Three Questions for Filner’s Pension Plan

Three Questions for Filner’s Pension Plan

Photo by Sam Hodgson

Bob Filner at a mayoral debate at the Balboa Theatre.

 

It’s here.

After about 300 days, mayoral candidate Bob Filner finally released his plan to reform San Diego’s pension system, something he first promised “about a month” after he announced his candidacy. Like we did when the June pension initiative was first released, we’ll break down the plan’s key elements and answer three significant questions about it.

Filner proposes to:

• End six-figure pensions for new hires.

• Negotiate five-year labor contracts with city workers that freeze pay for the next two years and provide 2 percent raises in each of the following three years.

• Create a task force to advise the mayor on further pension reforms, including taking out a $750 million loan, called a pension obligation bond, on the hope it earns more money in investments than it costs in interest to borrow.

• Eliminate the city subsidy for employee pension contributions and put half of any projected budget surplus into the pension fund.

• Keep guaranteed pensions rather than give 401(k)s to new city workers. This is its primary distinction from Proposition B, the ballot measure promoted by the city’s Republican and business interests and supported by Filner’s three mayoral opponents.

1. How Much Money Does Filner’s Plan Save?

Filner contends his plan will save $753 million over 15 years. But there are major catches.

The biggest savings — $483 million — comes from pension obligation bonds. This is the source of Filner’s oft-repeated claim that he can put hundreds of millions of dollars into the city’s day-to-day operating budget without raising taxes.

That comes at a significant cost. Filner is kicking the pension can down the road by paying back the city’s existing costs over a longer period of time, forcing the debt further onto future generations.

Filner couldn’t be reached for comment on Monday. But he has said that voters wouldn’t care if the pension debt grew if it meant more money could be freed up to fix the city’s current problems.

“The problem is now,” Filner told me in August. “If people are saying no new taxes and they want their potholes fixed and I can lower the payment, I think that makes more sense.”

Of course, city leaders previously pushed today’s pension costs off on future generations. That’s what caused the original pension crisis and officials have spent years undoing costly decisions like this.

Another aspect of the plan won’t save as much money as he says. He claims more than $25 million in savings from the five-year labor contract over the next two years. But the retirement system already assumes zero percent pay increases during that time. So that savings is already calculated into the city’s pension debts. There’s no savings left to claim.

2. What’s the Risk?

Filner often bashes Prop. B by arguing that the city shouldn’t make its workers reliant on the stock market “casino.”

But his plan doubles down on the casino and puts taxpayers at risk.

The way cities can make money off pension bonds is by playing the stock market.

Here’s how they work: Borrowing money doesn’t erase the debt, it just shifts it from one side of the books to the other.

A city’s goal is to make more money each year through investments than the interest rate it’s paying on its pension bonds. If that happens, the city can save money in the long run. If it doesn’t, then it costs even more and taxpayers are left to make up the difference.

So Filner not only is fine with the casino, but also he’s willing to borrow money to place his bet.

Filner is assuming the city will pay 6.5 percent interest on the pension bonds. The retirement system assumes the city will make 7.5 percent each year on its investment. This spread is where Filner hopes to make the city money.

Pension bonds make the most sense if they’re issued at the bottom of an economic cycle when the stock market is likely to rebound with big investment returns. That’s already happened for this latest cycle.

Public pension expert Girard Miller, who writes a column in Governing magazine, has called using pension bonds “increasingly imprudent” in current market conditions, when stock prices have already doubled from their recession bottom.

In a recent pension-related federal court trial in Baltimore, Miller compared pension bonds to taking out a second mortgage on your house and using the proceeds to fund your IRA. If you’re right, you make a profit. But if you’re wrong, you still owe the bank and have nothing to show for it. Miller would not take issue with the prudent use of pension bonds, but he would wait until the next recession. That begs the question of how Filner’s plan would save any money before then.

It’s also not like pension obligations bonds are a new idea. Current Mayor Jerry Sanders pondered pension bonds throughout his tenure, but never pulled the trigger because of the risk, his top deputy has said.

The outside investigators hired to clean up the city’s pension and accounting scandal also panned the idea of pension obligation bonds for similar reasons.

3. What About the Other Parts of Filner’s Plan?

Like Prop. B, Filner’s plan relies on savings from new labor contracts with city workers. The rationale is the same: Pay people less when they’re working and you pay them less in retirement.

The retirement system assumes city worker pay will increase by 3.75 percent each year. By giving 2 percent across the board pay hikes in years three through five of a labor contract, Filner aims to save pension costs. Contrast that with Prop. B, which aims to save more by giving no pensionable salary increases during that time.

In either case, though, these savings aren’t guaranteed. They have to come through union negotiations. Michael Zucchet, head of the city’s white-collar union, wouldn’t commit to supporting Filner’s exact salary figures, but said a long-term deal benefits the city and its workers. It’s also preferable, he said, to Prop. B’s five years of pensionable pay freezes.

“The notion of having a reasonable cost of living adjustment some years into the future doesn’t seem too unreasonable,” Zucchet said.

The other big ticket item in Filner’s plan — the $100k pension cap — won’t save any money in the short term. It will only affect new employees.

Liam Dillon is a news reporter for Voice of San Diego. He covers San Diego City Hall, the 2012 mayor’s race and big building projects. What should he write about next?

Please contact him directly at liam.dillon@voiceofsandiego.org or 619.550.5663.

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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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38 comments
Liam Dillon
Liam Dillon memberadministrator

This could turn into a much longer conversation. But if you're interested in having it, I'm open to getting coffee. Email me at liam.dillon(at)voiceofsandiegoDOTorg.

dillonliam
dillonliam

This could turn into a much longer conversation. But if you're interested in having it, I'm open to getting coffee. Email me at liam.dillon(at)voiceofsandiegoDOTorg.

Chris Brewster
Chris Brewster subscribermember

Regarding bias in the news. I think it is totally OK to admit that all reporters, as human beings, are biased, even if they try to avoid it. However, we rely on you to report facts to the best of your knowledge. If you have determined that it is OK to intentionally add bias to articles as a matter of course then how do we trust that the facts are as you represent them? If I read an editorial in the U/T, I assume that they have assembled the facts that buttress their opinion, to the exclusion of facts that may not. In the case of their news articles, I hope that the writers are aiming, to the best of their ability, to report the facts in a balanced way. I'm unclear where VOSD comes in on this and it leaves one with an uncertainty about the reliability of what appears here.

B Chris Brewster
B Chris Brewster

Regarding bias in the news. I think it is totally OK to admit that all reporters, as human beings, are biased, even if they try to avoid it. However, we rely on you to report facts to the best of your knowledge. If you have determined that it is OK to intentionally add bias to articles as a matter of course then how do we trust that the facts are as you represent them? If I read an editorial in the U/T, I assume that they have assembled the facts that buttress their opinion, to the exclusion of facts that may not. In the case of their news articles, I hope that the writers are aiming, to the best of their ability, to report the facts in a balanced way. I'm unclear where VOSD comes in on this and it leaves one with an uncertainty about the reliability of what appears here.

Liam Dillon
Liam Dillon memberadministrator

On the $100k limit, I asked Filner about it today. He said it would apply to new employees and didn't claim any savings in his plan because it would take a while to do anything. He's also told me in the past it would only apply to new hires. Today, he also said he was interested in looking at limiting current managers from accruing $100k pensions from their future service. He said his task force would look at it, but that it was legally untested. Hope that helps.

dillonliam
dillonliam

On the $100k limit, I asked Filner about it today. He said it would apply to new employees and didn't claim any savings in his plan because it would take a while to do anything. He's also told me in the past it would only apply to new hires. Today, he also said he was interested in looking at limiting current managers from accruing $100k pensions from their future service. He said his task force would look at it, but that it was legally untested. Hope that helps.

Robert Leif
Robert Leif subscribermember

"1. No more outrageous six-figure pensions! The horror stories you hear about $250,000 employee pensions are management employees who get crony pay raises and bonuses in their last years on the job. They can end up with pensions that amount to twice their salaries. Because these employees are not under any collective bargaining agreement, the Mayor and Council can end these outrageous practices today!"

rleif
rleif

"1. No more outrageous six-figure pensions! The horror stories you hear about $250,000 employee pensions are management employees who get crony pay raises and bonuses in their last years on the job. They can end up with pensions that amount to twice their salaries. Because these employees are not under any collective bargaining agreement, the Mayor and Council can end these outrageous practices today!"

Chris Brewster
Chris Brewster subscribermember

Mr. Sheffler: Certainly there are arguments that pensions should be erased entirely, so that there is no market risk to the city. I get that, though I disagree. However, the biggest problem the city faces right now in this area is a current obligation that cannot be resolved through pension reform. It has to be paid. I'm unclear why spreading the cost over a longer period of time instead of up front is not a good idea. People, businesses, and governments do that all the time when major expenses come their way. It doesn't prevent reform. It spreads costs over time.

B Chris Brewster
B Chris Brewster

Mr. Sheffler: Certainly there are arguments that pensions should be erased entirely, so that there is no market risk to the city. I get that, though I disagree. However, the biggest problem the city faces right now in this area is a current obligation that cannot be resolved through pension reform. It has to be paid. I'm unclear why spreading the cost over a longer period of time instead of up front is not a good idea. People, businesses, and governments do that all the time when major expenses come their way. It doesn't prevent reform. It spreads costs over time.

Mike Zucchet
Mike Zucchet subscriber

Or the $75 million 30-year bond just approved by the Council, which included road repairs that surely don't have a life of beyond 5 or 10 years, let alone 30...looks like we need to go back and pay that off in 5 years just to be consistent?

Michael Zucchet
Michael Zucchet

Or the $75 million 30-year bond just approved by the Council, which included road repairs that surely don't have a life of beyond 5 or 10 years, let alone 30...looks like we need to go back and pay that off in 5 years just to be consistent?

Jim Jones
Jim Jones subscriber

This plan is simply a way to leave the door open for more pension abuse by the unions.

Jim Jones
Jim Jones

This plan is simply a way to leave the door open for more pension abuse by the unions.

Brant Will
Brant Will subscribermember

Will read the whole article next time! Apologies.

brantwill
brantwill

Will read the whole article next time! Apologies.

Bill Sheffler
Bill Sheffler subscribermember

So MikeZ's contention that pension debt financing should look like public works financing doesn't hold water. Capital projects have a longer useful life than employee benefits. Extending the pension debt payoff period s just a leftist -labor official's attempt to open up the budget for more salary increases, which now all mayoral candidates are on record as opposing.

WmJSheffler
WmJSheffler

So MikeZ's contention that pension debt financing should look like public works financing doesn't hold water. Capital projects have a longer useful life than employee benefits. Extending the pension debt payoff period s just a leftist -labor official's attempt to open up the budget for more salary increases, which now all mayoral candidates are on record as opposing.

James Davis
James Davis subscriber

Who talks like that? Seriously.

Liam Dillon
Liam Dillon memberadministrator

The Prop. B financial analysis takes the existing SDCERS assumed no salary increases for FY13 and FY14 into account.

dillonliam
dillonliam

The Prop. B financial analysis takes the existing SDCERS assumed no salary increases for FY13 and FY14 into account.

Liam Dillon
Liam Dillon memberadministrator

Above all, I think it's fair to emphasize the dichotomy that Filner presents. The stock market, he says, is not an acceptable risk for an individual employee's retirement. But he believes borrowing money to put in the stock market is an acceptable risk for taxpayers.

dillonliam
dillonliam

Above all, I think it's fair to emphasize the dichotomy that Filner presents. The stock market, he says, is not an acceptable risk for an individual employee's retirement. But he believes borrowing money to put in the stock market is an acceptable risk for taxpayers.

Brant Will
Brant Will subscribermember

In a perfect world, SDCERS would change the amortization on the 2007 UAAL to a 30 year fixed or a 20 year rolling amortization but the City can't negotiate this with the Board. This would, however, give the City a lot of the cash flow benefits of POBs without the additional risk. This should be pretty simple to model.

brantwill
brantwill

In a perfect world, SDCERS would change the amortization on the 2007 UAAL to a 30 year fixed or a 20 year rolling amortization but the City can't negotiate this with the Board. This would, however, give the City a lot of the cash flow benefits of POBs without the additional risk. This should be pretty simple to model.

Mark Giffin
Mark Giffin subscribermember

The spread is an issue here and so are the return assumptions

mgland
mgland

The spread is an issue here and so are the return assumptions

Mike Zucchet
Mike Zucchet subscriber

ething similar in the City of San Diego they are branded as "imprudent"?

Michael Zucchet
Michael Zucchet

ething similar in the City of San Diego they are branded as "imprudent"?

Irvin krick
Irvin krick subscriber

Anyone in the city of San Diego even thinks about giving Filner a vote is a few bricks short of a ton. Remmber this is one of the guys (Filner) that keeps voting for all the Obama palns and screws the publuic with things and increases the debt. Remmber. Remmber. Remmber. Can not say this enough, even though I do not live in the city.

Irv
Irv

Anyone in the city of San Diego even thinks about giving Filner a vote is a few bricks short of a ton. Remmber this is one of the guys (Filner) that keeps voting for all the Obama palns and screws the publuic with things and increases the debt. Remmber. Remmber. Remmber. Can not say this enough, even though I do not live in the city.

Chris Brewster
Chris Brewster subscribermember

I would respectfully suggest that there are pros and cons to this proposal and you have mostly focused on the possible cons. Prop B is a crap shoot, since it is subject to legal review. The Filner plan seems to me to be more certain, in the sense that it depends on processes that are clearly legally defensible and that are in the best interest of unions, which must agree to them. There are uncertainties in both approaches.

B Chris Brewster
B Chris Brewster

I would respectfully suggest that there are pros and cons to this proposal and you have mostly focused on the possible cons. Prop B is a crap shoot, since it is subject to legal review. The Filner plan seems to me to be more certain, in the sense that it depends on processes that are clearly legally defensible and that are in the best interest of unions, which must agree to them. There are uncertainties in both approaches.

Mark Giffin
Mark Giffin subscribermember

Fiscal pedophilia best describes his "gamble"

mgland
mgland

Fiscal pedophilia best describes his "gamble"

Brant Will
Brant Will subscribermember

n refinancing from a 30 year to 15 year mortgage. The City is better off using pension obligation bonds to smooth out its payments to allow for restored services now when we know our revenues will grow in the future. It's also worth noting that we're already paying 7.5% interest on the money that ISN'T in the pension fund. There is some risk of negative arbitrage on the pension bonds, i.e., if we issue bonds at, say, 6%, we only make money if the pension fund returns more than 6%. But, again, the point of the pension bonds is more about cash flow than arbitrage. At least, that's my opinion.

brantwill
brantwill

n refinancing from a 30 year to 15 year mortgage. The City is better off using pension obligation bonds to smooth out its payments to allow for restored services now when we know our revenues will grow in the future. It's also worth noting that we're already paying 7.5% interest on the money that ISN'T in the pension fund. There is some risk of negative arbitrage on the pension bonds, i.e., if we issue bonds at, say, 6%, we only make money if the pension fund returns more than 6%. But, again, the point of the pension bonds is more about cash flow than arbitrage. At least, that's my opinion.