Friday, April 22, 2005 | As San Diego Mayor Dick Murphy and the City Council attempt to manage the city’s oppressing pension deficit, they will also be navigating another potentially tricky passage: their own financial interests in the system.
Like any other city employee, the mayor and eight council members put their financial future in the pension plan. But the legislators stand in the unique position of being asked to come up with a way to shrink the retirement system’s $1.37 billion deficit; one solution that many, including some on the council, point to is the reduction of current benefits.
One of the benefits drawing the most attention from critics is the purchase of service credits. It is a benefit that allows employees to purchase years of work service at a price substantially subsidized by the city. It is one in a long list of factors contributing to the pension debt.
Six sitting City Council members and the mayor have purchased credits at sizable discounts. The politicians are just a handful among the 2,900 employees that City Attorney Mike Aguirre says have purchased 13,000 years of service at an estimated cost of $120 million to the system. Council members Michael Zucchet, Toni Atkins, Brian Maienschein, Donna Frye, Jim Madaffer and Ralph Inzunza all purchased the benefit.
Aguirre calls the benefit illegal because employees receive much more than they put into the system. In relation to the benefit, he is currently investigating whether the mayor and council violated statutes that forbid public officials from voting on items in which they have a financial stake.
A retiree’s annual pension is based on a formula that includes their years of service to the city as one of the key factors; the more years worked, the more dollars received. By purchasing years of credit, employees can add years to this formula without actually having worked them. The system’s actuary determined in 2002 that the credit benefit – created in 1997 – cost the pension system significantly. Its terms were eventually changed in late 2003.
For example, Murphy purchased a total of five years of service, beginning in mid-2002, the time he and council members began receiving reports of the struggling pension system.
According to calculations based on information received in Public Records Act requests from the San Diego City Employees’ Retirement System, the mayor paid a total of $71,760 for the five years of credit.
Those five years would alter his retirement equation drastically.
Assuming Murphy finishes his term in office, he will have worked 12 years for the city, eight as mayor and four as a councilman in the 1980s. Using that assumption, he would retire with an annual city pension of $42,000 a year.
However, add his five years of credit and that annual pension jumps to $59,500 – a difference of $17,500 a year. Once he retires, it will take Murphy, who is 62 years old now, slightly more than four years to make back what he spent. After that, the pension system – and to no small degree, taxpayers – will be responsible for his augmented payment until he stops receiving a retirement check.
While Murphy’s original investment will likely earn money in interest and investments for the pension system, the pension’s actuary determined the credit to be a substantial subsidy for employees in 2002. He lobbied twice to have its terms adjusted. The pension board rejected his first attempt, but the purchase price for the credits was eventually increased significantly in late 2003. No council member has purchased them since.
A majority of the council members stand to benefit similarly. Assuming that each council member simply finishes out their current term in office, never works for the city again and never receives a pay increase, here are the figures based on statistics provided by the pension system:
– Atkins purchased more than five years of service in 2003 for nearly $59,000, which will boost her annual retirement check by $13,700 to a total of $47,800 annually. It will take her about four-and-one-third years to recover the money invested. She worked for the city for almost seven years as a council aide and just began her second term in office. If she completes the term, she will have worked a total of 15 years for the city. Council members are forbidden from serving more than two terms. Atkins didn’t return a phone call seeking comment.
– Inzunza purchased 4.67 years of service for $50,300 in 2002, adding an estimated $12,300 a year to what would have been about a $20,000 annual retirement payment. It will take him about four years to cover his investment. Inzunza worked as a council aide for more than three-and-a-half years. He took office in a special election in 2001, won again in 2002 and is up for reelection in 2006. By that time, he will have worked for the city for a little more than 13 years.
– Madaffer bought five years of credit in 2002 for $53,800. The purchase would enhance his annual pension check by $13,200 a year, upgrading a $34,000-a-year pension to $47,200. He worked as a council aide for nearly seven years and recently began his second term in office. Madaffer was traveling and unavailable for comment.
– Zucchet purchased almost three years of credit for a total of $33,100 in 2003. The move takes what would have been a $12,900 annual pension to $20,700. Zucchet worked more than a year as a council aide, was elected in 2002 and is up for reelection in 2006. He didn’t return a call seeking comment.
– Frye bought 1.83 years of service for $20,700 in 2003. As a result, she is slated to receive an extra $4,800 a year for a total of $18,000. Frye won in a special election in 2001 and again in 2002. She’ll be up for reelection in 2006.
Frye has written pension administrators to try and quantify the value of her purchase. “Whatever I receive, I want to make sure I’ve paid for – and fully paid for – and if I have not done that, I plan to correct that and understand it,” Frye said.
If it’s determined that there’s an imbalance, Frye suggested paying more into the system or having her credits devalued to reflect what she’s paid.
– Maienschein purchased .92 years of service for $9,900 and will receive a boost of $2,400 once retired, bringing his total estimated annual pension to $23,500. He recently began his second term in office and didn’t return a call seeking comment.
The above calculations assume that none of the council members will begin collecting retirement before age 55. At the time it was purchased, one year of credit cost general employees 15 percent. That number was adjusted to 27 percent in late 2003 for general employees and 50 percent for elected officials.
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