As Salary Freezes Thaw, Impacts Seen to Pension System

Thursday, April 19, 2007 | As the city of San Diego’s famous pension deficit has steadied in recent years, some officials have noted that progress could be made through simple measures. One of the most commonly cited: salary freezes that have either been accepted by or foisted upon workers.

In the last two fiscal years, only blue collar workers have received a raise — more than 1 percent in 2006 after they decided to lower their pay just before a scheduled increase.

The respite from pay increases has proven a boon to the pension system, as its financial projections expect employees to receive a 4.25 percent annual raise. For every year employees go without a raise, the system’s projected liabilities shrink.

Last year, for example, the pension fund reported netting $58.6 million because its projections — for items such as employee pay — didn’t go as planned.

But the period of wholesale salary freezes will end when the new fiscal year begins July 1. The raises will break a period of freezes that has, along with increased investment returns and ramped-up payments, helped stem the growth of a pension system deficit that had gone from $720 million in 2002 to $1.4 billion in 2004. The deficit then held steady at about $1.4 billion the following year and dipped to $1 billion in the latest report.

The city’s blue-collar and white-collar employees, in the last year of three-year deals, are set to receive a 4 percent raise. (White-collar workers have had two years of pay freezes; blue collar workers anticipated agreed to take a pay cut of 1.9 percent before a year when their pay went up 3 percent.) Police officers will get their first raise in nearly two-and-a-half years, and by the time the year’s complete, will have either an 8 percent or 9 percent boost depending on their experience.

And, against Mayor Jerry Sanders’ wishes, some council members are pushing a pay increase for firefighters, too.

At least one of those increases is expected to cause the city’s pension deficit to grow and force the city to use more of its annual budget to finance its pension bill. For example, the city’s actuary estimates that an 8 percent raise for all police officers will increase that $1 billion deficit by $51 million and force up the city’s annual pension bill by $6.4 million.

Union officials say that, even after the new raises, the pension system will still experience a net savings over the three-year period. Over that time frame, the pension system essentially expected 12.75 percent in salary increases — more than the 9 percent pay increase for officers, they say.

“The reality is that the police department hasn’t had a raise in 2 years,” said Mark Sullivan, member of the Police Officers Association who also sits on the pension board.

The raises for the white-collar and blue-collar workers, at 4 percent, still fall below the expected 4.25 percent.

Bill Sheffler, an actuary who sits on the pension board with Sullivan, said he’s long worried that recent years’ successes would be drowned out by new labor contracts.

“The concern was that they were going to try to recapture all of those concessions in the future years and wipe out all gains that were realized in the last couple of years,” he said.

“There is a real danger in that. I’m quite concerned,” Sheffler added.

City Attorney Mike Aguirre said earlier this week that the police officers’ contract was illegal because it didn’t identify how the city would pay for the increased pension costs. That opinion was largely ignored as the City Council voted to approve the contract. Councilwoman Donna Frye was the lone council member to vote against the contract, saying she didn’t see how the city would pay for the increased pension costs.

“Everyone on this council recognizes that these contracts will have an affect on the pension system,” said Council President Scott Peters.

Peters has lobbied for the firefighters to also get a raise. The mayor and firefighters union reached an impasse in labor talks this year, with Sanders refusing to provide a raise. Peters, who has compared fixing the city’s financial problems to going on diet, described the raise he’d like to give firefighters as “little itty bitty.”

Every raise given to employees directly impacts the pension system because employee pensions are calculated using each employee’s highest annual salary. The higher the base salary for each employee group, the more in benefits the pension system will be paying out into the future. And, with that, comes higher annual bills for the city.

Jay Goldstone, the mayor’s chief financial officer, said the raises’ impacts to the pension system were secondary to their impacts on the budget. “It’s about cash flow: What can we afford, and what can we not afford.”

Pay freezes certainly aren’t alone in contributing to the pension system’s steadying. The system last year posted double-digit investment gains. The city took out a $100 million loan and plugged it into the fund. And a one-time accounting switch gave it a brief boost, too.

“The biggest impact is going to be how the investments do,” said Gene Kalwarski, the pension system’s actuary.

Ron Saathoff, president of the firefighters union, said he proposed that the firefighters take other benefits in place of a pay increase because of the dual impact raises have on both the budget and the pension system. He said a 1 percent raise would cost the city $1 million, while the city picking up a 1 percent share of the firefighters’ pension contribution would only cost $510,000. “In terms of our pockets it’s the same,” he said.

The mayor’s five-year financial forecast doesn’t include pay increases for any unions beyond 2008.

The more than 300 layoffs proposed by the mayor are expected to have a positive effect on the pension system, though some employees are expected to continue working for other governmental agencies. If they stay in California and meet other conditions, those workers’ would be afforded reciprocity, so any pay increase or extra years worked for another government can be used to increase their city pension.

Union leaders are bracing for next year to be the year when pension reform becomes the centerpiece of labor talks. Next year, all five employee groups will be back at the bargaining table. Sanders is expected to push for converting the pension system into more of a 401(k)-type system found in the private sector.

“I think next year’s negotiations are going to be very tough for us,” said Joan Raymond, president of the blue-collar workers union.

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