How a Slam-Dunk Pension Vote Fell to Pieces

How a Slam-Dunk Pension Vote Fell to Pieces

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What had once seemed like a slam-dunk move to shave millions off the city pension bill ended in an epic failure last week, largely because chaos and confusion derailed the vote.

The city’s interim chief financial officer, the mayor’s designee on the board, was worried about getting ensnared in a conflict of interest and took a vacation instead of voting. Another mayoral appointee was stuck in Los Angeles. One traveling newcomer had yet to be sworn in. And then there’s the city worker who later told his colleagues he’d been confused and regretted his vote. And it all happened on the last business day of the fiscal year.

Now city officials are scrambling to update their budget for the fiscal year that started Monday. The vote means about $25 million fewer available dollars in the city’s budget. With that comes real consequences: It means officials must nix plans to keep libraries open three to four additional hours a week, to hire eight more police officers than initially planned and to make improvements at Mission Trails Regional Park. The city must dive into its rainy-day fund to pay for about $10 million in compensation increases included in those labor contracts and may need to come up with new solutions to cope with budget woes expected next year. (Mayor Bob Filner had said he’d use the extra cash to close next year’s budget gap too.)

“This is counter to everything we had thought in the last five months,” Filner said Friday, shortly after learning of the board’s vote.

Indeed, the board’s approval of the suggested recalculation of the city’s pension bill was little more than an afterthought. Almost everyone assumed the board would go along with the city’s suggestions.

But ultimately key absences, confusion and more than 90 minutes of deliberation ended with a shocking result: The savings expected along with the hard-fought five-year labor deals that freeze pensionable pay increases for city staffers aren’t coming this year.

***

Interim Chief Financial Officer Greg Bych knew about the impact of the five-year pensionable pay freezes long before the city’s unions agreed to them. He helped city leaders develop bargaining strategies and sat in many meetings with union leaders and City Council members.

Bych, a city staffer for more than two decades, has been on the city’s pension system board since 2009. He’s familiar with the city’s complex – and often controversial – history with its pension system.

“We in San Diego have this maybe not so unique but unique history in terms of people wearing multiple hats and voting on things they maybe should or shouldn’t have,” Bych said this week.

Months before the vote, Bych recalled something he heard from a board attorney after his 2009 appointment. The lawyer told Bych he should recuse himself if his dueling loyalties could create a potential conflict, or even the strong appearance of one.

Bych decided then he couldn’t vote on the five-year deals. He’d been involved in crafting them, so he’d need to recuse himself.

“Given my desire for a five-year deal as chief financial officer, because of the money it would’ve saved the city, I knew immediately this would be conflict for me to participate in on the (pension board) side,” he said.

(Bych didn’t, however, recuse himself in a 2009 vote on whether to change a pension accounting rule that could’ve shaved $30 million off that year’s pension bill. He was one of two on the board who favored the tweak. Bych says that vote differs because he wasn’t overseeing the city’s budget at the time and the pension system’s numbers cruncher proposed the change, not the city.)

So Bych attended a pension system investment committee meeting on Thursday afternoon and then headed north for a family vacation.

***

Others were out of town, too.

The City Council voted to appoint wealth management executive Mark Ealy to the pension board last Tuesday but he was on a previously scheduled family vacation in the British Virgin Islands. Fellow appointee Thanasi Preovolos began reviewing board paperwork within hours of the meeting.

Meanwhile, attorney and board member Valentine S. Hoy tried to make plans to phone into the meeting from Los Angeles.

Hoy, a partner in his large law firm’s San Diego office, was attending a crucial work meeting. Ultimately, that gathering ended too late.

“By time I got break in the L.A. meeting and texted that I was free, it was done,” Hoy said.

It’s unclear how either man would have voted. Ealy couldn’t be reached and Hoy refused to comment on whether he would’ve supported the change.

***

The pension board meeting kicked off early Friday with a consent agenda, various updates and a couple public comments.

Then the discussion of the city’s pension bill began. Pension system CEO Mark Hovey and three actuaries made presentations.

The actuaries, who make predictions about variables that could affect the city’s pension fund, told board members that the unfunded portion of the city’s pension holdings would drop from about $2.3 billion to $2.1 billion if they agreed to reconfigure their long-term plans. This would mean 70.5 percent of the city’s liabilities would be covered, up from 68.6 percent.

At the same time, the actuaries said, city staffers would see a slight decrease in their annual pension contributions.

The number crunchers didn’t endorse the plan, nor did they maintain that the pension system’s current methods are best.

Either would be acceptable, they said.

A couple board members advised their colleagues to focus on whether those assumptions seemed responsible.

Board members started to share their opinions.

Board President Herb Morgan was among those who weighed in.

Morgan, who heads a local investment firm, questioned whether it would be responsible to lessen the city’s pension bill this year, given that it’s far from fully funded.

“If we pass this, we’re gonna lower both sides’ contributions,” Morgan told fellow board members. “San Diego has a very unique history that we have worked, this board and previous boards, very hard to change, to change the image, to change the reputation, and to change the reality. We done a really outstanding job and I don’t want to do anything to even potentially tarnish what we’ve built.”

Board members deliberated.

Alan Arrollado, a prominent fire union leader who serves on the board, advocated against Morgan’s argument.

Recalculating the city’s method of assessing its pension bills would both lower costs for the city and employees while also lowering the long-term pension burden, Arrollado said.

Board member Jeff Wallace, a staffer in the city’s real estate assets department, agreed.

But Morgan didn’t waver and said he wished the city had consulted the pension board weeks before the last-minute vote, which included pay raises for staffers.

Arrollado challenged that point. In his case, Arrollado said, the increase only amounted to about $25 extra a paycheck and the change would benefit the city, its employees and taxpayers.

A few minutes later, a relatively new board member chimed in.

Jimmy Steel, who works in the city’s fleet department, said Arrollado and Morgan’s comments had swayed his vote.

“I (would) maybe consider not approving (the recalculation), just because of the reason that I don’t think $25 extra a month will really benefit (city staffers) a whole lot so that was kind of like, my outlook on the percentage increases,” Steel said.

The board voted shortly after that.

Six board members voted to recalculate the city’s pension assumptions. Four, including Morgan and Steel, voted against the change. Just one more vote would’ve allowed the city to shave more than $20 million from its pension bill.

Morgan was surprised. He said he expected to be a dissenter, not a member of the winning side.

Arrollado and Preovolos quickly proposed another vote.

“Quite frankly, I think leaving this issue open is a bad idea,” Preovolos said.

But a vote on whether to approve another recalculation method that would’ve lessened the city’s pension bill by $20 million this year, rather than the roughly $25 million initially foreseen, failed with a tie vote.

It was over.

***

Word of the vote spread within the hour.

A couple union leaders shared updates on Twitter.

An aide told Filner about the vote just moments before he walked into an explosive noon press conference with reporters.

He told the media he wanted to find out if board members could vote again.

“It was a 6-4 vote in favor of it. They needed seven. If one person changes their mind, we’ll see if that can be re-voted or not,” Filner said.

That never happened.

Bych called Hovey, the pension board chief, around the same time. He’d been driving all morning.

Bych got news he didn’t expect.

“I was surprised, frankly,” he said.

Within hours, Steel told fellow blue-collar union members that he’d made a mistake.

Steel, who was appointed to his post in April after running unopposed, said he was confused.

“He said he did not have all the information,” AFSCME Local 127 President Frank Pitarro said.

Pitarro and other Local 127 members were horrified.

“AFSCME wanted this to go through. That’s the whole reason we agreed to the five-year contract,” Pitarro said. “We agreed to the no pensionable raises for the next five years and giving the city a $25 million savings because it helps all of us.”

By Monday, the book was closed.

The city cut its $275.4 million check to the pension system on Monday and a refund wasn’t even a remote possibility.

“Once city makes their contribution it’s a one-way transaction,” said Hovey, the pension system chief. “The IRS does not allow us to return contributions once they’ve been paid.”

Still, future pension, and thus budget, savings are possible due to the five-year deals.

Hovey said the pension system’s actuaries will analyze the impacts of those contracts, along with a number of other variables, and likely assume similar savings. They’ll release their updated bill, due this time next year, in January.

“Not taking action effectively just punts it to next year,” Hovey said.

But it means fewer police cadets, library hours and park upgrades this year.

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Lisa Halverstadt

Lisa Halverstadt

Lisa Halverstadt is a reporter at Voice of San Diego. Know of something she should check out? You can contact her directly at lisa@vosd.org or 619.325.0528.

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16 comments
Chris Brewster
Chris Brewster

I would add one aspect to my earlier comments http://bit.ly/17CGZqv on this hearing. The independent actuary, Cheiron, apparently did their routine actuarial work earlier in the year which resulted in one of these report. That one was funded by the pension system, as is normal. That is, the pension system contracts for actuarial advice on funding status each year. In light of the recent pay freeze agreements with labor unions and the assumed savings, a second actuarial assessment was conducted by Cheiron, but this time it was funded by the City of San Diego, not the pension system. Now the pension board was presented by one actuarial recommendation assembled some time ago by Cheiron, funded by the pension system, and a second actuarial recommendation assembled by Cheiron with funding from the City of San Diego. Someone asked and was advised there was no conflict of interest in this. The reports, not surprisingly, gave two different recommendations, but Cheiron declined to recommend one of its recommendation over the other. Add to this that Cheiron is the group that estimated major savings due to a five year pay freeze prior to the vote on Prop B. There is an Alice in Wonderland quality to some of this.Voices: Better for City's Pension System to Play It Safe - http://bit.ly/17CGZqvMore than $20 million in savings the city was counting on in its budget disappeared on Friday when the city's pension board decided not to make certain changes to the city's pension bill. One impact Lisa Halverstadt noted: City libraries won't have t...

Chris Brewster
Chris Brewster subscribermember

I would add one aspect to my earlier comments http://bit.ly/17CGZqv on this hearing. The independent actuary, Cheiron, apparently did their routine actuarial work earlier in the year which resulted in one of these report. That one was funded by the pension system, as is normal. That is, the pension system contracts for actuarial advice on funding status each year. In light of the recent pay freeze agreements with labor unions and the assumed savings, a second actuarial assessment was conducted by Cheiron, but this time it was funded by the City of San Diego, not the pension system. Now the pension board was presented by one actuarial recommendation assembled some time ago by Cheiron, funded by the pension system, and a second actuarial recommendation assembled by Cheiron with funding from the City of San Diego. Someone asked and was advised there was no conflict of interest in this. The reports, not surprisingly, gave two different recommendations, but Cheiron declined to recommend one of its recommendation over the other. Add to this that Cheiron is the group that estimated major savings due to a five year pay freeze prior to the vote on Prop B. There is an Alice in Wonderland quality to some of this.Voices: Better for City's Pension System to Play It Safe - http://bit.ly/17CGZqvMore than $20 million in savings the city was counting on in its budget disappeared on Friday when the city's pension board decided not to make certain changes to the city's pension bill. One impact Lisa Halverstadt noted: City libraries won't have t...

MARK GIFFIN
MARK GIFFIN

Board president Herb Morgan.................. “Anytime I see a proposal in a system that’s 68 percent funded and here’s the proposal: let’s lower the plan sponsor’s contribution and let’s lower the participant contributions and let’s all ride unicorns and eat lollipops,” he said. “I want to know how is the system better … off if we lower both sides’ contributions at a time when we’re 68 percent funded.” Sounds like he sees it as more shell games in the system of perpetual debt.

Mark Giffin
Mark Giffin subscribermember

Board president Herb Morgan.................. “Anytime I see a proposal in a system that’s 68 percent funded and here’s the proposal: let’s lower the plan sponsor’s contribution and let’s lower the participant contributions and let’s all ride unicorns and eat lollipops,” he said. “I want to know how is the system better … off if we lower both sides’ contributions at a time when we’re 68 percent funded.” Sounds like he sees it as more shell games in the system of perpetual debt.

Bill Sheffler
Bill Sheffler

Arrollado was either dissembling or ignorant if he represented as reported above that lowering the contribution would lower the long term burden. It could only increase the burden in future years. The ultimate cost of the pension plan is not determined by the board, or the actuaries. It is determined by the details of the plan document. The same pension dollars are due employees when they retire regardless of the funding the city has done in the past. Delaying plan funding increases future required contributions because it reduces investment income. That lost income needs to be made up, and the only source is additional contributions. Further, the current funding level of the city plan so low that it would be deemed “endangered” or “critical” if current IRS standards were applied. This plan simply needs more funding if municipal finances are to be strengthened in the future. The board has a fiduciary duty to protect plan participants, in kind of a backward fashion that was accomplished Friday.

Bill Sheffler
Bill Sheffler subscribermember

Arrollado was either dissembling or ignorant if he represented as reported above that lowering the contribution would lower the long term burden. It could only increase the burden in future years. The ultimate cost of the pension plan is not determined by the board, or the actuaries. It is determined by the details of the plan document. The same pension dollars are due employees when they retire regardless of the funding the city has done in the past. Delaying plan funding increases future required contributions because it reduces investment income. That lost income needs to be made up, and the only source is additional contributions. Further, the current funding level of the city plan so low that it would be deemed “endangered” or “critical” if current IRS standards were applied. This plan simply needs more funding if municipal finances are to be strengthened in the future. The board has a fiduciary duty to protect plan participants, in kind of a backward fashion that was accomplished Friday.

Bill Sheffler
Bill Sheffler

If the city and labor undo the freeze after the five years, ie restore pensionable pay to the then current full pay level, the savings will be largely undone. The cost will fall entirely on the city, and the employees will pay nothing for the retro increase. These types of whipsaws are part of the reason for the shift to a defined contribution plan

MARK GIFFIN
MARK GIFFIN

So the recalculation Mr. Arrollado would of created a situation within the 15 year period of payments that would have (1)increased the future payments within the time frame or (2)required that time frame be expanded more years. IOW back to underfunding.

Augmented Ballot
Augmented Ballot

Bill, any comment on the rationale given by Cheiron and SDCERS that savings from the 5-year freeze were likely to be limited; that is, that the assumption of permanently depressed pay used in the Prop B analysis was unlikely to be true?

Bill Sheffler
Bill Sheffler subscribermember

If the city and labor undo the freeze after the five years, ie restore pensionable pay to the then current full pay level, the savings will be largely undone. The cost will fall entirely on the city, and the employees will pay nothing for the retro increase. These types of whipsaws are part of the reason for the shift to a defined contribution plan

Mark Giffin
Mark Giffin subscribermember

So the recalculation Mr. Arrollado would of created a situation within the 15 year period of payments that would have (1)increased the future payments within the time frame or (2)required that time frame be expanded more years. IOW back to underfunding.

Augmented Ballot
Augmented Ballot subscriber

Bill, any comment on the rationale given by Cheiron and SDCERS that savings from the 5-year freeze were likely to be limited; that is, that the assumption of permanently depressed pay used in the Prop B analysis was unlikely to be true?

Augmented Ballot
Augmented Ballot

Bill, Prop B has nothing to say about what happens to pay after a 5-yr freeze. There's nothing there to comply with. That's why assuming a permanent depression following 5-yrs was doubly silly.

Bill Sheffler
Bill Sheffler

Cheiron and sdCERS were assuming that the city would not comply with Prop B in the long term. The city has that discretion, the pensionable pay freeze element of prop B was not binding on the city. Taxpayers and voters have a limited voice in city labor matters.

Augmented Ballot
Augmented Ballot subscriber

Bill, Prop B has nothing to say about what happens to pay after a 5-yr freeze. There's nothing there to comply with. That's why assuming a permanent depression following 5-yrs was doubly silly.

Bill Sheffler
Bill Sheffler subscribermember

Cheiron and sdCERS were assuming that the city would not comply with Prop B in the long term. The city has that discretion, the pensionable pay freeze element of prop B was not binding on the city. Taxpayers and voters have a limited voice in city labor matters.