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Thursday, October 06, 2005 | Voice Special Report
Editor’s Note: Once a week leading up to the Nov. 8 election, the Voice of San Diego will explore a specific aspect of the mayoral candidates’ plans for San Diego’s fiscal recovery.
Though one union official has gone so far as to call what they are doing economic terrorism, both candidates for mayor of San Diego have expressed support for the effort to roll back any illegal pension benefits for city workers.
It would be an unprecedented move – to somehow instantly lower the formula by which city employees calculate the value of their nest eggs.
Yet both City Councilwoman Donna Frye and former police Chief Jerry Sanders have embraced the push by City Attorney Mike Aguirre to roll back city employee pension enhancements granted in 1996 and 2002. In total, the move would supposedly wipe out up to $700 million of the deficit in the city’s pension fund, which many estimate has reached $1.7 billion.
“I have never heard of pension benefits being rolled back – certainly nothing on this scale,” said Bill Sheffler, a career pension actuary and consultant and member of the board of administration of the San Diego City Employees’ Retirement System.
Behind the sound bites of a mayoral campaign, however, the actual plans to roll back the retirement benefits are full of nuances and complexities that may, in practice, make the impacts of the proposals a shadow of what is touted.
And both candidates have run into a moral dilemma that neither provides specifics on how they will overcome. That is, the issue of those who have already retired or made “life-altering decisions” based on what they thought their retirement would be.
Neither candidate seems particularly excited about drastically cutting the monthly pension checks on which retirees depend.
And the moral minefield extends further. The thought of the city eliminating the allegedly illegal pension benefits is particularly upsetting to employees who have worked for years under the impression they were building up a certain retirement allowance. The labor lawyers and representatives interviewed for this story said that while the city could try to roll back pension benefits, the employees have no way to travel back in time to reclaim their labor.
The dilemma has made its mark on Frye and Sanders’ proposals, and it’s clear that even if they and Aguirre succeed in voiding the pension enhancements granted in 1996 and 2002, those benefits will likely be backfilled significantly in newer, supposedly cleaner, labor contracts.
How they get there is where the candidates diverge.
One thing that everyone on all sides of the debate agrees on, however, is that if the candidates want to eliminate a large portion of the pension deficit, it will not happen through negotiations. It can’t.
State law prohibits unions or their representative from agreeing to lower pension benefits for current employees.
“Unions can’t bargain away an employee’s pension benefits no matter how much pressure they are under,” said Rob Butterfield, a labor attorney who once served on the board of administration of the pension system and has represented the city’s largest employee union.
Attorney Ann Smith, who represents the Municipal Employees Association, agreed – unions cannot lawfully give up those individually vested pension benefits.
“It is irresponsible of any politician to add to the public’s confusion or wishful thinking by suggesting that this can be done,” Smith said.
What’s more, the main financial advisors to both campaigns – attorney Pat Shea, who’s helping Frye, and Sanders’ volunteer April Boling, former head of the Pension Reform Committee – agree. Neither one of the candidates will push the unions to renegotiate current employee pension benefits. If you are an employee now, or a retiree now, the unions cannot negotiate away your pension benefits, both advisors say.
The rollbacks can only come from a legal determination that the contracts that created them are void. And without rollbacks, or loans or some kind of infusion of cash into the city’s pension fund, the current shortfall it faces will remain.
Yet Sanders’ second highest financial priority is to “renegotiate employment contracts.”
“I have said from day one that I would use the threat of bankruptcy and that the unions will respond to that threat and come back to the negotiating table,” Sanders said.
Because current employee and retiree pension benefits are not available to be discussed at the proverbial negotiating table, the only aspects of the pension deficit Sanders can negotiate with the unions is how fast that debt grows.
To that end, Sanders and his advisors said his threats to employee unions will be aimed at gaining salary concessions, work furloughs and changes to the pension plans for which future employees will be eligible.
Those moves, along with salary concessions and adjustments to the future of the pension plan, would keep the pension’s deficit from growing as quickly as it’s projected to. Under the most conservative of projections, the pension fund’s deficit will reach $2 billion by the end of the decade without a dramatic shift in its direction.
With his push to streamline city government and make it more efficient, Sanders believes he will be able to free up the money needed to make larger payments into the pension system to reduce the debt. Combined with his planned cuts of dozens of middle managers and other city employees, the revenue savings would help, he said.
Sanders, however, has a wait-and-see position when it comes to actually dialing back the pension benefits current employees expect and some retirees are already receiving. And he envisions a scenario where employees hired in the future enjoy significantly fewer guaranteed retirement benefits than some of the veteran coworkers they may work alongside.
“I will close down the existing pension plan for future employees,” said Sanders.
It’s a stark contrast to the approach of his rival.
Frye rejects the image of two employees working side by side for vastly different compensation levels.
She is much more confident that the pension benefit enhancements enacted in 1996 and 2002 will be invalidated and voided by a court at some point. So confident in fact, that one of her highest priorities upon taking office would be to instantly discontinue payment of the disputed benefits.
“That way we will be able to cease to recognize the illegal benefits on the books,” Frye said.
Such a maneuver would remove what Aguirre calls “paper benefits” from the pension scrolls. These are benefits owed to future retirees that currently show up as obligations on the pension books.
As her advisor Shea put it: “Not everything waits for a judge. If you’re driving 100 miles per hour down a residential street, do you really need a judge to tell you that’s illegal before you stop doing it?”
In other words, it would immediately slash the pension deficit by up to $700 million. That is, until the nuances and problems with the suggestion come into focus.
As a strong mayor, it’s assumed Frye could order the city’s auditor and comptroller to cease paying illegal benefits. But the retirement system, anticipating such a move after the city attorney suggested it several months ago, already began setting up bank accounts and contingencies that will allow it to write checks to retirees even if the city cuts off support.
And some say it’s a remarkable leap for her to void those benefits without a court order – one that would invite litigation of its own.
Smith said city laws require it and the pension system to pay benefits until a court deems them illegal.
“It would be a lawless, unethical and immoral action for any city official, elected or otherwise, to advocate non-compliance with or disobedience to those Municipal Code provisions without first obtaining a court order declaring one or more provision to be void,” Smith said.
The pension board filed its own legal action asking a judge whether it should continue to pay those pension benefit enhancements. Sheffler, the pension trustee, said that although he considers the deals that put those benefits into place “suspicious,” he wouldn’t feel comfortable ceasing payment of them until a decision was reached in court.
Pension Board President Peter Preovolos maintains the 1996 and 2002 arrangements were not illegal and he will continue to pay the benefit enhancements that were included in those agreements.
But Frye’s plan embraces judicial intervention into the process. Her plan is centered not on luring the unions to come back to the table, but instead to persuade them that a fight to protect the 1996 and 2002 benefits is senseless. If city workers agreed to settle all the legal actions and if they agreed that all the benefits were illegal, she in turn would agree to negotiate new benefits enhancements “that the city can afford” – even if it has to pay for them with tax increases.
“The goal is not to hurt people. The goal is to try to make sure the city pays the benefits the city can afford to pay,” Frye said.
And this is where the candidates differ on bankruptcy as an option. While both have spoken about it as an option, Frye hopes to ask voters as soon as possible for the authority to take the city into bankruptcy without the City Council’s approval.
But the goal wouldn’t be to “strengthen” the threat of bankruptcy. Instead, having the power to ask a federal court to take the city into bankruptcy would allow the mayor to actually do it. Such is the overwhelming burden of the current pension benefits, Frye claims, that unless the unions agree to void them and start over, she would pull the bankruptcy trigger.
Whereas Sanders wants to use the threat of bankruptcy to force the unions to talk about salary concessions, increased contributions to the pension system and benefit cuts for future employees, Frye sees bankruptcy as yet another tool to force pension benefit rollbacks on current employees and retirees.
“It’s not an abstract threat,” Frye said.
If those benefit rollbacks come, she and her advisors say that they will be replaced to some equitable level. She concedes that may mean raising taxes, which requires voter approval, hence the final significant point of her plan: to take the entire package back to the voters for consent.
Sanders said he would not support tax increases under any circumstance.
He does support Aguirre’s lawsuit to determine if benefits are illegal and rescind those that are, but he also recognizes that some sort of replacement or mitigation of the effects of that would need to occur.
The idea of backfilling or replacing voided pension benefits has accompanied all the efforts over the past year to declare the 1996 and 2002 arrangements illegal. Boling, as the chairwoman of the San Diego County Taxpayers Association, worked with attorney Michael Conger in January to file a lawsuit seeking rollback of the 2002 arrangement.
They pulled the lawsuit in anticipation of actions by the city attorney.
Had they continued with the legal action, and if they were successful, they estimated they could have voided the benefit enhancement included in the 2002 deal – immediately eliminating up to $200 million from the pension deficit.
But then they ran into the question of what the workers deserved. Were they to be successful, Conger envisioned that the benefits would have been immediately reinstated only this time under city laws that require them to be paid for more quickly.
The idea of rolling back benefits – no matter how illegal the contract may have been that created them – is full of moral problems, Boling said.
“Based on the benefits that were available, people made irreversible life-changing decisions and to go back after the fact and take away those benefits when they have no ability to change their decisions is just not the right thing to do,” Boling said.
Yet, as she acknowledged, once a policy maker considers the life-changing decisions of people who have already retired it’s a “slippery slope” that leads to consideration of all the city employees who have worked for several years under the impression that they could expect a certain retirement benefit.
To Smith, the union attorney, there’s more to worry about than the slippery slope. It’s “economic terrorism” to threaten to take away pension benefits, she said.
“It is morally and ethically reprehensible for this city to suggest that it can or should undo the promises of the past decade vis-à-vis employees – especially when it has done nothing to reverse the effects of its prior budget decisions, which led to the underfunding of the pension plan,” Smith said.
The mayoral candidates recognize the moral dilemma eliminating certain levels of benefits might create.
“There is probably going to have to be some middle ground – a way to make sure [retirees] weren’t so adversely affected that they can’t live on what they’re left with,” said Sanders, whose campaign Web site also mentions that he hopes to “minimize the dislocation for employees and retirees.
Frye said that what happens to retirees under her plan isn’t clear.
“It’s very, very tough when you have to make decisions where people – through no fault of their own – are being affected by this,” she said. “It’s hard to be particularly reassuring.”
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