San Francisco Finally Gets An Analyst!

All CA cities and their residents need a Patrick Wolff.

San Francisco has a $10 billion budget yet — until now — the only professional financial analysts covering the city have been rating agencies like Moody’s. But because rating agencies care only about San Francisco’s ability to service debt, the payment of which is senior to public services, that means no one has been looking out for the public.

Until now. Starting today Patrick Wolff is on the scene. A grandmaster in chess and long-time financial analyst and money manager, Patrick and his family live in San Francisco and his children attend public schools. Needless to say, they’d like to see their city sustainably provide services for citizens. But as he reports in his first post (also pasted below), that’s not likely.

All California cities and their residents need a Patrick Wolff.

My wife and I have two kids; our 12-year-old son is in sixth grade and our 9-year-old daughter is in fourth grade. Both were born and raised here in San Francisco and have gone to public schools from kindergarten on up. The City is a special place, and I love it very much. But love sometimes means telling hard truths, so here it is: I’m concerned about San Francisco’s future and the state of its finances.

I have more than a dozen years of experience managing money professionally, so I love reading financial statements and crunching numbers. A lot of people don’t feel the same way, and that might include you. That’s OK. I will comb through the numbers for you, so we can focus on the big picture together. All I ask is for a bit of your time to absorb what the numbers mean. Choose the red pill and see the world the way it really is. Let’s take this journey together and follow the money.

San Francisco is more than eight years into an economic boom, and city unemployment is lower than 3 percent. So you would think our budget should be in good shape, right? Wrong.

San Francisco’s cumulative budget deficit over the next two fiscal years is projected to be $262 million out of an annual budget of roughly $10 billion. And the deficit keeps growing as the forecast period lengthens: By year four, the cumulative deficit is $709 million. Those are the official forecasts from the 2017 Joint Report by the Controller’s Office, Mayor’s Office and Board of Supervisors’ Budget Analyst.

Take a moment to appreciate what the last paragraph means. Large and growing structural deficits mean that — all else equal — San Francisco must keep cutting city services and/or raising taxes year after year after year. Why is this happening? The largest source, by far, of San Francisco’s budget pressures is also one of the least understood: the obligations The City has already incurred and must now honor for health care and pension payments.

Before we walk through the numbers for San Francisco’s health care and pension obligations, let me explain how we are about to switch gears. So far, we’ve been looking at annual budget shortfalls — how much expenditures need to be cut and/or taxes need to be raised over two years ($262 million) or four years ($709 million) to balance the budget as required by law. But when we look at the health care and pension obligations, we look at the total amount of money owed. (For you finance geeks out there, we’re switching from the income statement to the balance sheet.) When you owe money, you must pay it down over time; San Francisco’s need to pay the health care and pension obligations it has already promised is swallowing up the budget.

Using the official numbers, San Francisco is $10 billion in the hole ($4.2 billion of health care liabilities, plus $5.8 billion of pension liabilities). But even those very large numbers are too small: Using more realistic numbers, the hole is a lot deeper.

Let’s go through the numbers step by step. We will start with the health care obligations, generally referred to as Other Post-Employment Benefits (OPEB).

The last official estimation date for the OPEB liability is July 1, 2014. (Yes, really.) The total liability was $4.26 billion using a discount rate of 4.5 percent, for which The City had provisioned $49 million, for a net obligation of $4.21 billion. Here’s how to think about this $4.21 billion: On July 1, 2014, if San Francisco had raised a lump sum $4.21 billion in taxes and invested that money indefinitely for an annual return of 4.5 percent, then all future OPEB costs could be paid from that lump sum. Obviously, The City did no such thing. In fact, quite the contrary: Based on the payments The City made in each of the subsequent fiscal years since (which you can find at the bottom of page 109 of the FY 2017 Comprehensive Annual Financial Report), it’s clear the obligation has actually grown.

But that $4.21 billion estimate is too small. The OPEB liability estimate is based on assumptions about the future growth rate of health care costs. In 2014, San Francisco assumed its health care costs would grow by low to mid-single digits, but now the 2017 Joint Report says we should expect “almost double-digit cost growth” for the future. Plug in “almost double-digit cost growth” and that $4.21 billion number goes a lot higher because San Francisco will have to pay a lot more in future health care costs.

Now, let’s talk about the pension obligation. As of June 30, 2016, San Francisco estimated its total pension liability was just less than $26 billion using a discount rate of 7.5 percent; to meet this obligation it had more than $20 billion invested in stocks, bonds, etc. The difference of $5.81 billion is the net pension liability. (San Francisco recently published the updated net pension liability on page 100 of the FY 2017 Comprehensive Annual Financial Report. Even after a very good year in the stock market, the net pension liability grew slightly by $20 million to $5.83 billion.)

If on June 30, 2016, San Francisco had raised a lump sum of $5.81 billion in taxes and added it to the already existing $20 billion in assets, and if that resulting $25.97 billion were to make a 7.5 percent annual rate of return indefinitely, then all future pension obligations could be paid from those investments. In my opinion, however — and I hold this view very strongly — The City’s investments will almost certainly not return 7.5 percent over the next few decades. We will be lucky to make as much as 6.5 percent, and we will probably make less. According to the FY 2017 Comprehensive Annual Financial Report (see pages 107 and 108), dropping the assumed rate of return by just 1 percentage point to 6.5 percent raises the pension liability to about $9 billion. And if the assets learn less than 6.5 percent then the pension liability goes even higher.

There it is: San Francisco is officially $10 billion in the hole. Using more realistic numbers, the hole is substantially larger — perhaps twice as deep. The need to pay down those liabilities is a major factor causing structural deficits to rise.

Is there anything else in our future other than higher taxes and reduced services? There are no miracle fixes, but there are important things we can do. I will explain more next time.

Patrick Wolff lives in the Sunset District. Email him at

This article originally appeared on Medium, 3/18/18.