The “50-50” Rule in Pension Funding (Part One)

If you ask anyone who works outside of government about the retirement plan they get from their employer, you’ll probably find that it is probably a portable retirement plan (like a 401K).

More importantly, you’ll also probably find that their plan is funded using the principle of a dollar-for-dollar match up to a capped level. For every dollar the employee puts in, the employer matches that dollar – up to a set percentage of their salary.

Sounds simple and fair, right?

We’ve all come to see how generous the pension plan is in the city of San Diego. The excessive pension benefits are an outrage to most taxpayers who wonder why city employees should be retiring with pensions higher than their average salary while working for the city, lifetime taxpayer-funded health insurance, and – in the case of DROP participants – lump-sum cash payouts of hundreds of thousands of dollars in addition to their lifetime pension benefits.

Pretty sweet deal if you can get it … and that’s why we’ve supported (at a minimum) pension benefit reforms proposed originally by the city’s Pension Reform Committee.

But it gets worse.

What is more outrageous is the fact that the city workers have not been required to pay their fair share of the cost of those benefits.

You may be surprised to know that the City’s Charter (as voted on and approved by taxpayers) contains language calling for the city (as the employer) and individual city employees to share equally in the cost of funding the pension benefits.

The only problem is the city’s politicians and officials have not complied with the Charter – and struck union contracts in recent years that got around the requirement. This scheme is called the “employee contribution offset” whereby the city picks up individual employee contributions for the cost of the pension in addition to the city’s own share.

To simplify this shell-game scheme for the average Joe, this would be like your employer paying your social security taxes on your behalf instead of deducting social security taxes from your paycheck. You’d look on your pay stub to see an amount for “Social Security payment” only to see it your employer has already cut a separate check from the company account to make your payment. No net reduction is made from your paycheck for Social Security, and viola, you are left with higher take home pay.

City union leaders will argue that the “employee contribution offset” was negotiated over the years in lieu of salary increases. They demand that city employees be given immediate pay increases to “compensate” them for any change in the employee contribution offset.

Wrong.

First, each labor contract can set salary rates irrespective of previous agreements. Heaven forbid anyone in government actually be given a pay cut! Particularly when that government faces its worse financial crisis ever! Not only is completely legal to require that employees pay their fair share, it is necessary.

Second, let’s talk about take-home pay for city employees. The unions have repeatedly claimed that city workers are underpaid, yet they produce no data to prove this claim. Each year, the Performance Institute has published a study of city employee net compensation. The study demonstrates that city workers receive excellent – and in some cases excessive – compensation.

Moreover, I agree completely with the mayor’s suggestion that the city conduct salary and compensation surveys in establishing pay rates. No, there should not be some across-the-board pay increase for city workers. We can and should provide competitive pay, and that should be the focus of negotiations on the labor contracts once the “employee contribution offset” is eliminated.

Third, the Charter requires it. The “employee contribution offset” is a flagrant disregard for the Charter and violates the public trust by not adhering to a key requirement imposed on the city and its pension system when taxpayers were first asked to approve the retirement program.

And finally, by picking up the employees’ share of pension costs, the city eliminates any check on the demands by city unions for higher pension benefits. After all, if you are not footing an equal portion of the bill for benefits, why worry about their cost? The sky is the limit on benefit increases. And we have seen with the multi-billion dollar pension debt facing the city today that this is true.

So when thinking of a key reform to include in a “comprehensive” pension reform package, the mayor should seek an immediate end to the “employee contribution offset” on a go-forward basis. If city employees are required to pay an equal share of the cost of the pension benefits they receive, they are likely to be more reasonable in their benefit demands.

In February I filed a ballot initiative to amend the City’s Charter to provide accountability and enforcement of this 50-50 share of retirement costs, but withdrew the measure in order to get Prop B and C placed on the ballot. I’m including the specific Charter language that I proposed below. Adopting this change to our Charter will end the city’s subsidization of the employee’s share of pension costs and will finally put the city’s retirement system under the 50-50 equal share rule originally envisioned by voters when approving the system years ago.

Bottom line: If more of their paycheck goes to paying their fair share of pension benefits, even city employees would start to think twice about excessive benefit levels. In fact, city employees might even want to do something about the unsustainable pension benefit levels that have already been granted and the main cause of the city’s unfunded liability … which is an issue I will address in my next post (Part 2).

P.S.: Here’s the language that we proposed be added to the Charter:

Section 143: Contributions

The retirement system herein provided for shall be conducted on the contributory plan, the City contributing jointly no amount in excess of the contributions made by with the employees affected thereunder for the cost of normal retirement allowances. Employees shall contribute according to the actuarial tables adopted by the Board of Administration for normal retirement allowances, except that employees shall, with the approval of the Board, have the option to contribute more than required for normal allowance, and thereby be entitled to receive the proportionate amount of increased allowances paid for by such additional contributions. The City shall not match any employee contributions in excess of the amount required for normal retirement allowances. The City shall not pick up nor assume responsibility for the employees’ mandatory contribution to the retirement fund. The City shall contribute annually an amount substantially equal to that required of the employees for normal retirement allowances, as certified by the actuary, but shall not be required to contribute in excess of that amount, except in the case of financial liabilities accruing under any new retirement plan or revised retirement plan because of past service of the employees.

– CARL DeMAIO