A Ballot Plan That’s More Than a 401(k)

A Ballot Plan That’s More Than a 401(k)

Photo by Sam Hodgson

Backers of a measure to give most new city workers a 401(k) rather than a pension announced the proposal at this press conference in April and released financial data about the plan's potential savings on Thursday.

 

When San Diego leaders sold the construction of Petco Park to city voters 13 years ago, they told them the development and revitalization of downtown would make the deal about “more than a ballpark.”

Thursday, backers of a ballot measure to replace pensions with 401(k)s for new city employees except police officers released long-awaited financial data about the plan and made a similar pitch: The ballot measure is more than a 401(k).

“People keep talking about this as the move to the 401(k),” April Boling, a local accountant who supports the initiative, said at a morning press briefing. “It’s kind of a simple way, I think, for the public to look at it. But this is so much more than that.”

When you examine their analysis, this messaging is easy to understand. By itself, their numbers show, their plan for replacing the city’s current pension system with 401(k)s won’t save much money. Swapping out pensions for 401(k)s isn’t the key — even if it is the primary selling point.

But when you add in the measure’s other aspects, most notably a five-year freeze in city employees’ base salary, backers still can make the case for $1.3 billion in savings over almost the next three decades.

And supporters say a 401(k) yields more benefits than savings. It shifts investment risks from city taxpayers to individual employees and provides more certainty in budgeting.

The cost figures released Thursday provide a key basis for supporters to promote their measure. They hope it will appear on next June’s ballot, the same time as the city’s mayoral primary.

We’ve put together a Q&A to help you understand how much the ballot measure does, and doesn’t, save.

Transitioning to 401(k)s costs the city money in the short-term. How will the initiative help the city’s deficit-ridden budget?

Giving most new workers 401(k)s not only won’t help the budget in the short-term, but also will make it worse over the next four years. The city will have to speed up its payments to the pension system because it’s closing the plan to most new workers. In the long-term, backers estimate transitioning to 401(k)s make up about 9 percent of the $1.3 billion in projected savings.

Freezing employees’ base salary, or pensionable pay, provides both the initial and long-term savings in the ballot measure. The pay freeze accounts for 87 percent of the total estimated savings.

Overall, supporters project $2.3 million in savings to the city budget in the first year and $189 million in the first five years.

What does it mean to freeze pensionable pay?

Projections for the city’s annual pension payment assume salaries will increase by 4 percent each year. In years when that doesn’t happen, like this past year, the city saves on the bill it owes the retirement system.

The initiative caps pensionable salaries for the next five years, which means city employees don’t get raises, and it counts the savings toward the pension payment.

The measure also anticipates giving city workers bonuses during those five years that wouldn’t count toward their pension calculations.

What are the potential problems with the pay freeze?

There are many. The measure’s supporters say the freeze strictly caps city workers’ pensionable pay. But it doesn’t. The initiative tries to balance the freeze with labor law, which requires negotiations. My colleague Scott Lewis described the freeze in April when Mayor Jerry Sanders and City Councilman Kevin Faulconer merged their own 401(k) initiative with a more radical one promoted by Councilman Carl DeMaio:

The main reason Sanders and Faulconer had originally said the cap was illegal was that in California, public employees have the right to collectively bargain about their wages. You are supposed to talk to them before you, for example, freeze their salaries for five years.

To assuage their concerns, DeMaio agreed to a provision in the initiative that says nothing in the new law interferes with collective bargaining. And if the City Council bargains with workers and wants to increase their pensions and pay, they can. They just need a two-thirds vote of the council or approval from the city’s voters.

Most of the near-term savings in the great (pension) initiative comes from this proposal. That means those savings don’t happen if worker pay — and therefore pensions — isn’t really capped.

Supporters are banking on the initiative being something that City Council members will enforce. But rather than the city’s hands being tied with chains, they’re tied with furry handcuffs you can escape from if you don’t like the game anymore.(emphasis added)

Also, the pay freeze doesn’t need to be tied to a 401(k). It could be bargained on its own through labor contracts or passed as a separate ballot measure.

Supporters have released several savings estimates. Have they all been accurate?

No. When the measure first was released, supporters claimed it would save $363 million over the first five years. Those numbers counted on a reform that’s already done. It’s been discarded in the new estimate.

The initiative’s supporters also released a higher estimate Thursday that claims $2.1 billion in total savings is possible, not $1.3 billion. The larger estimate comes from lower projected costs for 401(k)s. But those extra savings come at the expense of a fair comparison.

The $1.3 billion estimate shows city workers getting 4 percent annual raises after the freeze ends, which is the same as is currently projected. The $2.1 billion estimate trims raises under the 401(k) plan to 2 percent annually, but doesn’t change the current assumptions for the pension system.

It’s a key difference. If salaries only increase by 2 percent, then the pension system would have seen major savings, too.

“That certainly is misleading,” said Mark Hovey, head of the city’s retirement system.

What’s missing from the numbers?

The initiative includes a series of reforms that either don’t result in big savings or are more difficult to quantify. The measure gives future city politicians 401(k)s instead of pensions. It removes perks like extra pay for speaking multiple languages from pension calculations for current and new employees. (This move has raised legal complications.) It also would give new police officers reduced pension benefits.

The savings estimate assumes the city would make the maximum 401(k) match allowable under the measure.

Please contact Liam Dillon directly at liam.dillon@voiceofsandiego.org or 619.550.5663 and follow him on Twitter: twitter.com/dillonliam.

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Liam Dillon

Liam Dillon

Liam Dillon is senior reporter and assistant editor for Voice of San Diego. He leads VOSD’s investigations and writes about how regular people interact with local government. What should he write about next? Please contact him directly at liam.dillon@voiceofsandiego.org or 619.550.5663.

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24 comments
Gene Loucks
Gene Loucks subscriber

In San Diego, WE ARE NOT examining how the REST of the City is run, that is where the waste is, and that is where your biggest conspriacy lies.

Maxsmart86
Maxsmart86

In San Diego, WE ARE NOT examining how the REST of the City is run, that is where the waste is, and that is where your biggest conspriacy lies.

Mark Giffin
Mark Giffin subscribermember

Time for the taxpayers to get off this system after being abused in such a fashion. The system has the potential for future abuse. This city and its employees have proven the cannot be trusted.

mgland
mgland

Time for the taxpayers to get off this system after being abused in such a fashion. The system has the potential for future abuse. This city and its employees have proven the cannot be trusted.

Gene Loucks
Gene Loucks subscriber

The City, studied the feasibility of the contracts the City authored, the City sold the agreements to the employees and the taxpayers and we all bought into them. The City has to pay its bills....this really is not a difficult concept!

Maxsmart86
Maxsmart86

The City, studied the feasibility of the contracts the City authored, the City sold the agreements to the employees and the taxpayers and we all bought into them. The City has to pay its bills....this really is not a difficult concept!

Augmented Ballot
Augmented Ballot subscriber

Sheffler should be embarrassed. If he doesn't agree with the report, he should disown it.

Augmented Ballot
Augmented Ballot

Sheffler should be embarrassed. If he doesn't agree with the report, he should disown it.

Les Birdsall
Les Birdsall subscriber

Meanwhile, the $2 billion dollar past debt remains to be paid. It can't be talked or wished away.

Les Birdsall
Les Birdsall

Meanwhile, the $2 billion dollar past debt remains to be paid. It can't be talked or wished away.

Mark Giffin
Mark Giffin subscribermember

The initiative will go to end that screw job for the next generation. The current generation (20-40 yr olds) are stuck in this taxpayer death spiral.

mgland
mgland

The initiative will go to end that screw job for the next generation. The current generation (20-40 yr olds) are stuck in this taxpayer death spiral.

Bill Bradshaw
Bill Bradshaw subscribermember

Her only problem is boredom, a small price to pay for security, a great salary, job security and unchallengeable benefits. She's bored to tears, totally overqualified for the routine job she holds. Hang in there, girl, you're almost 55, time to retire and enjoy the good life. Start another career with a different agency!

toulon
toulon

Her only problem is boredom, a small price to pay for security, a great salary, job security and unchallengeable benefits. She's bored to tears, totally overqualified for the routine job she holds. Hang in there, girl, you're almost 55, time to retire and enjoy the good life. Start another career with a different agency!

richard brick
richard brick subscribermember

What about paying into SSI? Now that there will be no vested pension plan doesn't the city have to pay the SSI accounts of the employees with no pension?

zollner
zollner

What about paying into SSI? Now that there will be no vested pension plan doesn't the city have to pay the SSI accounts of the employees with no pension?

Gene Loucks
Gene Loucks subscriber

uhhhh,,,,Mgland...according to SDCERS their investment returns are about 20% over the last year.....that is 1Billion dollars....please let Goldsmith win the substantially equal lawsuit....I will deduct my $4k share of the $80 million he sued employees for as long as I get my substantially equal share of 1 billion which should be about $50k....that is how ridiculous his assertion of substantially equal is.

Maxsmart86
Maxsmart86

uhhhh,,,,Mgland...according to SDCERS their investment returns are about 20% over the last year.....that is 1Billion dollars....please let Goldsmith win the substantially equal lawsuit....I will deduct my $4k share of the $80 million he sued employees for as long as I get my substantially equal share of 1 billion which should be about $50k....that is how ridiculous his assertion of substantially equal is.

Mark Giffin
Mark Giffin subscribermember

Its a a simple demand.

mgland
mgland

Its a a simple demand.

Frank De Clercq
Frank De Clercq subscriber

What they are hanging there hat on is a joke. Freezing pensionable pay will be challenged in court and goes against the Corbet decision and ruling agreed upon in a settlement years ago. Why would anyone believe either one of these 'special interests'!

Frank De Clercq
Frank De Clercq

What they are hanging there hat on is a joke. Freezing pensionable pay will be challenged in court and goes against the Corbet decision and ruling agreed upon in a settlement years ago. Why would anyone believe either one of these 'special interests'!