes into consideration what will happen during the next economic downturn, which isn’t a matter of if, but a matter of when.
That’s why San Francisco’s continued dependence on the tech industry to offset its complete lack of fiscal prudence is so absurd. Companies that have made San Francisco their home like Twitter, Uber, and Yelp will be the first to crumble in a downturn. This is not the Silicon Valley, where heavyweights like Apple and Google can weather a storm with billions in reserves. San Francisco tech firms are trendy, frail, and profitless, often dependent on venture capital, and, like most of the city’s residents, have nothing saved for a rainy day. Twitter and Yelp have already done several rounds of layoffs in arguably the best economic times the city has ever seen. That doesn’t bode well for their employees when things aren’t as rosy.
Even in the good times, the ridiculous cost of living here is already driving companies and workers to look elsewhere. In a February 2017 article in the Guardian, tech workers complained they are “barely scraping by” on six-figure salaries. One Twitter employee in his early 40s who earns a base salary of $160,000 said his biggest cost is a $3,000, two-bedroom apartment he shares with his wife and two children. Another woman said she and her partner make over $1 million a year between them, yet cannot afford to buy a house. And, sick of his 22-mile commute and inability to buy a home anywhere in the Bay Area close to his job, a networking firm employee making $700,000 recently accepted a 50 percent pay cut to relocate to San Diego. According to one former Facebook executive, engineers asked CEO Mark Zuckerberg whether the company could subsidize their rents — it turns out even those oft-envied members of the 1 percent are paying around 50 percent of their income for housing in a wealth bubble they helped to create. As tech firms and their workers leave San Francisco for more affordable pastures, who will fill those 30,000 luxury condos set to come on the market over the next few years? Perhaps a more important question is who will make up for the tax dollars they take with them?
The other day I was talking to a friend in the real estate business, and I asked her what the market would look like after another tech bust or a national financial downturn. “I don’t see that happening,” she said confidently. And she’s not alone. I can’t count the number of people I know in real estate, government, and tech who believe the boom times will go on forever, despite the fact that nearly every decade we have some kind of correction at the least and a crisis at the worst. Do any of them have any idea about the pension volcano? I don’t know about you, but I hear that lava bubbling right about now.