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In my last post, I called on the city of San Diego to end its “employee contribution offset” scheme and require that the cost of all pension benefits from this point forward be funded equally between the city employee and the city (as the employer.) This 50-50 rule for funding is fair and reflects what most taxpayers have in private sector jobs.

There’s one catch. Even if we implement this reform today, the city of San Diego’s pension fund will still have a multi-billion unfunded liability for previous pension benefits granted and previous practices of underfunding the system. What should we do about that past debt?

This is the tricky part. Assuming the pension benefits are not overturned by a court, the city has to find some way to pay for them.

Unless … individual city employees “opt out” of those benefits.

That’s right; any individual city employee can waive their rights to the Cadillac benefits package and enroll in a Toyota benefits package. It would have to be done on an employee-by-employee basis and it would require some sort of contractual agreement stating terms for transitioning the employee from the old pension system into the new one. But it is legally possible.

I know – you are wondering “why on earth would a city employee waive their vested right to Cadillac pension benefits to enroll in the Toyota version?” No one in their right mind would do that … unless they got something for it.

Here’s my hunch: If you require current city employees to pay their fair share for the cost of the current benefits, they will start to feel some pressure to switch from a Cadillac plan to a Toyota plan. After all, they will see lower take-home pay if they actually have to pay their fair share of the cost of the benefits.

In fact, for new employees and existing employees wanting the Toyota version of benefits, the city can create a “Plan B” that offers a lower employee contribution rate and more sustainable benefit levels. (Heck, the city might even offer Plan B as a “portable pension” like a 401k program, but I digress.)

For employees insisting on receiving those expensive Cadillac benefits in the old “Plan A,” the city would have to honor those benefits … and pay for them. To finance those benefits, the city would have to devise a “Supplemental Pension Funding Plan” to reduce the unfunded liability. This Supplemental Pension Funding Plan would lock-in place an annual contribution for the unfunded liability in addition to the city’s normal contribution for retirement benefits. Where would the funds come from to make this supplemental payment? You guessed it, a 50-50 match between the city (diversion of existing tax revenues) and the “employee” (rank-and-file city employees).

The “employee” match could come in the form of diverting savings from staff cuts or salary cuts to fund the supplemental program. It might also come in the form of even higher employee retirement contributions (read: less take-home pay.) It would be painful, but necessary.

One final carrot might be needed if the sticks outlined in the Supplemental Pension Funding Plan are not enough to convince city workers to switch to Plan B. The city might have to offer a one-time cash buy-out (let’s call it an advance deposit of funds in the new Plan B employee retirement accounts) to sweeten the deal. While I oppose the use of Pension Obligation Bonds to pay one credit card with another, in this case we might need to use those bonds to help fund the transition of employees from Plan A to Plan B.

There’s one final element that should be considered by city employees when considering whether to enroll in Plan B or stick with the expensive Plan A. If we don’t solve this problem cooperatively (taxpayers and city employees both giving in a bit), then the next step might very well be bankruptcy court where city employees stand to lose a whole lot more.

I’m laying out this idea to generate discussion – it requires much more study and debate. But since we don’t seem to be talking about ways to solve the pension debt (other than filing more lawsuits or borrowing billions through bonds) I’m going to take the risk of putting a so-so idea out there in hopes someone else comes along with a better one.

Your thoughts?

P.S.: Here’s some Charter language that would force this kind of cost-sharing solution I’m proposing above:

Section 143.2: Contributions for Elimination of Unfunded Accrued Actuarial Liabilities

If at any time the actuary determines the retirement system has an unfunded accrued actuarial liability in excess of five percent, the Mayor and Council shall devise and implement a plan to eliminate the unfunded actuarial accrued liability in the City’s retirement system. Such a plan shall ensure that half of the liability shall be eliminated through employee acceptance of reductions in pension benefits or through increased contributions by employees to the system, or a combination thereof, and the other half of the liability shall be eliminated through the City providing increased contributions to the system.

To the extent that this section conflicts with existing labor agreements in effect as of the effective date of this section, the City shall have the authority to abide by those labor agreements provided that no officer, council, board or employee shall have the authority to enter into any new labor agreement, or extension of any labor agreement, that would conflict with this section.

CARL DeMAIO

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